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How to get funding for an e-business startup

11th April 2012
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Szymon Gawryszczak, CEO of the Agency of Innovation and Development (ARI), tells WBJ.pl about the options available for financing online business startups

Izabela Depczyk: E-commerce is booming in Poland, but getting access to funding can be difficult. Where can Polish e-business startups look for finance?

Szymon Gawryszczak: Novice businessmen don't have it easy, but I would say starting one's own business is not the most difficult part, it is getting the funding that is proving to be the biggest challenge. Indeed, almost 20 percent of micro, small and medium-sized business owners, resort to borrowing money from relatives and friends to start up their businesses, according to research conducted by Praktycy.com.

We think the go-to place for receiving funds for starting up a business are banks. Banks are trusted institutions and are often the first choice for micro, small and medium business owners. However, in order to get money from the bank, one must have credit rating. Young businessmen usually don't and this means that a credit loan is often out of reach.

Grants given by the EU Operational Program “Innovative Economy” are becoming an increasingly popular option. Entrepreneurs whose e-business plans are deemed the most innovative by specialists of the Polish Agency for Enterprise Development (PARP) can receive up to zł.700,000 in funding from the program.

Szymon Gawryszczak
Courtesy of ARI

Unfortunately, the criteria for assessing these projects is unclear. In theory, only projects targeting untapped market niches should be funded. In practice, this does not always happen. Another problem is the lack of flexibility associated with the program. Entrepreneurs who obtain funding have to stick to their original project plans or submit changes which then have to be approved. This proves difficult when the situation on the targeted market changes. Lastly the whole process, from project submission to receiving the money, takes up to a year. Entrepreneurs have to wait for their applications to be processed, which takes up to 180 days, and if selected, they must wait up to six months to get the money. That is a long time for the e-sector, which changes from one day to the next.

Last but not least, e-startups can look for funding among private investors or investment funds. This gives e-businesses more freedom, but private investors also tend to have higher demands. Business angels are a type of private investor for early-stage projects who, in return for capital, receive shares in the company. Their investments are considered high risk, and they demand high returns on investment, on average this is 20 percent per year.

Venture capital funds operate in a similar way. Their action is less flexible than that of business angels, because they are limited by a high amount of procedures designed to ensure the safety of investments. Venture capital companies only choose the safest projects and ones which guarantee a 30 percent annual return. This results in a vast majority of applications being rejected.

In the past 10 years companies and institutions specializing in the financing of innovative projects in Poland have increased. Yet, every fifth entrepreneur still borrows money from friends or family. The situation is still not as good as in the US, where getting funding for an innovative project is much easier, but we can certainly look to the future positively.


From Warsaw Business Journal by Izabela Depczyk


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