Surviving the dotcom vortex

Internet companies find diversification is the key to surviving lean times.

Marcin Żuchowicz experienced dotcom failure first hand and survived. When Internet projects were starting to come into fashion in Poland in the mid-1990s, he and a friend created an English-language Web site called Explore Poland to promote the country abroad. They worked diligently on the site for about six months, but eventually a lack of revenue zapped it offline.

"We expected to earn money on advertisements, but it was 1996 when no Internet advertising existed," Żuchowicz said. After ditching the Web site, his partnership, Point of View, concentrated on designing company Web sites - another Internet-related field that competitors quickly filled. But instead of being written off as another dotcom casualty, in the spring of 2000 Point of View became a joint-stock company, changed its name to e-point and started focusing on developing IT solutions that combine mobile telephony and the Internet. It is now one of the fastest growing tech firms in Poland. Żuchowicz, e-point's 28-year-old president and chief executive officer, has seen the firm's revenue shoot up 921% in the past three years.

I will survive

At a time when many tech-related companies are seeing revenue drop, market share erode and business models fail, some Polish IT firms are thriving - even in the current worldwide economic slowdown that has forced companies that purchase their products and services to cut back spending.

E-point topped a list of nine Polish tech firms that made it onto an annual ranking of the 50 fastest-growing technology companies in Central Europe issued earlier this month by international management consultancy Deloitte & Touche (D&T). The Fast 50 ranking was based on the percentage of revenue growth of companies that develop or implement hardware or software. The nine Polish tech firms had individual compound annual growth rates (CAGR) of more than 70% from 1998-2000. All 50 firms included in the ranking had an operating history of at least three years and an ownership structure that excluded majority-owned subsidiaries of strategic foreign companies. Slightly more than 50% had small asset bases of less than $1 million.

E-point's revenue grew from zł. 400,000 in 1998 to zł. 1.6 million ($390,000) in 1999 to about zł. 5.4 million ($1.3 million) last year. Turnover this year is expected to reach zł. 18 million ($4.3 million).

Żuchowicz said a number of reasons are behind the company's rapid revenue growth: starting a tech company from scratch; being one of the first firms to operate on Poland's Internet market; staying focused on offering Web solutions under the company's own brand; and building a solid client base of banks, insurance companies, fast-moving consumer goods (FMCG) firms and pharmaceutical companies. Last but not least, a capital injection of $1.25 million from the venture capital (VC) group Enterprise Investors in April 2000 also helped boost the company's growth, he said.

Other industry professionals, however, said rapidly growing tech companies in Poland have several characteristics in common, including adding value for clients, expanding products to complement existing ones and being aware of global and local developments in the tech sector. They said it also helps to have managers who understand IT products as well as the financial aspects of running a business, focusing on niche areas, growing the businesses and having at least one major corporate client. Analysts said that while most of these traits are universal for successful businesses in all sectors worldwide, others are more vital for tech companies that want to achieve and retain high revenue, especially in a tough economic environment.

Industry professionals said high-growth tech firms generally offer value-added services.

E-point, for example, now focuses more on developing mobile Internet and e-commerce solutions, an area that Żuchowicz said will add value for its clients by providing applications that can save time and money.

For PTE Nationale-Nederlanden Polska, a pension fund, e-point implemented an encrypted WAP service to allow the firm's clients instant access to pension fund accounts via WAP-enabled mobile phone handsets. The firm also creates mobile reporting systems for corporate sales forces to communicate with their home offices while they're on the move.

"More value means that (our) clients can take real advantage of the Internet by selling to or serving (their) clients via the Internet and making Internet communications more effective, especially when companies have lots of locations around the country," Żuchowicz said.

Successful tech companies have to look to add new products to their existing ones, industry analysts said. And other high-growth tech companies are following e-point's example in increasing their offerings based on their clients' needs.

Infocon, a tech company that creates IT systems for sales departments of FMCG and pharmaceutical companies, will begin offering customer relationship management (CRM) systems, enabling firms to collect and evaluate data from clients, next January. After Infocon discovered the need to develop a CRM system for its own use, one of its clients also asked for a CRM system. The company then branched off into a new product line, said Marcin Zastawny, Infocon's 30-year-old founder and president. According to D&T's Fast 50 ranking, Infocon was the eighth-fastest growing tech firm in Poland with 82% revenue growth from 1998-2000.

Carving a niche

Depending on their niches, tech companies may not have a choice but to expand their product lines to keep revenue high. "The danger is staying with a technology that could become obsolete in a short time," said Marcin Duczyński, director of the Warsaw office of venture capital firm Advent International.

Tech executives in rapidly growing companies are tuned in to global and local developments in their sector, industry professionals said. The Warsaw-based IT consultancy Infovide, for example, started out as a software house but switched to IT consulting as its main line of business when more software houses and large systems integrators started providing IT consulting functions during the mid-1990s.

Seeing that companies wanted objective analyses and advice from independent consultants not associated with software houses, Infovide - which was the fifth-fastest growing tech company in Poland with 111% CAGR from 1998-2000 - realized its opportunity lay in IT consulting.

"Companies understood that they needed consultants as independent agents who could fill the gap between suppliers and vendors and provide objective implementation (of systems)," said Borys Stokalski, Infovide's president and cofounder. "They wouldn't accept a consultant who was an agent of a major vendor, so these (consultancies) went out of business."

Industry professionals said management is also the key for successful high-revenue tech firms. Robert Manz, a managing partner at Enterprise Investors, said its high-quality employees were one of the reasons for the rapid revenue growth of e-point.

Others emphasize that tech executives must know how to run their businesses properly to survive market swings. "The problem facing Poland now is that certain sectors are declining because of the recession," Duczyński said. "Companies must start saving money instead of spending because when this happens, many managers don't know how to deal with it, so they cut costs."

Many high-growth tech companies have carved out niches where they are the dominant players. Infocon's niche in providing sales-force automation (SFA) systems - technology that enables sales departments to manage customer orders - to FMCG and pharmaceutical firms is fairly tight. The firm recently went head-to-head with only one of its main competitors vying for tenders for SFA systems from two FMCG companies. "(Since) we are in a niche business, we are fairly safe from competition for a little while," Zastawny said.

High-growth tech companies also need to reinvest profits or obtain external money to keep growing and expanding. For example, Winuel, a Wrocław-based producer of software for industrial concerns that had 98% CAGR from 1998-2000, and Spin, a Katowice-based software designer specializing in billing, medical, administrative and management systems, which had 468% CAGR from 1998-2000, both reinvest profits in further development.

Other high-growth tech companies must seek external funding. According to D&T's report, two-thirds of the fastest-growing tech firms in Central Europe plan to seek equity-based or debt-based funding or a combination of both during the next three years. Of the companies planning to seek capital, more than 80% said they would need up to $5 million.

Infocon, for example, will start searching for a VC firm to pony up financing, marketing and sales guidance in exchange for up to 40% of the company. "Looking at the potential of this market … the only way to realize it is with external financing to help create a brand and company image, which in turn would help sales," Zastawny said. Infocon would need about $3 million-$3.5 million to increase its two-person sales department and run a sustained advertising campaign to reach thousands of medium-sized pharmaceutical companies throughout the country, he said.

Meanwhile, Infovide has already started negotiations with five VCs to obtain about $5 million to develop new consulting products, allowing it to acquire other niche firms and to enable it to go public in three years.

Aram, a Warsaw-based company that implements IT systems for brokerage houses and data processing systems for local and national administrations, also needs significant investment for further development, according to Wojciech Skurzak, the firm's president. But with the market downturn, Aram will probably wait until the first half of 2002 before making a move. The firm was the third-fastest growing Polish tech company on the Fast 50 ranking with 288% cumulative revenue growth during the past three years.

Most high-growth tech companies have at least one major corporate client to sustain revenue growth. Spin, for instance, has been able to increase its revenue so quickly because of contracts with telecom giant Telekomunikacja Polska (TPSA) for which it provides billing software. "It's the main source of our revenue growth," said Michał Górski, Spin's vice president.

Likewise Aram has scored some big deals that have beefed up its revenue inflow. Last year, the company implemented Poland's National Court Registration system to record and update information about legal entities such as companies, institutions and foundations, which operate in the country.

In the end, however, some industry professionals purport that a much more simple theory can explain their two- and three-digit revenue growth. "Companies like ours just have to sit down from time to time and think about what the (firm's) strategy will be for the next one to two years," Żuchowicz of e-point said. "Sometimes you guess (correctly) and sometimes you don't. If you don't guess where the market goes, then you won't have fast revenue growth; if you guess correctly, then you'll have it."

Roseanne Gerin