The Skype's the limit in Central Europe

By bne IntelliNews November 22, 2006

Patricia Koza in Warsaw -

Does Central Europe have the capacity to produce a high-tech company that can achieve worldwide success in the next two years?

Two veteran Polish venture capitalists are betting a bottle of wine on it. And not just any wine: the prize is a $500 bottle of Opus One, the rather overpriced vintage of choice among connoisseurs in Silicon Valley, the incubator for US high-tech ventures.

Tomasz Czechowicz is CEO of the Warsaw Stock Exchange-listed MCI Management fund, which invests in Internet and high-tech companies. In an interview with bne, he explained his bet with fellow VC veteran Dariusz Wiatr: that by the end of 2008, Central Europe will produce a company like Skype, the Luxembourg-based internet phone service provider. Launched in 2004, Skype was scooped up by eBay only 18 months later for $2.6bn, netting its backers, Mangrove Capital Partners, $180m on a $1.9m investment.

The optimist

Czechowicz, who was co-founder of Polish software producer JTT while still in college, said Central Europe’s capacity to produce a global high-tech leader was a prime topic of speculation at a recent VC conference in Prague.

“We strongly believe that’s our priority (at MCI),” he said. “Looking for Skype-type projects which can potentially make a hundred times our investment.” And he adds the signs are encouraging.

"On yer bike!"

First he points to the region’s solid base of young engineers. Poland, for example, has the highest percentage of university graduates as a share of the under-30 population in the EU, and Poles have been dominating international programming competitions for years. In 2005, for example, 22-year-old Marek Cygan won the Google Code Jam, beating 14,500 other techies from 32 countries. Companies such as IBM, Microsoft and Intel – whose founder, Andy Grove, was born in Hungary – have set up centres in Poland to take advantage of the talent. Intel’s VC arm, Intel Capital, is also present in Poland.

And these young entrepreneurs are hungry. They are ambitious to show what they know and are willing to work hard. Many of them have tasted success in the formation of smaller ventures that they have sold off to Western investors, and they're pouring the proceeds into new opportunities with even wider potential.

The pessimist

Czechowicz’s betting opponent, Wiatr, is a former partner at Andersen Consulting in San Francisco and McKinsey & Co in Warsaw. He recently set up his own consulting company, Helix Ventures, after leaving the consulting firm Hexagon Capital where he was co-shareholder.

In his view, the biggest obstacle to developing a global leader is the lack of networking effect common to high-tech incubation areas such as Silicon Valley, Route 128 in Massachusetts or the area around Helsinki. Such areas combine high-tech enterprises, universities that turn our graduates as well as research, a VC community, and lots of “serial entrepreneurs” – people who start up companies that either fail or succeed, allowing their founders to exit and set up the next venture.

“It works like a neuro-network that basically puts good ideas together with money, with customers, with suppliers. This is missing in Poland,” says Wiatr, whose own company is focusing on near-shoring – providing services such as customer programming for the Western market – and business process outsourcing, or BPO.

While the network may be lacking, Czechowicz points out that entrepreneurs still abound. “We have many such stories of entrepreneurs that have built their own companies and brought them to the public market,” he says, alluding to hardware and software providers Prokom, Comarch, Softbank, portal, and private television group TVN

One such case is Rafal Styczen, 36, who co-founded the listed Polish IT company Comarch and managed network operator BillBird, and then used the proceeds to found the IIF Group, an Eastern European investment fund focusing on early-stage technology companies.

“What we invest in today, we invest in on a global scope from the very beginning,” says Styczen in a phone interview from his Krakow headquarters. “We encourage our companies to get international exposure.”

In Poland, he says, “There are tons of ventures that hope to be like this, but most are just making copies of other technologies.”

IIF’s newest project, called Personal TV, involves personalization technology for the media market of the future. The company is in talks with international companies about possible new fields of development and cooperation.

Styczen says that while IIF is focusing on finding interesting ideas at early-stage companies with potential growth, “Frankly I’m not holding my breath over finding a world leader. But that doesn’t mean you can’t make money here.”

Czechowicz also points out that access to capital is getting easier, as several technology investment funds that had been dormant for a couple years are reactivating in the region. “These three factors should put Central Europe in a very good position, because the development costs are much lower and because the motivation is there to deliver high-quality projects for the global market,” he says.

Under the terms of the wager, by the end of 2008 the company has to be among either the global or European top three high-tech firms by brand popularity, number of users or market share. Alternatively, the company must attract a top-rank venture capital investor such as Benchmark Capital, Kleiner Perkins or Sequoia. The Polish newspaper Gazeta Wyborcza is coordinating the bet.

The players

The company can be from anywhere in Central Europe; in fact, Czechowicz believes the prospects are actually better in Hungary, the Czech Republic or the Baltic states because unlike Poland’s economy based on 38m people, their economies are too small for a company to make its owner rich on the local market so they must think globally from the start.

“To be honest, I don’t understand why he doesn’t believe it will happen,” Czechowicz said of his betting opponent. “There are already Skype-like investments right now in Central Europe.”

Certainly biotech company Bioton, which started producing recombinant insulin in Poland a few years ago and now is fighting the three international market leaders for a 10% world market share by 2010, is an unqualified success as a Polish business (To read more on this click here). But Wiatr argues a global leader must be one that changes the way people do business or offer a fundamental technological breakthrough – and in that case, Bioton doesn’t qualify.

“Simple logic shows that the chances of a Skype-like company starting here are those of a meteor hitting the earth,” he added. “It can happen, but it’s unlikely.”

Statistics appear to back him up. A report released in October by the UN Conference on Trade and Development on world investment in 2006 shows that while in both Hungary and the Czech Republic foreign direct investment (FDI) is shifting towards high-tech activities, FDI levels for both high-tech investment and R&D actually declined in Poland, although remain at the relatively high overall level of $8bn.

“Dariusz is not as strong a believer as I am,” says Marek Borzestowski, a high-tech expert at the Sobieski Institute think-tank who co-founded Wirtualna Polska, Poland’s second-biggest portal, then sold it to dominant carrier Telekomunikacja Polska. “He sees the world rationally, but those who invent new things sometimes don’t. And when you’re talking about intellectual property – software –you don’t always need enormous investment to create a new product.”

Like Czechowicz, Borzestowski founded his first business while still in college. Now his new company, Inteliwise, is working on developing the use of artificial intelligence to facilitate websites for users.

He says he had no trouble finding a backer. “I contacted one company and it worked,” he said in a telephone interview. If a deal is agreed, his financier will be an American VC company. “Although it’s hard to get capital in Poland for new ventures, it’s still possible when you have enough determination.”

As far as the bet, Borzestowski, who knows both men, is optimistic. “Although Wiatr has lots of good arguments, I hope Czechowicz will win.”

Send comments to Patricia Koza

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