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Europe’s unicorns ride on
Will the lights go out for Polish business?
tibusiness bent of Law and Justice (pis), the populist party in power, will become even more pronounced as Poland prepares for parliamentary elections that will take place in the autumn next year.
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Economists disagree about which is the strongest of the multiple headwinds blowing against business in Poland, though nearly everyone forecasts a recession this year. For Ignacy Morawski, chief economist of Puls Biznesu, a business daily, the macroeconomic picture is the biggest cloud for foreign investors. Consumer prices rose by 15.6% in June compared with last year, a level unseen in more than 20 years, and up from 13.9% in May, according to Poland’s statistics agency. Interest rates have shot up from 0.5% last October to 6%. That has squeezed borrowers as about 90% of loans to households and businesses are at variable rates. This in turn creates even more uncertainty, says Mr Morawski. The zloty, Poland’s currency, is weak, which helps exporters but makes the imports needed by producers pricier still.
Adam Czerniak of Polityka Insight, a research outfit, thinks concerns over the rule of law and “economic patriotism” are the biggest worries for foreign investors, in particular those from eurozone countries. Since coming to power in 2015 pis has neutered the judiciary and placed judges firmly under the control of the government. It extols the virtues of “repolonisation”. Statecontrolled companies bought foreignowned banks (on a voluntary basis); the government is now targeting bank profits with a moratorium on loans. And pis tried to limit foreign investors to a stake of no more than 30% in Polish media firms.
Last year foreign direct investment (fdi), both greenfield and other funding, was still strong owing to Poland’s welltrained labour force, relatively low wages and closeness to western Europe. fdi flows were up by 79% (see chart on next page) and the stock grew by a healthy 7.8% compared with a slump by 2.7% for the entire European Union. This year fdi is set to decline, though it is unclear how cold foreign investors’ feet will become. Since the start of the year investors have dumped Polish stocks in droves. The wig20, the stockmarket index of the 20 largest companies listed on the Warsaw stock exchange, declined by 28% from the start of the year to July 6th. Polish mutual funds are reporting redemptions, which means the wig20 is unlikely to make up lost ground soon.
Mr Czerniak forecasts that the economy will be in recession in the second quarter. Poland’s manufacturing sector contracted for a second month in June, when Standard & Poor’s Polish manufacturing purchasingmanagers’ index fell to 44.4 from 48.5 in May, remaining below the line of 50 that divides growth from contraction. Like most of his colleagues Mr Czerniak expects a soft landing in which the heat is gently taken out of the economy and the unemployment rate remains low.
Business leaders are holding their breath. The government has in recent months stimulated demand with generous tax cuts, which is fuelling the inflationary spiral. Adam Glapinski, the head of the central bank, recently said that the rateraising cycle is nearing the end, but he did not name a specific timeline. Foreign investors expect both inflation and interest rates to stay high for some time to come and they do not anticipate that the war in Ukraine will come to an end at any time soon. On top of which pis is forecast to win the election next year, giving business little hope of relief. n
Venture capitalism in Europe A species reborn
B E R L I N A N D S A N F R A N C I S C O The downturn is unlikely to lay waste to the old continent’s tech unicorns “None of my friends stayed in tech.” Fred Plais, the boss of Platform.sh, a cloudcomputing company based in Paris, still remembers vividly what happened in Europe in 2001. The firm he ran back then, an onlinesearch engine, closed down after the dotcom bubble burst—along with most of the other startups he knew.
The story was much the same in 2008 as a result of the global financial crisis. European technology firms again suffered more than their American counterparts. Fears that the looming downturn and plummeting tech valuations will once more hit harder in Europe than across the Atlantic were stoked on July 1st, when the Wall Street Journal reported that Klarna, a Swedish buynowpaylater darling, was trying to raise fresh capital at less than a fifth of its peak valuation of $46bn.
Such stories notwithstanding, both Europe’s startups and its venture capitalists look much sturdier than they have in the past, and much less reliant on foreign knowhow and capital. They may even weather the storm better than American counterparts this time around. To understand why, start by considering the boom. Last year was a smasher in Europe even by frenetic global standards. For the first time, venturecapital (vc) investments on the old continent exceeded €100bn ($118bn) in a single year, reports PitchBook, a data provider. Startup valuations rocketed accordingly, pushing the number of European “unicorns”, private firms worth more than $1bn, to nearly 150 today, about 13% of the world’s total. Although Europe’s tech ecosystem is still only about a third as big as America’s in terms of vc investments, it has more than doubled in size since 2020. Some of this growth is a mechanical consequence of excess capital flooding
into Europe, where startup valuations had lagged behind those in America and Asia. In 2021 American vc firms invested in European deals worth $83bn, a threefold increase on the previous year, according to PitchBook. Nontraditional investors, both American and from elsewhere, such as hedge funds and big companies’ vc arms, discovered Europe, too, participating in nearly $100bnworth of deals, an increase of 150% from 2020.
As Klarna’s attempt to raise funds implies, this surfeit of capital is poised to end this year in Europe as elsewhere. Happily for European tech, that isn’t the whole story. “The European flywheel has taken off,” says Sarah Guemouri of Atomico, a vc firm in London, referring to the idea that success in tech breeds further success. Flywheels spin at the level of the individual firm, when more users translate into better services, which draws in more users, and so on. They can also help to rev up the whole industry.
Nothing ventured, nothing gained European venture capitalism indeed looks capable of powering itself. A critical resource is talent. Last year Dealroom, another data provider, analysed the careers of 38,000 startup executives. Almost twofifths had already worked for both small startups and established firms, signalling a growing collective experience. Similarly, when Mosaic Ventures, another European vc firm, recently looked at nearly 200 founders of unicorns, it discovered that two in three were repeat entrepreneurs. “It is the second or third time that produces a unicorn,” says Simon Levene, one of the firm’s partners.
As they become more experienced, European entrepreneurs are not only becoming more ambitious, but better at telling a convincing story about what they want to achieve. Nadine HachachHaram, founder of Proximie, a healthcare startup which uses augmented reality to allow doctors to remotely watch a surgery, is on a mission to create the “borderless operating room”. Avi Meir, who runs TravelPerk, a site to manage business travel based in Barcelona, wants it to become the place to facilitate “human connections between remote workers”, for instance by offering tools to organise reallife team meetings. Nicolas Brusson, the boss of BlaBlaCar, which started as a Parisian service to arrange shared car rides between cities, aims to turn it into a “multimodal platform” that also aggregates demand for buses and perhaps even trains globally. To some this may sound like marketing guff but it is precisely the sort of thing investors and prospective staff still want to hear.
Capital is being accumulated and fed back into the industry, too. According to PitchBook, nearly €100bn in vc was raised by European funds over the past five years. Almost half of that has yet to be deployed, leaving Europe’s venture capitalists with plenty of “dry powder” to tide over startups even if the crisis drags on. European investors also tend to plough a lot of cash into earlystage startups. In 2021 European startups attracted a third of all investments in financing rounds of up to $5m globally, estimates Dealroom—almost as much as their American counterparts.
The number of “angels”, successful entrepreneurs who funnel some of their tech wealth back into other startups, is also growing. Some create their own vc firms. On June 28th Taavet Hinrikus, cofounder of Wise, an internationalpayments service, and three other European entrepreneurs, launched Plural, a €250m fund. Executives lower down the food chain have also started to invest, in part because more and more European tech workers are compensated in part with their employer’s stock. A few years ago only about 10% of shares were allocated to employees, says Dominic Jacquesson of Index Ventures, a transatlantic vc stalwart. Thanks to legal changes, and a growing cultural acceptance of stock options in Europe, the figure is about 17%, not far off the 20% or so common in America.
The structure of the tech ecosystem is also more robust now whereas once it was a disparate collection of unlikely success stories, such as Skype, a videoconferencing service now owned by Microsoft, or Spotify, a Swedish musicstreaming app. In a recent report on European unicorns Richard Kersley of Credit Suisse, an investment bank, and his colleagues split the firms into “enablers”, for example payment services like Klarna and Checkout.com, and “disrupters” (such as Getir, a Turkish delivery app) which thrive by piggybacking on such infrastructure.
On top of more homegrown experience and capital, as well as a hardier structure, European firms boast certain comparative advantages that will come in handy in a leaner, postpandemic era. One is their relative thriftiness. Although private companies are not required to disclose such numbers, indications are that their “burn rate”, the speed at which they spend money they have raised, is lower, at least at younger startups. It helps that hiring software developers in Barcelona or Berlin costs on average only half what it does in San Francisco or Seattle.
Burning ambition As they become unicorns, however, such differences seem to disappear. On average, American and European startups have raised about the same amount of capital before reaching that status: $378m compared with $392m for firms that have achieved a valuation of more than $1bn since the beginning of 2021.
Mature startups in Europe, meanwhile, are less geographically concentrated than their counterparts in America, both in
Chasing unicorns
Venture-capital investment
Number of deals, ’000
5
United States 4 Value, $bn
United States 100
80
3 60
Europe 2
1 40
20
0
Europe 0
2016 18 20 22* 2016 18 20 22*
Source: PitchBook *To June 17th
