The new Movens Growth Equity fund, of which you are one of the founders, will invest in companies from the SME sector. Why is there so little investment in SMEs in Poland?
Maciej Kraus: SMEs are another market above the VC market. One of the reasons why the VC industry is growing in Poland is because of public support. And so far there has been very little of this support in the growth segment, in which we invest. But this is changing. Looking at global trends, Poland is following a foreign model. In other countries the private equity market (i.e. large buyout funds) developed first, followed by the VC market, and the growth segment, investing in growing companies and minority stakes, has existed for many years, but its dynamic development has been observed relatively recently.
This is a difficult segment to invest in primarily because we do not have what the buyout funds have, i.e. we do not have a majority stake. To be successful together we have to get along with the founders because they are our majority shareholder.
When we talk to potential targets that are not large corporations, and we tell them that we want to be a minority shareholder in their company, they are often not mentally prepared for such a concept. We explain to them that what we’re doing is a marriage of convenience: we need to merge for about 4 years and figure out what terms we’re going to work together on, but today we already have to figure out what terms we’re going to happily divorce on. This process requires a lot of trust and openness.
Sequoia or Tiger Global are operating under new conditions bypassing certain regulations to achieve greater financial benefits. Do non-standard models derived from family offices or hedge funds have a chance to be adopted in Poland in the area of VC and growth?
We are not at that stage yet, if only because we have relatively few family offices. Those that exist often do not specialize in any particular industry. In the States, a good example is Dolby Family Ventures, which focuses on the medtech sector and Parkinson’s treatment. And I think they are very good at such investments, but we in Poland haven’t developed such cases that someone would have so much money and could put aside $300 million to invest in businesses specializing in a particular niche. Poland is a small country, so in our fund we invest in very different industries. But the faster such a trend comes to us, it will mean that, the faster we grow.
Wouldn’t abandoning the 10-year cycle by funds make it easier to reap the benefits of this marriage of convenience with a startup?
I think it certainly would. But to get to that point, you have to go through the first stage: let’s get along for a period of time, we’re going to meet each other for 4 years, and then if we find that we trust each other, we’re not going to stick to a deadline on the horizon, and we don’t have to insist that you should give us the money after a period of time. That’s limiting because the funds have companies in the portfolio that they wouldn’t have to sell, but they have to because you have to account to investors. I believe that this is some kind of a cycle of market development, and we must first go through the stage that we are currently at in Poland.
And the fact that companies are deciding to go public later and later is not a problem for the funds?
The fact that the stock market is less and less popular solution is due to the fact that much faster can be developed through private investment. I recently read the book “Secrets of Sand Hill Road” by Scott Kupor, managing partner of Andreessen Horowitz. There’s a passage in there that Microsoft’s IPO in 1986, after valuation, was $350 million; today the company’s market cap is $2.2 trillion. That is an increase in market cap of over 6,000 times! That is, if you put a dollar in, you get $6,000 out of it.
Facebook when it did its IPO had a valuation of $100 billion, today its valuation is $600 billion. To earn the same amount on a $1 investment in Facebook’s IPO, that company would have to have a capitalization of three times the annual GDP of the entire world! Most of these growth gains have been consumed by private funding rounds. The stock market is no longer the place to raise capital today. It is often a way for individual investors to cash out. The IPO cases of Uber, Slack, UiPath have shown that tech companies, outside of those BIG4s, are not such super success stories post-IPO.
Are foreign investors, who started to be more active in Poland during the pandemic, a real threat to Polish VC interests?
Nothing supports development like competition and the breath of someone on your back. I think it is good. Personally, of course, to be the only fund which sends a term sheet in a given company and to have more negotiating power. However, it is good when several funds are interested in a cool topic. I want my portfolio companies to grow globally someday.
Foreign funds, however, lure in more money.
Let’s remember that it’s not just about valuation. It is about choosing a partner that will best help the company grow. Each founder decides for himself whether he prefers a fund with lower valorization but giving him additional competences, believes that this is a fund which can help him develop in a given geography and give him competences in the area of product development, or he prefers to take stupid money.
You believe that we are not dealing with a startup bubble. So why do experts fear that we may be facing a crisis similar to the one in 2000?
That comes from the fact that experts have predicted twenty of the last two tech market crises. I remember that when we founded Movens Capital, I had already heard that the market was overheated. That was four years ago. When we did our first investment in “Pack.to”, today’s packhelp.com, it was also investors who thought it didn’t make sense to invest in technology companies. Of course, if someone says all the time that something is going to tank, they will eventually be right at some point.
There can always be a market crash and we can be afraid of that, the only question is what I do with that fear. I see threats, but I try not to focus on them and think about opportunities, which are always there.
In Poland we don’t have to be afraid of the bubble bursting. We have much less money than on the American market. In our country valuations are lower than in the west and the private investment market is smaller. We are making up for this loss and I believe that this market will develop in Poland.
