Editor's note: This is a guest post by Marcin Szelag, a Partner at SaaS-focused seed fund Innovation Vest. Here, he shares his personal observations on the Polish entrepreneurial scene and some words of advice from a VC point-of-view.
Startup — a temporary organization established for the purpose of finding a repeatable and scalable business model.
The term 'startup' was popularized by Steve Blank, an American entrepreneur and lecturer at Stanford University, and is an apt description of young organizations who are similar to tiny experiments.
Originally, the term was applied only to companies in the technology space. But ever since it hit the mainstream, 'startup' is being used to describe nearly every new, emerging business.
Startups are the flavour of the month, a way of life and a symbol of being liberated from the corporate leash. The trend made its way into Poland a few years ago, but there hasn't been – in my opinion – any big success stories from the country to talk about.
For three years, I have been observing, from an investor’s point of view, the development of Poland's startup ecosystem. My experience is strictly related to tech startups, or – to narrow it down even further – Internet startups. The trend of creating startups reminds me of the fascination with the free market experienced by the previous generation of Polish 'entrepreneurs'. Back in the 90s, while Poland was going through a period of rapid economic transformation, people could make a fortune in a blink of an eye... But how are things now?
The Internet and mobile phones have freed the young and rebellious generation from the shackles of the unconnected world. These days, everyone and everything can be found online, including the chance to achieve Silicon Valley-type success. Thousands of online entrepreneurs flood the ecosystem with their 'ideas'. From afar, it might seem like business is good, but if we take a closer look, I feel like we’re slightly deceiving ourselves.
Startup vs. scalable startup
The definition of a startup I referred to at the beginning of the post suggests a certain business model-oriented way of thinking about organizations. Steve Blank makes a clear distinction between a startup and what he calls a 'scalable startup'. It may seem like a slight name difference, but once we determine what that 'scalability' is, the difference will become crucial.
From an investor's point of view, a startup can be described as a business whose main objective is to generate enough income for its owners to guarantee them a good life. Whether it comes in the form of a popular blog, or an online store — there’s hundreds of thousands of such examples to be found online. Unfortunately, startups like these have a fundamental flaw: They’re un-investable from sources such as a venture capital.
As long as Polish entrepreneurs fail to understand this, we can forget about huge international tech companies of Polish origin. If such a company does eventually crop up, it’s going to be the result of luck, and not a planned operation.
So what is a 'scalable startup', then? A scalable startup has a single objective: To create a new market or dominate an existing one. This market must be big enough to generate huge returns for the investors. The best investments give a multiple return of the invested funds. Even though these multiples may seem high, it's still not enough for a venture fund to be really successful. Venture capitalists aim much higher than that. All VCs are on the lookout for the next billion-dollar company.
According to research conducted by VC firm Atomico, there are 134 tech companies in the world that are worth more than $1 billion, and there are a few times more companies worth more than $100 million. As far as I know, not a single one of them comes from Poland (I’m not including domestic companies). Granted, one could surely contest the research and claim the data is incomplete, however, to me, the fact remains that Polish entrepreneurs are unable to build scalable startups.
This problem becomes apparent at almost every startup-related event organized in Poland I've attended. Everybody talks about how good things are, how great their product is and how amazingly their team gets along. But as soon as someone sitting at the very back of the room starts asking the tough questions – What’s your revenue? How many users do you have? What’s your traction like? – that idyllic mood seems to disappear.
Once you’re in the backroom, though, in a small circle of usually the most experienced participants of our ecosystem, only then will you finally be able to witness the bitterness felt by those who fight on the fronts of scalable startups. Some of them go public with their concerns. I love listening to Bartek Gola, Partner at Speedup Group, whose presentations concerning the problems of 'Startup Poland' hit the nail on the head. Unfortunately though, no matter how many conferences he attends or how many presentations he gives, the audience seems to fail to grasp his key ideas and continue to move in the 'startup' direction while avoiding the issue of scalability.
However, we do have a bunch of positive pioneering examples that show a lot of potential: Brainly , a global network of Q&A sites for students; DocPlanner, a fast-growing network of booking services for Europe’s medical industry; and Estimote , a key player in contextual computing based on beacons. It’s also difficult not to mention LiveChat, which IPO’d on the Warsaw Stock Exchange, and was valued at around $200 million.
My question is this, though: Why are there so few examples of scalable startups in Poland – a country populated by almost 40 million people, some of whom are considered to be the best programmers in the world?
The first piece of advice for Polish tech entrepreneurs is this: If you want to participate in the tech race, be sure to build a business that can be scaled globally. The risk between a startup and a scalable startup is roughly the same, but the potential is incomparably larger. Make a conscious decision: Are you building a small business or a scalable startup?
Locally vs. globally
I still remember the first time I went online – it was back in 1996. The Internet was in its infancy, but already incredibly appealing. Later, the Internet started growing even more quickly thanks to the rise of mobile devices. Now, almost everybody is online.
This rapid popularization of the Internet – and now the mobile Internet – has had a huge impact on building scalable startups. Currently, the ability to reach millions of clients and users is possible from almost any place on earth, including Poland. Unfortunately, there is a downside to this. Namely, the lack of geographical barriers for Internet products means more competition from global players. The best example of such changes is the domination of Facebook, who managed to kill many local players.
Nowadays, when building a tech startup, entrepreneurs must remember that the market they’re operating in will constantly be attacked by competition from all over the world. The consequences of local vs. global also have an obvious impact on a company’s growth potential. For instance, let's take a look at the history of a few Polish companies: Kwejk vs. 9gag, Nasza-klasa vs. Facebook, Gadu Gadu vs. WhatsApp, and Allegro vs. Ebay.
In some cases, the Polish ideas came before their foreign counterparts; however, choosing the path of the local leader massively restricts the potential growth a business can achieve.
Being in tech, startups no longer have a choice – they need to go global. Deciding to be local marginalizes companies and forces them to be a small business right off the bat. Still, no matter how obvious this is, most Polish founders I talk to still go the local route. Maybe it’s a comfort zone issue they need to overcome, or maybe it’s lack of experience and ambition. Whatever the reason, it seems we are afraid of going global, which is an ingrained obstruction to building large tech companies.
The second piece of advice for Polish tech entrepreneurs: Poland is too small of a market to build a significant tech company that will influence the world. Instead of focusing on satisfying the needs of the local market, think of ways of capitalizing on the global growth potential.
Hacker, Hipster, Hustler
Typically, a startup’s founding team requires – at a minimum – a programmer, a designer and a salesman. If you’re on your own, you should be all of them at once. If there’s a bunch of you, it’s best if each of you is a specialist in one of those fields.
That’s theory and good practice, but what's the reality? Poland keeps producing very good engineers.
Polish programmers keep winning contests and finding employment in the biggest tech companies in the world. They establish their own software houses, which are very successful in selling programming services to foreign countries. What we can’t do yet, though, is get our product out on the global stage.
Everybody keeps talking about how Poland doesn’t have enough programmers, but rarely anybody talks about how badly we need marketing experts who know their way around technology and how to sell online. Creating a product in itself is becoming less and less of a problem.
The challenge now lies in making the masses aware of it. This won’t change until we start educating ourselves in the field of online marketing. Looking at Silicon Valley and the salaries of people from areas such as social media, content marketing and lead generation, you can see that those positions are the becoming more and more crucial in tech companies.
The third piece of advice for Polish tech entrepreneurs: Even the best product isn’t going to sell itself. Despite the Internet’s viral nature, your startup still needs somebody who knows how to reach your potential clients with the information about your product. Be sure you have that person on board.
Many founders consider questions about traction to be the most uncomfortable ones you can ask. You can’t bend the truth, and you can’t say that it’s going to happen some day. Either you have traction or you don’t. Paul Graham, partner at Y Combinator, says that it’s the only thing that matters in startups.
Silicon Valley investors are obsessed with traction. If you’re looking for financing, your presentation can honestly consist of a single slide – traction. Traction will heal any of a startup’s ailments and address (almost) all of its issues. If there’s no traction, you’re better off not mentioning any numbers and saying that you are still working on the product.
Traction is the litmus paper for distinguishing startups who have a chance of success from those who will surely fail.
So what should traction look like?
In products aimed at business clients, there should be around 20% growth per month. In products directed at consumers, it should be several times higher. At first, when startups begin with one client or user, achieving that kind of a growth dynamic is not difficult. However, the problems begin arising when it has to reach new milestones, such as $10,000 monthly recurring revenue (MRR), then $100,000, then $1 million, and so on. It’s the same with products that monetize traffic: First the aim is 100,000 users, then 1 million users, then 10 million users, and so on and so forth.
Well, what’s it like in Poland? Due to the fact that most entrepreneurs operate locally, their growth rate and activity scale is significantly smaller. Nobody seems to plan for consistent growth – sometimes I feel like they leave it to chance.
Sure, in the beginning, each business plan trotted out during investment talks looks promising and shows large growth after three or four years of operating. Unfortunately, it is often too little and too late. The Internet is a widespread medium and an ingrained part of our everyday lives. It is possible to gain a big following of clients or users much more quickly.
There’s really no excuse for low traction. Low traction can only mean two things: Either nobody needs what we’re trying to sell, or you don’t know how to reach your clients.
The fourth piece of advice for Polish tech entrepreneurs: Traction is the most important thing for your startup – figure it out quickly.
1 in 50,000
During the last three years, I’ve heard over and over again that venture capital is a hit-based business. Urban legends tell us that nine out of ten startups fail, which could explain why only a handful of funding companies generate returns from their investments. Contrary to what you might think, one out of ten is actually a very high success rate; however, there’s a huge margin of error there. Following pure mathematics, one could presume that one in every ten investments will create another Facebook. Obviously, this is not the case.
Dave McClure, Partner at 500 Startups, calculated that the global startup market could create as many as 100,000 new startups per year. It’s hard to estimate how many startups are actually established each year, but to discuss the success rate, let’s assume that McClure’s number of 100,000 is correct.
Let’s go a step further. Marc Andreessen, General Partner at Andreessen Horowitz, calculated that each year there are two companies established, at most, that are eventually valued at more than $1 billion.
Connecting these two stats gives us a rough estimate of what it really means to score a hit. Specifically, the chance of creating a significant, global tech company is 1 in 50,000. That’s still a better chance than winning the lottery, but much worse than the '1 in 10' number that keeps being thrown around.
Going back to my observations about the Polish market, I won't complain about lack of good ideas. We’ve got a lot to learn and a lot of experience to gather, but there’s no school that can teach you all of this stuff. The only way to acquire that knowledge is by doing, experimenting and honing in on the ability to adapt to ever-changing conditions.
Entrepreneurs, consider yourselves lucky. The startup industry is quite open, and people keep sharing their experiences, skills and tricks. Spend a bit of time finding the right blogs and people to follow. There are tons of books describing ways to help you build your startup and there's also a network of mentors who will share their know-how in exchange for a cup of coffee.
It's often hard for me to understand why such a small number of Polish entrepreneurs actually take advantage of these resources. Maybe it’s the language barrier. Or maybe it’s our national trait of wanting to do everything our own way, even if it sometimes means denying basic facts. Whatever it is, it seems Polish startups keep making the same mistakes.
Although there may be no recipe for success, there are areas of identified risk , so ask yourself some important questions:
- Why do you want to create a startup?
- How did you get the idea?
- What are your skills?
- What do you know about the market you’re entering?
- How will you get funds to kick off your company?
- Are you able to build the first version of your product?
- Is anybody buying whatever it is you’re selling?
- How will you convince investors to invest?
- Do you know your way around online marketing?
- Will you achieve product-market fit?
Ask yourself these questions and try to determine whether you’ve got the right answers. Each of the above questions is related to a particular area where your startup may fail. The further ahead you are, the more difficult the path becomes. Perhaps it’s better not to waste your time if you’re not convinced you’re the best.
The list of examples of wasted time and money could go on and on forever. Just take a look at a list of contests and EU funding programs in Poland to see how many of these startups managed to gain traction.
The final piece of advice for Polish tech entrepreneurs: In order to have a shot at success in this industry, you’ve got to be the absolute best. Take your time to think through whether you’ll be able to compete at the highest level.
Looking into the future
Poland has a lot of potential to become a technological hub in Central and Eastern Europe. In my opinion, in order to push that idea forward, we need to:
- Focus our thinking on scalable startups
- Agree that creating a global company is not a matter of choice, but necessity
- Expand our online marketing skills
- Focus on quickly building high-traction for our products
- Support only the best people who have set the objective of being the 1 in 50,000
The last three years have reassured me that Poland is currently experiencing its first wave of tech startups with a shot at global success – a wave that will continue for a few years. And I’m convinced the country will soon deliver a global online company that will be eventually sold for more than $100 million.
A version of this post first appeared on Medium. This version was edited by Tech.eu.