Venture caps cautious on IT sector
"The past year was not a very active one on the venture capital scene regarding investment in the IT sector," said Andrzej Jasieniecki, a capital markets analyst at MCI Management. "There was still a need by young enterprises looking for capital, but the readiness among investors was weaker than before because a question mark hangs over the IT sector in the longer perspective."
Since the Internet bubble popped two years ago, the IT sector has become a much tougher arena for venture capitalists. With Poland's economy chugging along in low gear, computerization and technology upgrades by Polish businesses remain a distant priority, postponing the awaited recovery of demand for IT systems and services.
As a result, ven caps are seeing fewer attractive investment proposals, and their transaction numbers and outlay have fallen, so that niche investments requiring an funding below $1 million remain the focus of VC interest, Jasieniecki said.
"IT companies have competitive products, services and technologies, but they don't have clients or significant demand, so there is no way to get the expected return on investment," he said.
MCI's only investment this year was its purchase of a 50% stake in mobile solutions provider 1 to 1 at a cost of $100,000. Since then the fund has brought new investment to a halt.
"We've stopped our investment policy until the first half of next year, until we eliminate the biggest cash risks in our portfolio," Jasieniecki said. "Most investment policy is focused on capability expansion rather than venture capital. It's not a time for investment. It's a time to acquire competitors, merge, reduce costs, and redefine business models, not to engage in new projects."
The decline in the domestic capital market that has followed the economic slowdown has made it tough for ven caps to sell off the portfolio businesses they have nurtured, leaving sales to strategic investors as their only realistic exit strategy, said Neil Milne, the managing director of Copernicus Capital.
"It's no longer possible to invest in a company and then sell it for silly money a few years down the line," he said.
With the investment market swept clean of financial investors, venture capitalists must be prepared to shell out to develop their portfolio companies until they attain financial independence with little or no external financial support, Milne said.
The only attractive investment proposals in the current market must demonstrate demand firmly rooted in blue-chip corporations and offer their clients tangible savings, such as electronic billing systems, said Tomasz Piętka, the managing director of BMP Polska.
"It's time for investment in IT infrastructure, access, mobile applications and smart services - little things that will add value to existing corporations," he said.
But with weak economic growth and a bear market, venture capitalists don't see the business climate improving in the short term.
"It is very difficult to invest, build value and exit right now," Piętka said. "In 2003 the trend will be the same."
