Warsaw: A Lesson in Outliving Toxicity
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The Family is on the road, hunting for the best founders all across Europe & understanding how to build bridges in what remains a pretty fragmented continent. One of our latest stops was Warsaw, where we met entrepreneurs, investors and great community builders. Here are some thoughts on our encounters in the Polish capital, where we engaged with dozens of founders & investors; if we didn’t get to meet, please reach out! (mathias@thefamily.co).
In Warsaw, we met two contrasted responses to what was once a very underserved venture capital market. On one hand, we met warriors who in an effort to generate cash had built local businesses, ranging from software outsourcing firms to restaurants, and were now set on building scalable businesses. On the other, we met founders lost in the twisted incentives and counterproductive state programs & grants created in an attempt to kickstart the local ecosystem. In that sense, the Galatians aren’t completely right when it comes to ecosystem building: you don’t always reap what you sow.
A Sea of Public Money
Until very recently, local financing options for early-stage and bold ventures were quite limited. That changed completely with the recent EU-Polish decision to inject venture money into Polish startups. All of a sudden, dozens of people with varied track records found themselves at the head of early-stage funds pouring millions of euros into Polish startups, grant programs were established to support founders in the earliest days, etc. With too little history to recognise the good from the bad, entrepreneurs have ended up with toxic investors in their cap tables and incredible conditions tied to their financing.
Public-private partnerships have hugely increased the amount of capital available to Polish ventures: adjusted for market size, the Polish government is pledging 10x times more capital to startups, in the form of grants, than its neighbour, the Czech Republic. As the team from Startup Yard points out, these government programs aren’t necessarily evil, but…
“Today a grant might be easy money for a startup in Warsaw or Krakow. But a year from now, the company may have to turn down an investor that somehow doesn’t fulfil the grant’s requirements. Or maybe the company won’t be able to relocate.”
Those are all dangerous things for founders to sacrifice so early. You don’t know at the beginning if the city you launched from is the one that makes most sense long-term, or where your next investor will come from.
Defeating Toxicity
With few foreign seed funds being adventurous enough to keep heading east past Berlin, for a long time the options were constrained to a few business angels or self-financed bootstrapping. Lots of the people we met did the latter by building side-businesses. It was amazing to see how recurrent that narrative was. Sometimes it was an outsourcing agency, or several of them. A few of them owned restaurants. But almost invariably for the best ones, their beginnings had been entirely self-funded. This taught them discipline in putting the capital they subsequently raised to work, but more importantly it freed them from any of the constraints that come with public grants or state money transiting through the hands of VCs.
These constraints are real: as an example, the Bridge Alpha & NCBiR programs give government a priority clause when startups get sold and the right to seize VC shares in startups if needed. Not a great selling point for global growth capital. Being involved in 80% of VCs through both programs, the government is by far the single largest LP.
Much like some outstanding founders manage to navigate these toxic waters, some investors outshine the swarms of new funds that have cropped up with the recent inflow of capital. The ecosystem is definitely moving in the right direction, and as investors build a track record with founders, its quality will only keep increasing; newer founders won’t have to worry about the funding issues their predecessors faced.
Market One, RTA & Kulczyk (we must have missed other good ones, and would love to hear from you!) stood out as value-adding, founder-friendly partners, conscious of the perils local startups face and determined to protect them from some of the surrounding malpractice.
And there is a lot worth protecting:
- the talent of Poland’s engineers has been evident for a while and prompted the establishment of big outsourcing firms; but as competition to hire local talents heated up, several founders mentioned that many firms were now building software teams in Romania.
- Valuations are still low when put next to comparable companies in Western Europe, likely due to the lack of competition in early-stage investing.
- Poland is a pretty big market, but it’s quite decentralised. Unlike France or the UK, which concentrate most economic activity (and even more so tech activity) in their capitals, the Polish ecosystem is made up of several near-equal hubs (Warsaw, Krakow, Gdansk, Poznan…); this means that when considering what market to launch next, neighbouring countries come almost as naturally as other Polish cities.
- Polonia, the Polish diaspora, is one of the world’s largest and most dispersed. There is a culture of emigration in the country, which makes international expansion or relocation to more strategic markets significantly less daunting.
- Though Poland’s unicorns don’t include a single company less than twenty years old, a new generation of entrepreneurs is emerging, and will serve as the bedrock for a healthier ecosystem. Brainly, Docplanner, Creamfinance, but also younger companies like Packhelp or Growbots are great examples.
So what’s The Family’s plan in Warsaw?
Our offer to Polish founders is straightforward: we are here to bring alternative sources of financing, avoiding all the strings current options come with. But we’re also coming to help the earliest stage companies connect to the broader European ecosystem in terms of markets, talent pools, and advisor/investor networks.
There is no reason Polish founders should restrain the scope of their sources of support and inspiration to just founders in their country, let alone city. There is an opportunity to leapfrog other ecosystems in terms of experience and ambition. For local investors, we’re also bringing the opportunity to invest in companies outside of Poland: sourcing deal-flow anywhere is hard, but diversification is essential to managing both risks and returns.
We will be back soon with more events, dinners and parties to engage more deeply with a community we are very eager to work with. In the meantime, we’re looking forward to the Polish companies who join The Family making the most of the infrastructure we’ve built: you can now have embassies in Paris, London and Berlin. To build huge companies, European founders need to be thinking on a European scale very early and European ambassadors are a great way to do just that.
In the meantime, if you’re a founder based out of Warsaw that we didn’t get to meet during our stay, or an investor interested in learning more about how you can work with The Family and our portfolio companies, please reach out (mathias@thefamily.co)!
Our tour will bring us to Kyiv next, before heading to even more cities. If you’re in one of those places, we want to meet you! Reach out to Hugo (hugo@thefamily.co).
