|Mobile application startups are popular funding targets for early-stage investors|
Three big Polish companies are already interested in her product, but Anna Czoska isn’t hiding her plans to conquer foreign markets. Her mobile application, which has won the praise of several juries, is defying the economic downturn by riding its wave. Virtual Recruiter has found its niche market in a large number of job seekers. There is a free basic version for future sales managers, marketers and other sought-after positions, but employees are interested in the app too. “I’m a generation Y girl and would like to use it myself,” said Ms Czoska, the startup’s founder.
A recent survey ordered by the Polish Agency for Enterprise Development (PARP) shows that more than 40 percent of twenty-something Poles of Anna’s generation Y intend to set up a company within the next three years. Is this genuine entrepreneurial zest or a way to survive an economic downturn that has rendered 13.3 percent of Poles unemployed, many of them young?
A million-dollar idea
MCI, a private equity group operating in CEE, runs two startup funds, MCI.BioVentures and Helix Ventures Partners (HVP). HVP is co-financed by public partners, the National Capital Fund and PARP, while BioVentures is financed by MCI and private investors. BioVentures invests sums ranging from €1 to E5 million in health care, medtech and life science projects, while HVP invests up to €1.5 million in early stage projects in cloud computing, internet, software, mobile and wireless technologies.
“Polish entrepreneurs do not lack innovative ideas, especially in IT,” said Piotr Pajewski, who manages HVP. Where they are at a disadvantage is financing. “Our support makes it possible to take up projects that otherwise would have been dropped,” he said.
Lewiatan Business Angels (LBA), the largest business angels network in Poland and one of many such cooperation platforms for investors and originators that have mushroomed in Poland in recent years, confirms that most of their investment goes to projects in IT and mobile technologies.
“Investors are interested in this dynamic sector, which is expected to yield high returns,” said Szymon Kurzyca, a financial expert at Lewiatan Business Angels. But it’s also a matter of supply. LBA receives hundreds of mobile and internet-based projects per year, but very few based on scientific research in chemistry, physics and engineering. “There are many interesting projects developed in Polish university labs, but most of them never see the light of day,” he said.
I don’t want to be a startup founder
Some other Polish startup-based tech services include a price-search engine, a dating portal, a mobile application for grocery shopping and smart management of your busy schedule. All of these are cool and useful, and provide much-needed proof of the entrepreneurial spirit of Poland’s generation Y. But how innovative and profitable are they really? Is it what big fish are looking for?
According to the European Regional Innovation Scoreboard 2012, Poland is not as innovative as most would like it to be. It’s in the weakest category of “modest innovators.” Robert Bogdanowicz, a young scientist at Gdansk Technical University and previous Stanford University intern, is doing research in material science with a focus on diamonds. He’s interested in innovations and would like to commercialize his findings, but has no intention of giving up his scientific career to pursue a startup dream.
“The ministerial system of appraising scientific research makes it practically impossible to do both,” he said. “I treasure my research too much to give it up completely.”
Commercialization is still a new concept at Polish universities. Procedures are being established but the academic world still looks down on scientists who flirt with business. So taking an entrepreneur’s path equals burning bridges to the academia. “If you fail as an entrepreneur, there is no way back,” said Mr Bogdanowicz.
In search of innovation
Contrary to what an outsider to the innovation business might believe, a startup is not a vehicle for all sorts of innovation. There are projects, like those in material research for the energy sector, that require costly experiments and large teams of specialists. They cannot be done by a few computer programmers working in a garage.
“Along with a classic model of a hi-tech company that can reach a significant size, there is a newer strategy that consists of quickly selling a company in its early stage to a large corporation,” explained Dr Jerzy Cieślik, director of the Center for Entrepreneurship at the Kozminski University in Warsaw. An internet portal is also a startup, but probably of no interest whatsoever to a corporation hunting for the next big idea that will conquer the world.
“There is enough money available through various programs that finance startup development. What is needed are innovative ideas with high commercial potential,” professor Cieślik said.
If the originality of a startup’s idea is its essence, then most Polish startups aren’t particularly outstanding. They mostly copy existing solutions. But innovation is a relative term, at least to Rafał Pagan, marketing & PR manager at Innovation Nest, a seed and startup fund that has recently launched an accelerator program for internet and other web-based high technology startups with global ambitions.
“There has been a clear shift from product innovation towards business-model innovation around the world. As a limited number of new business models come up every year, most startups are bound to replicate them. They might adjust them to the local environment or modify them slightly to stand out from the crowd. If that’s our definition of innovation, then Polish startups are as innovative as the rest of the world,” said Mr Pagan.
A big chunk of Poland’s “modestly innovative” startup activity is generated through European money. A quick look at PARP’s website (the agency manages state and EU funds assigned for entrepreneurship and innovation support) shows 23 business environment institutions, 18 tech incubators and 35 technological parks, all funded from the European Structural Funds for 2007-2013. It’s hardly an exhaustive list of entities that make use of these funds.
“There has been a wave of beneficiaries of the European funds for startup support,” noted Mr Bogdanowicz. “They have been commercialized and constitute a sector on its own. But you have to keep in mind that it’s artificial support. It’s like juicing up an athlete with performance-enhancing drugs.”
Such financial injections can have consequences for a project’s flexibility. Much of the funds are granted on non-negotiable terms, such as those from the National Centre for Research and Development (NCBR), which also provides venture capital. Usually there are strings attached to grants.
“In the case of European funds, it might be a commitment to a given market. But what if there is a whole new market created, say, in Africa, while you have committed to sell your product in the EU? ” asked Mr Bogdanowicz.
Alex Barrera, founder of Press42.com and a startup mentor, says Polish startups have great tech ideas but know next to nothing about business. “Technically speaking, Polish developers are not only good but above average. They can do amazing stuff. The problem is that most of the teams are composed of tech guys with zero knowledge on how to build a business. This is one of the things that has been preventing great companies from expanding beyond the Polish borders.”
Going global is the only way to go, most startup experts agree. Ideally, starting from Silicon Valley and expanding from there. “Polish startups are forced to think globally from their very inception,” said professor Cieślik. “The domestic market’s absorption capacity is low.”
It’s very difficult to introduce new products in the Polish market, especially innovative ones. “Consumers are conservative, their purchasing power is weak and demand for innovative products across segments low. Price is what matters,” said Mr Bogdanowicz.
The hard-to-battle external factors might push ambitious Polish entrepreneurs abroad, but there are also mental attitudes at home that are not exactly conducive to the startup mindset. While in the US a startup is created to quickly sell, earn and finance the next big idea, a small business in Poland is expected to stay in the family. In the US a failure is part of an entrepreneur’s portfolio – in Poland it ruins your reputation. In the US it’s easy to open a business – in Poland bureaucracy can kill it. And many potential Polish startup founders simply do not believe in themselves.
Perhaps one thing that helps a young Polish entrepreneur most in climbing to the top is what can be both his advantage and its opposite: the ability to wheel and deal. “Where other people might see a wall, a Polish entrepreneur will find a door,” said Mr Bogdanowicz.
There is some good news for the ambitious Polish startups that are not afraid of global challenges. A recent report by Ernst & Young expects a “paradigm shift” in the behavior of American venture capital. Currently, the vast majority of VC firms invest in their home markets, the report says, but more will be investing internationally in the next five years – including in the CEE as the new destination for fresh blood.
“Most of our startups are at a very early stage,” said Innovation Nest’s Rafał Pagan. “But we can already distinguish startups that think and operate globally. There are several dozen of them and the list is being expanded.”
Startups do not exist in a vacuum. “Developing technologically advanced entrepreneurship is a long process,” professor Cieślik said. “Companies that are not necessarily innovative but generate dynamic employment and sales should be supported too. It’s them, not the high-tech startups, that generate most of the employment in today’s economy.”
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