High rollers
The last three years have seen a brutal survival-of-the-fittest among this country's venture capital (VC) firms, with a group of around 15-20 being honed down to a mere handful today, leaving the rest either under deep restructuring or else vanished altogether. One such survivor is MCI Management, a venture capital firm out of Wrocław that this past Friday held a press conference regarding the sale of a zł.30 million convertible bond issue, a large portion of which it plans to use toward a takeover of Wirtualna Polska, the country's number two Internet portal, in addition to numerous other projects in their investment pipeline. But that's only the start of their ambitious plans.
With their focus on IT, the Internet and wireless/mobile technology, MCI hopes to triple their market value over the next five years, according to Andrzej Jasieniecki, investment manager at MCI Management, who spoke to the Journal shortly before Friday's big press event. If their gambles pay off and that goal is reached, the holders of the 5-year convertible bonds on sale this week will likely opt to convert those bonds to MCI stock come 2009, rather than cash out. At least that's what MCI hopes.
The company also has a yet broader operation under wraps, with plans for a larger venture group called TechVenture 2.0, which will cover investments in Poland, Slovakia and the Czech Republic. MCI intends to be the main investor and manager of this fund, with most of the funds coming from institutional investors. Clearly this will all make for one busy VC, with the only question being-will it all pan out? And who will have the guts to put their money behind these young VC cowboys?
Venture capital in Poland
Perhaps it goes without saying that Poland's entrepreneurial environment leaves something to be desired, as most people who know this arena will reluctantly admit. But a venture capital fund called PBK Investycje, started in 1998 by main shareholder PBK, provides one of the few examples of a VC that's managed to stay afloat, although they have not made any new investments in the last year and a half.
"Nowadays we do not consider any new investments, except building the value of our current portfolio companies and making exits," says Piotr Pawinski, a financial analyst for PBK Investycje.
Pawinski gives several explanations for the situation in this country's entrepreneurial climate. For one, he cites the Polish law that does not allow pension funds to invest in either venture capital or private equity funds. "As far as I know, they [pension funds] are the main source for venture capital in the U.S. and the EU," he says. Another general problem is simply that entrepreneurs find it particularly difficult to develop their activities in this country.
MCI Management's February 19, 2004 report, on the other hand, predicts that "In the next few years the Polish venture capital market should develop dynamically and move in the direction of developed markets such as in Western Europe and USA." But the firm's optimism shouldn't strike anyone as particularly surprising, considering MCI's latest ambitions.
Important for investors to understand is the distinction between venture capital and private equity. As Pawinski points out, VCs are a special type of private equity investor that invest at the very early stages of development, like for start-up or seed capital, whereas private equity is a more general term typically used to describe a firm that invests in existing companies that already have a well-known brand on the market and want to expand. Thus usually firms labeling themselves as 'private equity' bear substantially lower risk.
The classic venture capital investment animal is looking for investments with extremely high return on investment-up to 10 times the initial investment at exit, for example. Since these companies are at a very early stage of development, they are extremely high risk. But if the fund were to have, say, ten such investments, they would only need two or so to actually pay off in this way, with the rest either not performing or ending up money-pit disasters. This is what a VC can expect when going into the game: they only need a few "stars"-big winners, to make up for the
many projects that never get off the ground. Another important point to remember is that, even if a VC's holdings has an enormous market value, the pay-offs are not realized until they are able to make exits on their investments. The situation is analogous to the casino floor: you haven't really won anything until you cash in your chips and walk out the door.
Of course, the global presence of the classic VC dropped off immensely following the late-1990's Internet boom, and most had to start balancing out their portfolios with some less risky investments.
VCs 'need to have know-how and good people," says Pawinski, and that is often hard to come by in Poland as anywhere. Thus companies like MCI just might be the exception, and in fact MCI was the first company that popped into Pawinski's mind when discussing the topic.
"There are a lot of projects in Poland that need $1-2 million max, and they carry very significant risk. And right now it seems only MCI is able to bear that level of risk," he says.
Following the ticker
A brief look at MCI's stock price history reveals that it's been tough road since their beginning-they are a survivor. While their IPO in 2001 was supposed to begin around zł.3 per share, it hit the market at well over zł.8 per share because of anticipation over a deal to sell the Poland.com portal to Elektrim S.A., a behemoth holding company involved mainly in energy and telecom. But soon after IPO, MCI's share price dropped off after Elektrim abruptly backed out of the deal. MCI ended up using Poland.com as a write-off. Bad news for anyone that got in on the IPO, surely- when the share price bottomed out at zł.0.31 the company had lost over 96 percent of its valuation.
But the firm has indeed gained ground since its stock price bottomed out a year and a half ago. The latest share price as of this writing stood at around zł.2.85 per share (still only 35 percent of the 2001 IPO valuation). So it must be said that the firm has a long way to go to recover it's peak value in 2001.
MCI Management is actually a unique case, as they are one of the few publicly-traded VCs in Europe. Most VCs are privately-held. And the fact that investors can take a gander at MCI's stock quote every day to gauge the market's reaction to their every move adds quite an element of spectator excitement unusual for most VCs.
Jasieniecki is quick to point out that seven of ten of their portfolio companies have achieved profitability, pointing especially to the two big stars in its arsenal, Travelplanet.pl, a travel booking site, and One-2-One, a mobile network. With Travelplanet.pl, for example, they're initial investment was zł.2.7 million (for a 94 percent chunk), and today Jasieniecki claims that the company is worth well over zł.20 million. But these investments are so far only partially 'realized', as MCI has opted not to exit the investments entirely as of yet. Let's hope they don't have to repeat the Poland.com experience.
The big deal
Of course one of the hottest issues surrounding MCI's new zł.30 million bond offering is the legal battle over bankrupt portal Wirtualna Polska (WP).
"This is one of the most exciting deals of the last three years," says Jasieniecki, reflecting that the Netia deal is the only other recent deal that compares in its level of complexity. In the deal, for which they have bid around zł.40 million, MCI is being backed by a consortium that includes the French CA IB and is supported by WP's former president and founder Marek Borzestowski.
But Jasieniecki is mum beyond that as far as Wirtualna goes, as this can be quite a sensitive issue, for one thing because a whopping zł.20 million of the new funds raised from the bond issue are to be set aside for this project, and, after all, the battle revolves around bankruptcy law for the most part, and is largely being fought by legal professionals, not the businessmen they represent. Some market watchers give them about a 50/50 chance of landing the WP deal. And that's assuming they can raise the zł.30 million.
So why take on a bankrupt portal? What the savvy investor might note is that Wirtualna Polska, although bankrupt, is nevertheless number two on the market, in between Interia.pl, who have a market capitalization of around zł.72 million, and leader Onet.pl, with a market cap around zł.344 million. Most would guess that what MCI is banking on is that WP can find some middle ground between these two widely spaced rivals and manage to bank in a neat market cap of around zł.150 million. And it can surely be said that they recognize the power of the Wirtualna brand, still prominent in Poland's mind space despite dreary news in the business press. If their valuation of zł.150 million is for real, then getting hold of WP for zł.40 million would be quite a bargain indeed.
Most analysts feel that, provided the shareholder conflict is wrapped up soon, and with the right plan going forward, Wirtualna has a fighting chance, if not solely derived from the strength of the brand.
"It's very hard to destroy a good brand," remarks Ewa Zborowska, analyst at market research firm IDC, whose sentiment can be backed up by many other market watchers, including Steven Buckley, managing partner of Innova Capital, a private equity firm, who says that, provided the issues are resolved quickly and a good plan is in place, WP indeed has a good chance of staying in the game and succeeding. Whether MCI will be the one to save it will have to wait for the court decision.
What's in the pipes
It's the heart and soul of venture capital-the investment pipeline, where small high-risk ventures are thoroughly researched and analyzed to determine whether they'll make the cut and maybe some day become stars.
"Now we have in our pipeline more than 25 projects," says Jasieniecki. And most likely this list will be narrowed down to an even ten by the time they get ready to let the sails loose for investment. "We plan to make-this year-two to four investments from this pipeline of 10 most likely candidates," he says.
As part of their goal to triple in value over the next five years, MCI plans to invest zł.10-60 million for 2004-2006. The sources will be zł.10 million of their own cash, zł.20 million from exits, and zł.30 million from the bond issue. According to their website, the key objectives through 2006 include a minimum three exits from investments, asset value growth of zł.6/share, the growth of the number of portfolio companies to 15-20, and the building of the regional TechVenture 2.0 fund, with expansion into Czech, Slovakia, and the Ukraine. To say their plans are ballsy would of course be an understatement, but that's what this is all about.
As far as the classic high-risk start-up venture projects in the potential investment pipeline, the list revealed at last Friday's press conference included a joint venture with AGD/RTV for a B2C E-commerce site, a Wi-fi hotspot operator, and a shopping comparison search engine, among others, all in the zł.1-2 million initial investment range.
So what about other Polish VCs? PBK Investyjne, for one, is playing the patience game. "We care about the price, the value, and are not worried about how much time it will take," says Pawinski of his fund's current portfolio. When asked of the chance for the firm to make any new investments soon, he said, "I think there is a chance, but it depends on the range of successful exits, and the will and strategy of our main shareholder, PBK. We're still waiting."
Meanwhile MCI Management is apparently in the enviable position of not having to wait anymore. Granted, the Wirtualna Polska deal may be a big determining factor in the end equation-but we'll leave that one to the lawyers. For the rest, it's off to the horse races.
With their focus on IT, the Internet and wireless/mobile technology, MCI hopes to triple their market value over the next five years, according to Andrzej Jasieniecki, investment manager at MCI Management, who spoke to the Journal shortly before Friday's big press event. If their gambles pay off and that goal is reached, the holders of the 5-year convertible bonds on sale this week will likely opt to convert those bonds to MCI stock come 2009, rather than cash out. At least that's what MCI hopes.
The company also has a yet broader operation under wraps, with plans for a larger venture group called TechVenture 2.0, which will cover investments in Poland, Slovakia and the Czech Republic. MCI intends to be the main investor and manager of this fund, with most of the funds coming from institutional investors. Clearly this will all make for one busy VC, with the only question being-will it all pan out? And who will have the guts to put their money behind these young VC cowboys?
Venture capital in Poland
Perhaps it goes without saying that Poland's entrepreneurial environment leaves something to be desired, as most people who know this arena will reluctantly admit. But a venture capital fund called PBK Investycje, started in 1998 by main shareholder PBK, provides one of the few examples of a VC that's managed to stay afloat, although they have not made any new investments in the last year and a half.
"Nowadays we do not consider any new investments, except building the value of our current portfolio companies and making exits," says Piotr Pawinski, a financial analyst for PBK Investycje.
Pawinski gives several explanations for the situation in this country's entrepreneurial climate. For one, he cites the Polish law that does not allow pension funds to invest in either venture capital or private equity funds. "As far as I know, they [pension funds] are the main source for venture capital in the U.S. and the EU," he says. Another general problem is simply that entrepreneurs find it particularly difficult to develop their activities in this country.
MCI Management's February 19, 2004 report, on the other hand, predicts that "In the next few years the Polish venture capital market should develop dynamically and move in the direction of developed markets such as in Western Europe and USA." But the firm's optimism shouldn't strike anyone as particularly surprising, considering MCI's latest ambitions.
Important for investors to understand is the distinction between venture capital and private equity. As Pawinski points out, VCs are a special type of private equity investor that invest at the very early stages of development, like for start-up or seed capital, whereas private equity is a more general term typically used to describe a firm that invests in existing companies that already have a well-known brand on the market and want to expand. Thus usually firms labeling themselves as 'private equity' bear substantially lower risk.
The classic venture capital investment animal is looking for investments with extremely high return on investment-up to 10 times the initial investment at exit, for example. Since these companies are at a very early stage of development, they are extremely high risk. But if the fund were to have, say, ten such investments, they would only need two or so to actually pay off in this way, with the rest either not performing or ending up money-pit disasters. This is what a VC can expect when going into the game: they only need a few "stars"-big winners, to make up for the
many projects that never get off the ground. Another important point to remember is that, even if a VC's holdings has an enormous market value, the pay-offs are not realized until they are able to make exits on their investments. The situation is analogous to the casino floor: you haven't really won anything until you cash in your chips and walk out the door.
Of course, the global presence of the classic VC dropped off immensely following the late-1990's Internet boom, and most had to start balancing out their portfolios with some less risky investments.
VCs 'need to have know-how and good people," says Pawinski, and that is often hard to come by in Poland as anywhere. Thus companies like MCI just might be the exception, and in fact MCI was the first company that popped into Pawinski's mind when discussing the topic.
"There are a lot of projects in Poland that need $1-2 million max, and they carry very significant risk. And right now it seems only MCI is able to bear that level of risk," he says.
Following the ticker
A brief look at MCI's stock price history reveals that it's been tough road since their beginning-they are a survivor. While their IPO in 2001 was supposed to begin around zł.3 per share, it hit the market at well over zł.8 per share because of anticipation over a deal to sell the Poland.com portal to Elektrim S.A., a behemoth holding company involved mainly in energy and telecom. But soon after IPO, MCI's share price dropped off after Elektrim abruptly backed out of the deal. MCI ended up using Poland.com as a write-off. Bad news for anyone that got in on the IPO, surely- when the share price bottomed out at zł.0.31 the company had lost over 96 percent of its valuation.
But the firm has indeed gained ground since its stock price bottomed out a year and a half ago. The latest share price as of this writing stood at around zł.2.85 per share (still only 35 percent of the 2001 IPO valuation). So it must be said that the firm has a long way to go to recover it's peak value in 2001.
MCI Management is actually a unique case, as they are one of the few publicly-traded VCs in Europe. Most VCs are privately-held. And the fact that investors can take a gander at MCI's stock quote every day to gauge the market's reaction to their every move adds quite an element of spectator excitement unusual for most VCs.
Jasieniecki is quick to point out that seven of ten of their portfolio companies have achieved profitability, pointing especially to the two big stars in its arsenal, Travelplanet.pl, a travel booking site, and One-2-One, a mobile network. With Travelplanet.pl, for example, they're initial investment was zł.2.7 million (for a 94 percent chunk), and today Jasieniecki claims that the company is worth well over zł.20 million. But these investments are so far only partially 'realized', as MCI has opted not to exit the investments entirely as of yet. Let's hope they don't have to repeat the Poland.com experience.
The big deal
Of course one of the hottest issues surrounding MCI's new zł.30 million bond offering is the legal battle over bankrupt portal Wirtualna Polska (WP).
"This is one of the most exciting deals of the last three years," says Jasieniecki, reflecting that the Netia deal is the only other recent deal that compares in its level of complexity. In the deal, for which they have bid around zł.40 million, MCI is being backed by a consortium that includes the French CA IB and is supported by WP's former president and founder Marek Borzestowski.
But Jasieniecki is mum beyond that as far as Wirtualna goes, as this can be quite a sensitive issue, for one thing because a whopping zł.20 million of the new funds raised from the bond issue are to be set aside for this project, and, after all, the battle revolves around bankruptcy law for the most part, and is largely being fought by legal professionals, not the businessmen they represent. Some market watchers give them about a 50/50 chance of landing the WP deal. And that's assuming they can raise the zł.30 million.
So why take on a bankrupt portal? What the savvy investor might note is that Wirtualna Polska, although bankrupt, is nevertheless number two on the market, in between Interia.pl, who have a market capitalization of around zł.72 million, and leader Onet.pl, with a market cap around zł.344 million. Most would guess that what MCI is banking on is that WP can find some middle ground between these two widely spaced rivals and manage to bank in a neat market cap of around zł.150 million. And it can surely be said that they recognize the power of the Wirtualna brand, still prominent in Poland's mind space despite dreary news in the business press. If their valuation of zł.150 million is for real, then getting hold of WP for zł.40 million would be quite a bargain indeed.
Most analysts feel that, provided the shareholder conflict is wrapped up soon, and with the right plan going forward, Wirtualna has a fighting chance, if not solely derived from the strength of the brand.
"It's very hard to destroy a good brand," remarks Ewa Zborowska, analyst at market research firm IDC, whose sentiment can be backed up by many other market watchers, including Steven Buckley, managing partner of Innova Capital, a private equity firm, who says that, provided the issues are resolved quickly and a good plan is in place, WP indeed has a good chance of staying in the game and succeeding. Whether MCI will be the one to save it will have to wait for the court decision.
What's in the pipes
It's the heart and soul of venture capital-the investment pipeline, where small high-risk ventures are thoroughly researched and analyzed to determine whether they'll make the cut and maybe some day become stars.
"Now we have in our pipeline more than 25 projects," says Jasieniecki. And most likely this list will be narrowed down to an even ten by the time they get ready to let the sails loose for investment. "We plan to make-this year-two to four investments from this pipeline of 10 most likely candidates," he says.
As part of their goal to triple in value over the next five years, MCI plans to invest zł.10-60 million for 2004-2006. The sources will be zł.10 million of their own cash, zł.20 million from exits, and zł.30 million from the bond issue. According to their website, the key objectives through 2006 include a minimum three exits from investments, asset value growth of zł.6/share, the growth of the number of portfolio companies to 15-20, and the building of the regional TechVenture 2.0 fund, with expansion into Czech, Slovakia, and the Ukraine. To say their plans are ballsy would of course be an understatement, but that's what this is all about.
As far as the classic high-risk start-up venture projects in the potential investment pipeline, the list revealed at last Friday's press conference included a joint venture with AGD/RTV for a B2C E-commerce site, a Wi-fi hotspot operator, and a shopping comparison search engine, among others, all in the zł.1-2 million initial investment range.
So what about other Polish VCs? PBK Investyjne, for one, is playing the patience game. "We care about the price, the value, and are not worried about how much time it will take," says Pawinski of his fund's current portfolio. When asked of the chance for the firm to make any new investments soon, he said, "I think there is a chance, but it depends on the range of successful exits, and the will and strategy of our main shareholder, PBK. We're still waiting."
Meanwhile MCI Management is apparently in the enviable position of not having to wait anymore. Granted, the Wirtualna Polska deal may be a big determining factor in the end equation-but we'll leave that one to the lawyers. For the rest, it's off to the horse races.
