Venture capital bets on retailer office depot
But unforeseen costs and time delays inflated the total cost to $8.5 million, and about a year ago they decided to look to venture capital funds for help. "Initially we believed we could do it ourselves," Rick Lepley said last weekend as workers at the 4,500-square-meter Office Depot store in the Warsaw suburb of Janki took inventory to prepare for the Sept. 7 opening. Lepley formed Potamkin International Polska with three others, including Polish-American entrepreneurs Robert and Alan Potamkin.
"More and more, I could see we'd probably be better off not to take the whole risk," said Lepley, the store's president.
Getting a loan from a Polish bank was not an option.
Lepley and his partners had a lot of unexpected short-term costs and needed cash quickly. They also had no credit rating in Poland and did not have any assets to offer as collateral.
"What we were really talking to people about was a concept of a company that doesn't exist," or one without any track record, said Lepley.
Though the Potamkin Companies own 500 Office Depot stores throughout the world with 1994 sales exceeding $4.2 billion, they have nothing to do with the Polish venture. Potamkin International has the right to use the Office Depot brand name in Poland.
Lepley and his partners found cash from venture capitalists, who generally make equity investments in high-risk, but potentially high-reward ventures. Under the equity arrangement, both sides share in profits and losses.
Lepley and his partners gave up 34% of their company in exchange for $4 million in equity capital and assistance in setting up shop in Poland.
Poland Partners and Renaissance Partners, two funds specializing in equity investments in the region, each pledged $2 million.
"We see ourselves as the coach of an athletic team," said Robert Lepkowski, who moved here from Boston in spring 1994 to help set up Renaissance Partners. "We don't play the game, but we help them analyze strategy, review the performance of individual players and help them with teamwork."
Renaissance Partners has a total capitalization of $60 million; Poland Partners, $40 million. Neither can expect to see a return on its investment for at least three yeas, noted Jacek Siwicki, a senior vice-president with Poland's largest venture capital firm, Enterprise Investors in Warsaw.
"You need at least three years to grow the business and increase its value," said Siwicki, who said his firm never considered investing in Potamkin International. "You need at least two to three years of patience before the results start to appear."
Renaissance Partners will probably sell its share in Potamkin International in about five to seven years, said partner Jacek S. Witak. He said his fund's investors expect an annual return of about 20%-25% over that period, which he is confident Office Depot will achieve. He said his fund may pledge another $2 million if Office Depot proves to be profitable in the next couple of years.
Traditionally, venture capitalists look for enterprises that promise returns exceeding the GDP growth rate, which in Poland is 6.5%. Lepley, while vague on profit projections, said he feels his company can achieve that - but only after they have opened two or three more stores in the next two years.
With venture capital, Lepley and his partners bought some time.
Their strategy is to have 15 to 20 stores open throughout Poland in the next five years. But they don't expect to see a profit before they have their third store open, said Lepley. But they will need to go back to the market for more money - most likely in the form of venture capital - to finance additional stores.
"What you're really trying to do is to build the value of the business" over the long term," said Lepley. His company plans to do that by opening as many stores as possible in a short period, carving a niche before competitors arrive.
Lepley said he hopes annual sales in Poland reach $100 million by the time he has 10 to 12 stores open. But if the past two years are any indication, getting there will not be easy.
In his business plan, Lepley did not reckon with translating 4,000 computer software programs from English into Polish - which cost about $500,000 - and paying $200,000 to send 20 employees to Office Depot stores in the United States for two months of training.
While Poland is virgin territory for large retail chains, Lepkowski of Renaissance Partners said the success of the Makro Cash & Carry store, which opened earlier this year, is an encouraging sign. Now that consumers are learning to buy in huge quantities, the time is ripe for large discount retail outlets such as Office Depot.
"If you can provide good prices and good products, you should be able to supply a good part of the market," he said. "Every business needs office supplies, but the market here is very fragmented ... We felt someone who came in with the purchasing clout is a winner."
Lepley conceded that he may be a bit early getting into the retail and wholesale office supply market. But "I'd rather get in early and understand the market conditions," he said.
"More and more, I could see we'd probably be better off not to take the whole risk," said Lepley, the store's president.
Getting a loan from a Polish bank was not an option.
Lepley and his partners had a lot of unexpected short-term costs and needed cash quickly. They also had no credit rating in Poland and did not have any assets to offer as collateral.
"What we were really talking to people about was a concept of a company that doesn't exist," or one without any track record, said Lepley.
Though the Potamkin Companies own 500 Office Depot stores throughout the world with 1994 sales exceeding $4.2 billion, they have nothing to do with the Polish venture. Potamkin International has the right to use the Office Depot brand name in Poland.
Lepley and his partners found cash from venture capitalists, who generally make equity investments in high-risk, but potentially high-reward ventures. Under the equity arrangement, both sides share in profits and losses.
Lepley and his partners gave up 34% of their company in exchange for $4 million in equity capital and assistance in setting up shop in Poland.
Poland Partners and Renaissance Partners, two funds specializing in equity investments in the region, each pledged $2 million.
"We see ourselves as the coach of an athletic team," said Robert Lepkowski, who moved here from Boston in spring 1994 to help set up Renaissance Partners. "We don't play the game, but we help them analyze strategy, review the performance of individual players and help them with teamwork."
Renaissance Partners has a total capitalization of $60 million; Poland Partners, $40 million. Neither can expect to see a return on its investment for at least three yeas, noted Jacek Siwicki, a senior vice-president with Poland's largest venture capital firm, Enterprise Investors in Warsaw.
"You need at least three years to grow the business and increase its value," said Siwicki, who said his firm never considered investing in Potamkin International. "You need at least two to three years of patience before the results start to appear."
Renaissance Partners will probably sell its share in Potamkin International in about five to seven years, said partner Jacek S. Witak. He said his fund's investors expect an annual return of about 20%-25% over that period, which he is confident Office Depot will achieve. He said his fund may pledge another $2 million if Office Depot proves to be profitable in the next couple of years.
Traditionally, venture capitalists look for enterprises that promise returns exceeding the GDP growth rate, which in Poland is 6.5%. Lepley, while vague on profit projections, said he feels his company can achieve that - but only after they have opened two or three more stores in the next two years.
With venture capital, Lepley and his partners bought some time.
Their strategy is to have 15 to 20 stores open throughout Poland in the next five years. But they don't expect to see a profit before they have their third store open, said Lepley. But they will need to go back to the market for more money - most likely in the form of venture capital - to finance additional stores.
"What you're really trying to do is to build the value of the business" over the long term," said Lepley. His company plans to do that by opening as many stores as possible in a short period, carving a niche before competitors arrive.
Lepley said he hopes annual sales in Poland reach $100 million by the time he has 10 to 12 stores open. But if the past two years are any indication, getting there will not be easy.
In his business plan, Lepley did not reckon with translating 4,000 computer software programs from English into Polish - which cost about $500,000 - and paying $200,000 to send 20 employees to Office Depot stores in the United States for two months of training.
While Poland is virgin territory for large retail chains, Lepkowski of Renaissance Partners said the success of the Makro Cash & Carry store, which opened earlier this year, is an encouraging sign. Now that consumers are learning to buy in huge quantities, the time is ripe for large discount retail outlets such as Office Depot.
"If you can provide good prices and good products, you should be able to supply a good part of the market," he said. "Every business needs office supplies, but the market here is very fragmented ... We felt someone who came in with the purchasing clout is a winner."
Lepley conceded that he may be a bit early getting into the retail and wholesale office supply market. But "I'd rather get in early and understand the market conditions," he said.
