Venture capital funds have over 13 milliard PLN to invest in financing business ideas. But they will only support those ones which can guarantee profits.
The idea of Adam Mocarski – to distribute medical equipment not only to hospitals, but also for ordinary people to use at home – was like hitting the bull’s eye. There appeared to be many people willing to buy blood pressure monitors. As soon as one year later, the demand was so big that in order to be able to realize all the orders on time, his company Diagnosis had to find the funds for investments: half a million zloty to build a countrywide distribution network. In July 2003, the company started the negotiations with the Podlaski Equity Investment Fund (PEIF), which in December became Diagnosis’s shareholder.
PEIF is one of over 30 venture capital(vc) funds, which invest in miscellaneous business enterprises. Their advantage is the fact that, unlike bank loans, while offering equity capital, they also assume a part of the risk connected with the possible success or failure of the financed investment. On the other hand, it is this higher risk that makes it so difficult to persuade a vc fund to invest their money. An entrepreneur has to be very effective in convincing the fund manager that the company’s development strategy guarantees satisfactory profits.
For us, the biggest asset of Diagnosis are the people who know this branch of industry perfectly well, and the success they achieved in Podlasie indicates that they can repeat it on the national market as well. – says Andrzej Parafiniuk, the President of PEIF.
Those looking for an investor will have to prepare themselves for tough negotiations. It is estimated that the value of the active capital at the disposal of all venture capital funds in Poland, exceeds 13 milliard zloty. This is how much those funds can invest in different enterprises. However, only the best can count on their support.
– We invest the capital in one out of ten enterprises on average. – says the President of PEIF. Statistically, the selection is much tougher: only one out of one hundred projects which entrepreneurs bring to venture capital, gets a positive recommendation.
Before the funds decide to invest the money, they subject the applicant to a close investigation. They verify managerial skills and experience of company managers. Simultaneously, the business that a company is doing is also examined. There should be something extraordinary about the company’s activity, a distinguishing element giving it the upper hand against the competition. Several years of experience on the market is an asset which makes the project more credible, but that does not mean that those who only want to start business activity have no chances. One of such examples was Artur Dżagarow who came to Enterprise Investors fund two years ago. All he had was some experience of working in a wholesale drug warehouse and an idea to create a chain of pharmacies. He received 10 million US dollars and is currently managing Pharmacy 21-the biggest chain of pharmacies in Poland. The most important task of the entrepreneur is to convince the fund that the company development plan is feasible. A good business plan and profit prognoses are vital (the fund will only invest if they are convinced that they will make money on that).
Make the best impression at every stage of the talks
Even if we pass all the selection stages with the highest notes, what may appear to be an insurmountable barrier is the scale of the company’s activity. In general, foreign commercial funds operating in Poland do not want to get involved in projects below 5 million US dollars.
– The costs of preparing, operating and closing an investment worth 1 million dollars are similar to those for an investment worth 10 million dollars, while a possible profit in the second case is several times higher. – explains Piotr Tamowicz, an economist at the Institute of Market Economy Research. This is why smaller scale enterprises can only look for support in, so-called, funds with a mission, which invest, for instance, only in a limited area, or in a particular branch of industry. Such funds are often subsidized from public funds, by non-profit or international organizations. Apart from the Podlaski Equity Investment Fund, there are also such funds as: Caresbac, Hals Equity Investment Fund, The Górnośląski Equity Investment Fund and The Society of Socio-economic Investments.
What may appear to be a solution for small enterprises is the Seed Capital Program, which is financed from the funds of the European Union. Over 200 million Euro from this program, is to be spent, next to micro-loans, on creating the, so-called, seed capital, which would provide capital support for small and medium-sized companies. The Polish Agency for Enterprise Development, which coordinates this project, has two years to implement it.
Private investments can also be supported by individual businessmen, so-called, business angels. Their investment power in Poland is estimated to be from 3 to 5 milliard PLN. They act on the same basis as the funds, but in a less formal way. They are more difficult to find, but often appear to be more flexible as far as the requirements towards investments are concerned. Hubert Stępniewicz is one of those who experienced that while looking two years ago for money to take over and invest in Hygienika, the producer of Bambino diapers. Even though he knew very well venture capital industry (he had been a manager of 3TS -a new technologies fund), for half a year he was not able to persuade any vc fund to invest. He was saved by a private investor, who was convinced by the development strategy prepared by Stępniewicz. Within a year, the company managed to double its share in the diaper market.
You have signed a contract? You will be constantly monitored
When a fund or an investor has decided to support the company, all what remains to be done is to negotiate the investment contract. Most often, the fund subscribes to a minority share in the company, which means that they must have a guaranteed influence on the company. It usually boils down to a place in the Supervisory Board and a detailed supervision of the financial situation of the company. The entrepreneur must be aware that the investor will at all costs want to achieve the agreed rate of return. Thus, they will pay special attention to costs and keeping a financial discipline.