The Polish venture capital scene had a storming second half of 2019, with more than 1bn Polish zloty (€235.7m) invested in startups in the third quarter alone. In part, this was due to Polish startups such as DocPlanner, Brainly and Booksy pulling in large investment rounds from overseas investors.
This jump in funding was also spurred on by an influx of money from the EU and government-backed programmes such as the National Center for Research and Development (NCBR) and the Polish Development Fund (PFR). Between them they have provided funding for nearly 80 new venture capital funds.
But while there is now roughly five times as much venture capital money in the Polish ecosystem as there was five years ago, there are questions about the strings that are being attached to some of that money.
Mathias Pastor of The Family, the Paris-based investor and startup support network, suggested in an opinion piece published by Sifted, that some of this new money has proven “toxic”, with onerous conditions that would make it unattractive for foreign investors to invest in Polish companies further down the line.
“There is some truth in this but also another side to the story.”
He wrote of the government money: “The truth is that entrepreneurs have ended up with toxic investors in their cap tables and financing tied to onerous conditions. What was supposed to be a help has, in fact, become a hindrance.”
This led to a series of pushbacks from local Polish venture capitalists and investors who say that while this was partly accurate, the true picture is more nuanced.
“There is some truth in this but also another side to the story,” says Max Moldenhauer, founding partner at Sunfish Partners, a German investment company focused on Polish startups.
Borys Musielak, cofounder and managing partner at SMOK Ventures, a Polish-American fund that invests in early-stage startups in Poland, says: “It is a picture of the Polish ecosystem that would have perhaps been relevant in 2014, but not 2020.”
One of the biggest problems for foreign investors is that some of the grant money given to businesses by the government-backed NCBR, through the BRIdge Alfa funds it has set up, comes with a clause that gives the Polish state preemption rights to buy the business in certain circumstances.
Włodzimierz Kuc, director of the department for research and development investments at NCBR, tells Sifted the clause (which predates him) was in all likelihood put in with good intentions, to prevent a brain drain of promising startups leaving the country. However, it has ended up putting off foreign investment.
Moldenhauer from Sunfish Partners’ agrees it has had a negative effect: “We have seen some reluctance by renowned international VC firms to get involved with companies if they have this kind of clause.”
Not so bad though
These preemption rights are not as bad as they seem at first sight though, in part because they are rarely used any more.
Sebastian Kwiecień, executive director at Epic Alfa, a Bridge Alfa fund, says: “In most cases the priority clause can be disabled, and so we did that for our projects.”
“We realised it was problematic for foreign investors so we amended the rules.”
NCBR’s Kuc says that the government has never actually exercised the preemption rights, and this clause is now no longer included in the funding agreements done by the NCBR, except in the case of companies working in the security and defence industries.
“We realised it was problematic for foreign investors so we amended the rules,” he says. The preemption rights only really apply to a small number of startups funded in 2017.
NCBR does retain veto rights over what investments are made by the funds — another thing that some investors find problematic.
However, says Kuc, this is used only in cases where the startup does not have enough of a Polish connection or if there isn’t enough of a research and development component to the work.
Government money best for very early stage
These restrictions are well understood by most people in the ecosystem, says SMOK Ventures’ Musielak.
“[NCBR and Bridge Alfa money] is best suited for research projects that cannot raise money on commercial terms yet.”
“Polish startups are well aware of the fact that grant money either directly from NCBR or through one their Bridge Alfa funds comes with strings attached — it’s best suited for research projects that cannot raise money on commercial terms yet,” he adds.
“It is very common that grants have a purpose. NCBR’s money is for research and development stimulation — that’s why there are some limitations here usually,” says Epic Alfa’s Kwiecień. He adds that there are also big advantages to the grants, given that they are non-dilutive.
The vast majority of Polish venture capital investment, in any case, comes from PFR Ventures, the fund-of-funds arm of the state-owned finance group.
Lack of venture capital experience still a problem
It is true to say that Polish venture capital teams are still, for the most part, quite inexperienced, says PFR Ventures’ Maciej Ćwikiewicz. There are only between five and seven venture capital teams with long track records of managing more than two funds, he adds. The rest are younger teams that have only done a few investments to date. Inevitably, some of these will be better than others.
“You can’t compare three 30-year-olds with a handful of investments with their own savings to a 50-year-old manager in London who is raising a fourth fund.”
“You can’t compare three 30-year-old guys who have made a handful of investments with their own savings to a 50-year-old manager in London who has made 75 investments and is raising a fourth fund. We just don’t have that yet,” says Ćwikiewicz.
Moldenhauer says he often still comes across poorly drafted term sheets when co-investing with Polish funds.
A typical feature, he says, is that a Polish term sheet will be full of penalty clauses that can really limit the startup.
“We were negotiating to co-invest with a Polish fund. They had 20 penalty clauses in the agreement. We had two. The biggest thing you need to get used to in Poland is a lack of trust. In Germany I generally trust someone until proven wrong. In Poland you protect yourself against everything,” Moldenhauer says.
Ćwikiewicz says PFR Ventures is doing what it can to educate the market. The team has spent time working with organisations such as the European Investment Fund (EIF), the British Business Bank and Bpifrance to learn best practice.
“Five years ago we had just 25 venture capital funds — including 16 financed with public money — and not all were operating according to international standards. But since then there has been a dramatic change in the number and quality of funds. We now have 35 new VC funds, eight of which are international and we are expecting to have 10 more in the next year.”
“It will take another 10 years to build the investment know-how comparable to the one available in London, but we have already set very strong foundations to make it happen.”
“It will take another 10 years to build the investment know-how comparable to the one available in London, but we have already set very strong foundations to make it happen,” he adds.
Proof that it is on the right track, says Musielak, is that a number of international early-stage investors have joined the PFR Ventures programme, including Sunfish, SMOK and Israel’s BioMedIn.
“The funding environment in Poland is already pretty diverse with dozens of acceleration programmes, hundreds of angel investors and a growing number of VC funds. What we definitely need is more general partners with experience in top global funds and even more interest from international limited partners,” he says. “I believe we’re on the right path to achieve both in the coming years.”