Start-ups and their discontents

An entrepreneurial mindset is critical for turbulent times ahead of Europe, but Polish startups are yet to become significant for the country’s economy.

Poland’s unparalleled development over the last two decades has earned the country a label of post-communist poster child. However, mechanisms that historically propelled growth could soon lose their relevance. Rising labour costs disincentivise multinational corporations from investment in Central Europe, whereas the stream of EU structural funds, which was plentiful in the past, is slowly drying up. There is a widespread consensus among political elites that it is high time to develop systemic instruments which will propel the shift of the Polish economy from being based on natural resources towards one which is more dependent on knowledge. Would betting on start-ups and SMEs raise Poland’s capacity to innovate?

“For an advanced economy, the path to competitiveness is not to copy what others are doing. It is to do things others cannot do, or to do things in different and better ways.” This short excerpt from a white paper guiding UK’s post-Brexit industrial strategy sounds trivial, yet is painfully true. As tempting as it sounds, Poland will never become ‘the second Ireland’ (as was stated by former Polish PM Donald Tusk) or ‘the second South Korea’ (current deputy PM Mateusz Morawiecki). Nor it should attempt to.

At the forefront of a new revolution

Development is not linear, and on the eve of a fourth industrial revolution, countries endangered by the middle income trap, should make every effort to leap over the global value chain ladder. To embrace its strengths, Poland has to deal with its shortcomings first. A classic study of the origins of comparative advantage by Harvard Business School professor Michael Porter has long pointed that only the understanding of nations’ deficiencies and global trends can lead to sustained technological advancement.

Jeff Furman, associate Professor of Strategy & Innovation at Boston University, uses the term “national innovative capacity” to capture the intricacies of “nations’ ability to generate new ideas and to translate them into economic growth”. Every metric of his scale leaves Poland with a significant room of improvement, be it availability of public R&D infrastructure, incentives for companies to innovate and their ability to seize foreign markets or perhaps most importantly strength of linkages between public and private actors involved with the innovation ecosystem, which translates into level of human capital and trust.

Just one in four Polish start-ups has been founded by a female, and only one in eight founders boasts a PhD degree.

A report published by Startup Poland Foundation in 2016 estimated that Poland has almost 2,700 companies perceiving themselves as start-ups, more than 2/3 of which are three years old or younger. Just one in four Polish start-ups has been founded by a female, and only one in eight founders boasts a PhD degree. No more than 14 percent of country’s start-ups hold a patent or are in the process of securing one, whereas almost half declares copying or modifying existing products. In European Startup Monitor, an annual comparative study of the EU’s innovation ecosystem, Poland stands out on three metrics – the highest share of non-EU founders (33.3 percent), the lowest perceived ability of universities to promote entrepreneurial behaviour, and one of the highest levels of self-financing the company from the get go (bootstrapping). The former only underlines the significance of introducing dedicated start-up visa mechanisms, the second speaks volumes about the urgency of the reform of Poland’s tertiary education system.

Funding is key

Marek Borzestowski, founder of Wirtualna Polska and veteran venture capitalist, points out to the effects of lack of external funding: “Polish start-ups need strong partners able to provide not only financial capital, but more importantly global business development experiences and international networks”.

Local experts are cautious as well as enthusiastic. Maciej Sadowski, CEO of StartHub Poland, a nonprofit that aims to facilitate technological growth of Central Europe, points out that entrepreneurs and scientists alike seem to be compelled by start-up gospel and availability of public funding: “the Valuation of

CD Project, the acquisition of Zen Card by a major bank or public listings of start-ups stimulate imagination. However the number of VC investments decreased in 2016 and regulatory framework is still unfavourable.”

Decision-makers seem to be well aware of these constraints. The Polish government’s flagship strategy, so called ‘Morawiecki plan’ responds to many of the industry’s concerns, yet it took 15 months since its announcement to be adopted after lengthy consultations and inter-ministerial push and shove. Start-ups are particularly looking forward to the promise of launching a PLN 2.8 billion (EUR 0.65 bn, USD 0.69 bn) venture capital fund by the state investment arm – the Polish Development Fund (currently under development), as well as the introduction of a simplified capital company model (expected to kick off in January 2018).

Poland has seen many industrial strategies over the last decade, and all of them have been tested by political circumstances, bureaucracy’s inefficiencies and adverse geopolitics. As much as regulatory instability decreases the country’s ability to innovate, a lack of regulation whatsoever may sometimes be beneficial. Polish banks were among the first to introduce contactless payments and mobile platforms globally, becoming the most avantgarde in the world. Today, in the shadow of Brexit and EU’s PSDII directive that allows non-banking institutions to access customer’s banking account history and initiate payments on behalf of customers, Poland stands a good chance of becoming Central Europe’s fintech hub.

No startup is an island

The government’s strategies require making political and economical assumptions with regard to both the process and desired outcomes, hence are never value-neutral – at least in a country where some of the biggest companies on the market are state-owned. Poland’s technological advancement is not happening in vacuum and is subject to geopolitical circumstances and bureaucracy’s ability to improve. Endemic optimism that characterises startup mindset can be at times infectious and blur rational judgement.

As the old adage goes: “what gets measured gets done”. Yet, traditional measurement models tend to focus on economic performance, completely neglecting wider social benefits, such as level of trust, and cross-sector collaboration. Even if startups are still not a significant chunk of the Polish economy, we should still give them a chance for their real impact on Poland may be far beyond the cost-benefit analysis.

Maciej Kuziemski is a public policy scholar at the University of Oxford and a board member of Res Publica Foundation, nonprofit Central European publishing house. For the past year, he has led the Coalition for Polish Innovations, a multi stakeholder knowledge sharing and capacity building platform. Recently, he co-founded Kuchnia Konfliktu, an Ashoka-awarded social enterprise which aims to create employment opportunities for refugees.

Startups making a wave in Poland

CD Project
A Warsaw-based video game developer, publisher and distributor founded by Marcin Kiciński and Michał Iwiński, CD Project is best known for The Witcher series that sold 20 mn copies. In Feb 2017 the company’s valuation hit USD 1.6 bn.

Codewise

One of the fastest growing Polish SMEs that focuses on tech performance of the marketing sector. Its founder, Robert Gryn is the first start-uper to be recognised by Forbes’s 100 Wealthiest Poles in 2016.

Zencard
This is one of the foremost examples of the success Poland’s fintech capabilities. Zencard is a customisable loyalty redemption platform founded by Krzysztof Klimczak, Jarek Sygitowicz and Marek Rogoziński. It was recently acquired by Poland’s largest bank, PKO BP, heralding a new era of domestic start-up acquisitions.

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Written by: Maciej Kuziemski