Is the Polish Government Drowning its Innovators in Money?
The Polish Government is pouring money into its startup ecosystems. But investors and startups alike admit, the results have been less revolutionary than promised.
In preparing this post, we sought the input of several startup founders and VC investors in Poland. Among them were Chris Kobylecky, and Marcin Szelag, from the seed VC fund InnovationNest, in Krakow. You can read a very insightful post on similar issues from Innovation Nest on Medium. We also draw on our own experiences from at least half a dozen trips to Poland within the past 2 years, and talking with scores of startups and investors.
The post below is based on our observations and opinions. If you have a different perspective, we welcome you to get in touch and tell your side of the story. Tweet to us @startupyard.
During the selection process for StartupYard Batch 7, we had an experience which I can only imagine has become more common in the past couple of years. A Polish startup, run by a pair of very qualified and experienced entrepreneurs, breezed through our selection process with a very attractive tech and business proposition, and arrived at our Startup Day as a favorite to be offered a spot in the batch.
And they were offered the spot. If we could do it again, we would still offer them the spot. But something got in the way, and that thing was money. To be specific: Polish government money. The startup founders were, to their credit, very straightforward with us about the situation. “We are waiting to see whether we will win a grant for half a million euros,” the founder told us. But to get it, the company couldn’t have any investors from outside the country.
And so the startup didn’t join us at StartupYard, and we’ll never know if that made a crucial difference in their potential for success. I hope for their sake that the money was worth it.
When It Comes to Money, Everybody is Just a Number
At StartupYard, we don’t refer to ourselves primarily as investors. We are an accelerator. To the startups that we have worked with, and I think this has been true down to each team, the value of the StartupYard program and community of mentors has not been the money we provide. 30,000 euros isn’t a fortune. It’s not enough to pay one full time programmer for one year. It’s enough for two or three people to move to Prague for 3-4 months, live on ramen noodles, and develop themselves as a real business, while seeking real investment.
And when they do gain further investment (as nearly half of our startups have), it’s because they know what to do with it. We have angel investors in our community, very smart ones, who almost exclusively focus on startups from StartupYard. They do that not just because it’s convenient, but because it’s a way for them to know what very few early investors can: what will happen with my money? While they might not get it back in the end, these investors can at least know that they aren’t being led down the garden path.
Early-stage investment has very little in common with the stock market. Startups can’t provide a prospectus or a dividend guarantee. It’s about the people, and it’s about a deep level of trust. For investors, it’s often less about giving money than about giving a team they believe in a chance to succeed, and helping them do that.
Not that money isn’t important. That initial cash we provide startups can make the difference between life and death; the difference between quitting your job and devoting yourself to your startup, or spending half your time browsing LinkedIn, and thinking about how much money you are losing by not taking a salary.
But the fact is that if you compare the financial support StartupYard provides to any pure investment firm, there is no real comparison. If we’re talking about government grants, then the comparison is even more ridiculous. We just aren’t about money. Startups come to StartupYard because of where they can go from here, not because of what we can give them.
But, something funny happens when you ask people to make a choice between something hard to value in terms of money, and actual money. Often they pick the money. After all, most of a young company’s most pressing problems have to do with money, at least from the typical founder’s perspective. And we can hardly complain– who doesn’t think that having more money makes your life easier?
Read the Full Fast 50 Report from Deloitte
A breakdown of the most promising companies in the CEE region.
40x the Funding = 40x Better?
It’s a cliche among startups and investors in the CEE region, that Polish startups lack urgency. There are many cases in which that just isn’t true, but I have to say, having visited Poland many times in search of startup founders with global ambitions, the stereotype is rooted in some truth. There is an overwhelming sense, when talking to many young entrepreneurs there, that startups that don’t do well can afford to “wait it out,” and hope for better days. In the Czech Republic, startups that are “waiting” are dead, and people generally acknowledge that. Their founders move on to the next thing, as they likely should.
Both countries suffer from the legendary Slavic sense of guilt and shame over failure, a neurosis that Californians or Western Europeans have a hard time understanding. And yet Czech founders do seem to fail faster, and move on just as quickly.
There are, as we have discussed on this blog before, disadvantages to being too big, too comfortable, and too secure. Polish companies have access to the whole Polish market, 4 times the size of the Czech market, and growing quickly. The Estonias and the Kosovos and the Czechias of the world have to foster global thinking in order to make an impact. But Polish startups can and do focus on the Polish market, and do reasonably well.
Startups like Gjirafa (SY 2014), have to think about changing the way everything works in their regions, because there is so much left to do. Others have to look to the whole world to find a market big enough for a truly disruptive idea. But local startups in big regions can settle for a slice, of a slice, of a slice of the bigger pie. They can be just ok.
And Polish government money, most recently in the form of about 1.7 billion euros in public/private funds announced last year by the Polish parliament, certainly makes Polish startups more comfortable and secure. Compare that to just 40 million euros for the Czech innovation fund run by EIF. It seems like I haven’t met a startup in Poland in the past year that hasn’t been in the process of getting a grant, already gotten a grant, or is considering a grant. One founder told me “it’s a trap: you can’t escape the grants.”
So the Polish tech ecosystem enjoys around 40x as much government support as the Czech ecosystem. Even adjusted for the size of the market, that’s 10x more funding than a typical Czech startups is likely to get from the government. And yet, are the results 10x better? According to figures from Delloite’s “Fast 50,” breakdown of the fastest growing tech companies in the CEE region, the answer is no. Over the past 4 years, the number of Polish companies included in the fast 50 has actually dropped, from 22 in 2013, to just 12 in 2015, back up to 17 last year.
For comparison, The Czech Republic has grown modestly on the list, from 5 in 2013, to 7 in 2016. And yet that has been enough to bring the Czech ecosystem to #2 overall on the list, behind Poland, but surpassing Romania, Hungary, and Croatia.
Perhaps more damning, Poland boasts just 4 of the 10 “Rising Star” positions in Deloitte’s map for 2016, detailing high growth tech companies in the region. The Czech Republic has 3, and Lithuania 2.
You Can’t Buy What’s Most Important
There’s not a perfect correlation between the Delloite Fast 50 and the performance of the overall tech ecosystem, but it is pretty glaring. According to Eurostat, Poland has 7 metro areas of a million people or more. The Czech Republic has only 1. Are Czech startup founders smarter than their Polish neighbors to the north? I doubt it. I have met no shortage of brilliant people on my trips to various Polish cities. Their high tech community is thriving, and Polish engineers are in demand all around the world for their coding skills..
By all rights, and given the amount of money being spent, one might expect that Poland would now be rocketing ahead of the rest of the Visegrad region, and making global news with disruptive global companies.
I talked to Marcin Szelag, a Partner at InnovationNest, a seed VC fund based in Krakow, that aims to bring Central European startups global. He agreed to have his comments reproduced here in full:
Marcin Sezlag: Venture Partner
Marcin Szelag: Venture Partner at InnovationNest
The tech industry in Poland has been boiling for many years now. It all started with the basic internet services in the 90s, through social networking and ecommerce in the 2000s and now being dominated by SaaS. I have been active in the industry for 10 years now. I caught the last wave of social networking on the startup side and now I’m taking the benefit of the SaaS outburst on the VC side. In more than two decades Poland has been able to yield two Unicorns – Allegro and CDProject. In the same time, there have been many other successful tech companies but on a much smaller scale – mostly local. The whole industry flourished even though our local Venture Capital market was very scarce.
In 2004 Poland joined the European Union. Since 2007 the government has been trying to fuel further growth of the industry with EU funding. This “support” came in many shapes and sizes. From failed grant programmes targeting e-businesses to failed “hatching” of the Venture Capital market through numerous incubators. To date, Billions of Euros have been invested in “tech” and “VC”. So far it doesn’t seem to have moved the needle on the Unicorn count. Instead, we have a market with more VCs than fundable companies. High valuations without escape velocity growth rates. Thousands of zombie startups, without anyone gutsy enough to put them out of their misery. Maybe we have reached a point, where one should stand up and say – “is everybody out there nuts?”
Marcin Szelag @innovationnest: Is everyone in Polish startups nuts? Click To TweetWhen I look at the industry from the far I start to think that maybe we are all to blame. We all cheered for the “startup phenomenon” to go mainstream. The government picked it up and thought it might be a good way to push the economy forward under the umbrella of high-tech and innovation. Suddenly we went from scarcity to abundance of capital. We got what we wanted. For years everyone in the tech industry in Poland complained that “startups” were under the radar – now they are in the spotlight. Unfortunately, the system in all its greatness has one fundamental flaw – it fulfils a social rather than capitalistic agenda. I’m new to venture capital – only 6 years in the business, but one thing I have learned very quickly was that return on investment is the only thing that matters. This slight difference in perception of venture capital is exactly why the government will fail – it cannot act as a true venture capitalist. For one it has a social responsibility second, it is not really accountable to its Limited Partners (tax payers or the EU). This “flaw” is passed top-down. From programme origination to final execution.
In my humble opinion, this ship cannot be turned around. We will sail on the set course until the EU funding concludes around 2020. Many if not almost all of the startups, accelerators, incubators and VC funds supported by government grants and investments will fold. What I also think will happen after 2020 is that we will see a rebirth of the startup/VC industry in Poland. Some EIF backed funds will emerge. Few really dedicated founders with solid businesses will seek seed/series A capital. We might even see some exits from companies funded around 2010 create an influx of angel investors. So the best strategy, for now, is to sit tight and be ready when the time comes.
What Can we Do About It?
We are not monetary or industrial policy experts. But what we do have is a very particular set of skills. And unfortunately, not just for us but for the many founders of tech companies in the CEE region, our ability to apply those skills, to help startup founders launch on the global stage are in competition with a great deal of easy money. There will probably only be more of it, as the populations of these nations age, and as unemployment continues to bottom out across the region.
And yet that is not sustainable. Stimulus funds come, ironically, only when money is cheap. When it’s hard to start a business because interest rates are high, and consumers are being squeezed, there is rarely any government money to go around. And that’s ironic, because those are the time when we need startups to disrupt stagnant industries and shake things up.
This is not a screed against government support, of course. We are still the same accelerator that came out strongly for a Universal Basic Income last year- a first in the region. As Marcin noted above: the aims of government funding are largely social. The problem arrises when the stated purposes of government funding run contrary to their actual effects. Grant programs that are supposed to kick tech into high gear, end up sinking it in mud and slowing it down.
Government funding is supposed to kick tech into higher gear. Often, it slows us down instead. Click To TweetWe also have experience with government funding, having accepted and helped distribute it in the past. It comes with strings. It comes with small caveats that, taken individually, are perfectly reasonable, and perfectly logical. But taken together, and multiplied for larger sums and for bigger and bigger programs, they become something different.
Today a grant might be easy money for a startup in Warsaw or Krakow. But a year from now, the company may have to turn down an investor that somehow doesn’t fulfill the grant’s requirements. Or maybe the company won’t be able to relocate. Or maybe it will find that it’s spent that money foolishly, and has become unattractive to serious investors because of mounting financial obligations, high technical debt, and anemic traction.
Or maybe the money will induce the founders to spend too much time developing the perfect product, only to be beaten to market by a smaller, faster team. This happens all the time, and governments are not exactly good at moving fast when it comes to technology.
The Art of Saying No
On the human scale, we are now at a point where early-stage investors have to shift gears. The imperatives of governments, and their macroeconomic agendas, don’t mesh well with the long and slow changes in society that actually produce high value tech companies over time. We can’t think in election cycles. We need to think 5-7 years ahead.
We need to be more outspoken about the value we provide, and the real reasons why tech ecosystems succeed. We need to be, in a sense, more institutional and seek solidarity.
I have been heartened to see influential investors in the region do exactly these things in recent years. We may be competing, but we all must also recognize that we have common goals, and all of us win if those goals are met: more entrepreneurs building their own companies. More successful entrepreneurs returning as mentors and investors. This benefits all investors, and all societies as well.
A glut of money that turns middling startup ideas and middling founding teams into zombies that drag out their existence for years hurts all of us, including the founders of those companies, who could be moving on to new ideas, and leaving behind the baggage of companies that aren’t set up to grow into the future. Failure is a relief valve for bad business ideas and mistakes- it shouldn’t be scary, and it shouldn’t take any longer than it needs to.
At the same time we need to be more flexible than a government can be. We need to invest in things that a bureaucrat might hate. In fact, we need to invest in exactly that kind of thing, because it’s likely that whatever disrupts the status quo isn’t going to be something a government will like or understand at the beginning. A government has an interest in keeping things more or less the same; maybe slightly better.
A really disruptive startup is a small company that is operating outside the normal rules, looking to do the unexpected, and be rewarded for it. For that, you need space, and a sense of independence and ownership. Ask yourself, why would the state give you money in order for you to turn around and disrupt industries that employ thousands of people, and account for huge portions of tax revenues?
Real disruption happens in areas we least expect it. Innovations that governments like can be different from the ones people really need. Click To TweetThe answer is, they wouldn’t. And that’s why relying on public grants is a double-edged sword. You can have money, but it comes with strings that might make you think twice about taking real risks. Where a good private investor pushes a startup to risk more and have a higher impact, a government won’t do that.
Building an ecosystem isn’t a matter of money. It’s a matter of time and people. The right people, and enough time, along with enough space and the right incentives to take risks.
This process is slow, rewards attention to detail, and requires patience from investors and team members. It takes years of consensus building, and more years of personal sacrifice from founding teams and investors.
Cut out the risk, cut down on the time, and cut corners on the people who are elevated to leadership in your tech ecosystem, and you end up in Poland’s position today: awash in money, but lacking a sense of confidence in itself that only experience and hard lessons of failure can bring.
More money beyond a certain point doesn’t make those things easier. It just makes them more complicated. So are we against government funding? Of course not. But we must approach it with open eyes, and with an understanding of what is behind it. We need to embrace the fact that tech is not just about money, and so success can never be just about more money.
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