Internet cos., vencap funds not coming together yet
While telecom companies are raising vast amounts of funds and that sector is undergoing heavy investment as new alliances are formed, the internet sector awaits even a trickle of funding.
Few, if any venture capital companies have done any recent internet deals in Poland and they said that generally the pickings for such investments are slim.
"It's not that we won't invest in these companies, we just haven't found any good ones yet," said Neil Milne, managing director of Copernicus Capital Management.
"Some people have come to us with ideas, but it's just 'idea-stage' companies. We're not interested in that," said Richard Engel, vice president of Pioneer Investment Poland.
"We haven't found anything where the people had the right concept," added Gregory Stangel, an investment manager at Copernicus.
So far, the only internet investment plays have come from companies already in the sector. In March, for example, pan-European telecom company Global TeleSystems Group took 24.9% stakes in two of Poland's leading internet service providers, Internet Technologies Polska and Atom. (See WBJ March 22-28) The two firms are now acting in concert under the name Internet Partners.
But venture capitalists remain hopeful that the internet deals will soon start coming to fruition - if, and it's a big if - the companies have proven track records rather than złoty-starred dreams.
Copernicus gets about one internet deal proposal per month, Stangel said, and that pace is increasing. "I've seen some exciting possibilities in Poland, but they don't fit our profile: large companies with a track record," Stangel said. "We've already got some start-ups in the portfolio, and we're not looking for any more."
Despite this, "We are very positive on the sector," Stangel said.
And others hope to close deals later in the year. Enterprise Investors said it is considering a "several million dollar" investment in a Polish internet start-up, said Zygmunt Grajkowski, executive vice president of Enterprise Investors. A decision should be made by September, he added. The company wants to adapt business models that have proven successful in the United States, like Amazon.com, to the Polish market, Grajkowski said. If the investment happens, it would be Enterprise Investors first internet deal in Poland.
Pure start-ups aren't the only type of internet companies searching for venture capital, however. More established Polish internet companies such as portal site Wirtualna Polska and internet service provider Polska Online have also looked for deals.
So far, one of the few vencap internet deals was the 1995 purchase of a stake in Internet Securities, an emerging market financial news service, by Advent International. But Advent cashed out in January of this year, with Euromoney, a U.K.-based publishing house, taking an 80% stake in the firm for more than $40 million, said Marco Bosman, general manager of Internet Securities Poland.
Also, EDventure Ventures, a U.S.-based venture capital fund, has a stake in Polska Online, an ISP.
Finding the right deals isn't the only problem facing vencap funds or internet companies, however. Working out the thorny question of valuation is also difficult.
"Even if I did find one, valuing it is extremely difficult. I wouldn't know how to do it," Engel said. "With the exception of maybe a couple VCs in California, nobody knows."
"Internet companies are not valued like other companies are valued," he added. "There's just a lot of speculation and expectation. It's tulip mania all over again."
This can lead to some potential cyber-deals getting shot down.
"There's often a difference of opinion between the entrepreneur, with an (understandably) high valuation of his company, and people like us looking for their revenues over the next three years," Milne said.
The relative youth of the Polish internet industry is another obstacle to firms searching for cash, vencap investors said.
"Often these companies are at a very early stage. Their requirements of significant technical assistance and hands-on experience make them a gamble," Milne said.
In addition to youth and inexperience, Polish internet start-ups, like their counterparts everywhere else, are hampered in their search for capital by invisible returns on investment.
"With some of them, there's no profit as far as the eye can see," Engel said.
"You have to ask yourself, how are they going to get revenue? Ad space? Nobody has been really good at selling that," Engel said.
"With the characteristics these firms have, it's going to be very difficult for them to easily get money from the typical venture capital companies doing business in Poland today," Milne said.
"We may be venture capital companies, but there is a limit to how much we'll gamble," Milne said. "They don't have revenues, but they require lots of cash, not only for hardware but for promotion. They are low revenue, high cost businesses."
But at least one benchmark puts Polish internet companies right alongside the majority of their Silicon Valley counterparts. Asked what was the most significant characteristic of internet companies in Poland, Milne said, "They're bleeding lots of cash."
Few, if any venture capital companies have done any recent internet deals in Poland and they said that generally the pickings for such investments are slim.
"It's not that we won't invest in these companies, we just haven't found any good ones yet," said Neil Milne, managing director of Copernicus Capital Management.
"Some people have come to us with ideas, but it's just 'idea-stage' companies. We're not interested in that," said Richard Engel, vice president of Pioneer Investment Poland.
"We haven't found anything where the people had the right concept," added Gregory Stangel, an investment manager at Copernicus.
So far, the only internet investment plays have come from companies already in the sector. In March, for example, pan-European telecom company Global TeleSystems Group took 24.9% stakes in two of Poland's leading internet service providers, Internet Technologies Polska and Atom. (See WBJ March 22-28) The two firms are now acting in concert under the name Internet Partners.
But venture capitalists remain hopeful that the internet deals will soon start coming to fruition - if, and it's a big if - the companies have proven track records rather than złoty-starred dreams.
Copernicus gets about one internet deal proposal per month, Stangel said, and that pace is increasing. "I've seen some exciting possibilities in Poland, but they don't fit our profile: large companies with a track record," Stangel said. "We've already got some start-ups in the portfolio, and we're not looking for any more."
Despite this, "We are very positive on the sector," Stangel said.
And others hope to close deals later in the year. Enterprise Investors said it is considering a "several million dollar" investment in a Polish internet start-up, said Zygmunt Grajkowski, executive vice president of Enterprise Investors. A decision should be made by September, he added. The company wants to adapt business models that have proven successful in the United States, like Amazon.com, to the Polish market, Grajkowski said. If the investment happens, it would be Enterprise Investors first internet deal in Poland.
Pure start-ups aren't the only type of internet companies searching for venture capital, however. More established Polish internet companies such as portal site Wirtualna Polska and internet service provider Polska Online have also looked for deals.
So far, one of the few vencap internet deals was the 1995 purchase of a stake in Internet Securities, an emerging market financial news service, by Advent International. But Advent cashed out in January of this year, with Euromoney, a U.K.-based publishing house, taking an 80% stake in the firm for more than $40 million, said Marco Bosman, general manager of Internet Securities Poland.
Also, EDventure Ventures, a U.S.-based venture capital fund, has a stake in Polska Online, an ISP.
Finding the right deals isn't the only problem facing vencap funds or internet companies, however. Working out the thorny question of valuation is also difficult.
"Even if I did find one, valuing it is extremely difficult. I wouldn't know how to do it," Engel said. "With the exception of maybe a couple VCs in California, nobody knows."
"Internet companies are not valued like other companies are valued," he added. "There's just a lot of speculation and expectation. It's tulip mania all over again."
This can lead to some potential cyber-deals getting shot down.
"There's often a difference of opinion between the entrepreneur, with an (understandably) high valuation of his company, and people like us looking for their revenues over the next three years," Milne said.
The relative youth of the Polish internet industry is another obstacle to firms searching for cash, vencap investors said.
"Often these companies are at a very early stage. Their requirements of significant technical assistance and hands-on experience make them a gamble," Milne said.
In addition to youth and inexperience, Polish internet start-ups, like their counterparts everywhere else, are hampered in their search for capital by invisible returns on investment.
"With some of them, there's no profit as far as the eye can see," Engel said.
"You have to ask yourself, how are they going to get revenue? Ad space? Nobody has been really good at selling that," Engel said.
"With the characteristics these firms have, it's going to be very difficult for them to easily get money from the typical venture capital companies doing business in Poland today," Milne said.
"We may be venture capital companies, but there is a limit to how much we'll gamble," Milne said. "They don't have revenues, but they require lots of cash, not only for hardware but for promotion. They are low revenue, high cost businesses."
But at least one benchmark puts Polish internet companies right alongside the majority of their Silicon Valley counterparts. Asked what was the most significant characteristic of internet companies in Poland, Milne said, "They're bleeding lots of cash."
