Small firms come of age, enabling VC funds to find deals

That has changed. Venture capitalists now say they have a richer pool of qualified applicants for the $1 billion-$1.2 billion in funds the Polish Venture Capital Association estimates were available here in 1997. Inexperienced, poorly run companies have given way to polished small enterprises that need some cash to get big.
"When you asked managers a few years back about the future of their companies, they usually panicked," said Jacek Siwicki, executive vice president of the Enterprise Investors. "Now they'd elaborate on the different possibilities of what may happen."
Siwicki said that over the last few years, business owners have become better prepared and now come to meetings with a well-conceived business plan.
"They really know where they want to go," he said.
That's good, because venture capitalists now have even more money to give entrepreneurs. Siwicki said he expects the $1 billion worth of venture funds available last year to grow by $200 million-$250 million a year. Some new entrants also plan to throw a significant amount of fresh capital into the market. The European Bank for Reconstruction and Development (EBRD) plans to invest up to $10 million in a real estate fund managed by Pioneer Investment Poland.
In addition, Barings Central European Fund plans to invest up to $250 million throughout the region, "a significant part" of which will go to Poland, said Gyuri Karady, managing partner of the fund. He said that a few years ago it might have been difficult for venture capital funds to do "quality" deals, that is no longer the case.
"I'd certainly agree that things are changing, and changing for the better," he said. "I think in this respect Poland may be taking the lead."
Barings plans to set up an office in Warsaw within the next six months, Karady said. The fund's goal is to raise the entire $250 million by the end of 1998 and invest all of the money in three to four years. The fund will initially invest $5 million-$10 million in each company, he said. The fund is currently looking at two companies in Poland, after completing its very first investment in Hungary in December 1997, when it took a 40% stake in a firm that produces chip-based cards.
Of the $918.2 million venture capital available in Poland in 1997, $808 million has been invested so far. (See the List, page 14). The most active firm is Enterprise Investors, one of the first funds to come to Poland in 1990. Enterprise Investors raised half of all available venture capital in Poland - $505 million - through its three funds: the Polish American Enterprise Fund (PAEF), Polish Private Equity Fund and Polish Enterprise. The fund has already seen a healthy return on some of its investments, which has enabled it to plow some extra money into new projects. To date, the fund has invested $564 million and still has $130 million waiting to find a home.
Siwicki said his firm expects to see an average return of 30% annually - a figure for which most funds aim.
However, venture capitalists have to invest with a steady hand in order to see those returns. Blalej Dymaczewski, capital investment manager with the Pioneer Poland Fund, said he is particularly interested in agro-businesses, telecommunications and distribution, although he does not limit investments to those sectors.
Pioneer Investment Poland raised $61 million and has committed $32 million in nine separate deals so far, said Vice President Richard Engel. The fund has promised a further $10.5 million to other companies.
Dymaczewski said Pioneer's 1998 goal is to sign deals with five companies, putting in $1 million-$7 million each time.
Dymaczewski said that while his firm has no shortage of companies it wants to invest in, that does not necessarily mean the companies themselves are interested in taking on a venture capital partner.
"The problem, however, is that they don't look for this type of financing," he said. "The concept of funds is not yet widely known on this market. Most of our talks start with educating."
It is the same problem Jerzy Strzelecki, general director of the Poland Investment Fund, said he has.
"I think there are many dynamic and fast-growing companies to invest in," he said. "Sometimes they just lack an ability to present themselves well, but generally the situation looks good."
Poland Investment Fund, managed by Copernicus Capital Management, has already invested half of the $25 million it raised, Strzelecki said. The firm is trying to reach companies in four major sectors: building materials, telecoms, media and food products. Copernicus has already closed one deal this year. Together with Advent International, the company is planning to spend $13 million in a waste-recycling company called Slag Recycling (See WBJ, March 16-22).
To date, Copernicus has closed seven deals with a minimum of $1 million invested in each. But Strzelecki said it is getting harder to get entrepreneurs to agree to bring on venture money, which often also requires them to give up a large stake in their company.
"It's more and more difficult to make easy transactions, without sweating and hard work," he said.
Siwicki said one problem is competition among venture capitalists and other funding sources. Many companies that had difficulty finding financing a few years ago now have several options from which to choose, including private investment or a public listing on the Warsaw Stock Exchange (WSE) or the over-the-counter market.
"Companies that go to the stock exchange have dispersed ownership," he said. "They don't feel the pressure that a fund would put on them."