Warsaw Equity Group

Business development is part of our DNA. We’re not focused on chasing unicorns.

Author: Przemysław Danowski, Managing Partner, Warsaw Equity Group

Despite the tempting prospect of looking for and having a significant stake in a company valued at over $1 billion in our portfolio – we have decided to take a different route. One that is less media-savvy but equally effective. This isn’t because of a lack of ambitioun. Given the small number of companies with unicorn status in our region, especially in the group of companies that were established less than 10 years ago, we decided to pursue a more “down-to-earth” and, in our opinion, more effective investment model – especially in terms of portfolio structure. At Warsaw Equity Group (WEG) we search for the optimal financing models for our companies while remaining flexible. We believe that strong businesses are built first and foremost thanks to a competitive/technological advantage – not just by giving a growing business access to funds raised in the venture capital model. We believe that this flexibility is important, especially in the long term, when is vital to keep in mind the concept of economic cycles and the fact that cheap financing is not always available.

History is on our side

At Warsaw Equity Group, we invest the private equity of the our two founders, who have worked together in business for nearly 30 years. It is access to these private funds that gave us a great deal of flexibility in terms of developing our strategy – allowing them to work best for the companies we invest in and – consequently – give us satisfactory rates of return.

Over 30 years, we have made nearly 60 investments in both the private equity and venture capital segments. We have also carried out venture building investments.

We successfully executed investments in which we held controlling as well as minority stakes achieving an average return on capital of 8x. Among the projects from which we exited or completed a partial exit are such companies as Gadu Gadu (84x), Vigo Photonics (20x), Artifex Mundi (15x) and Tektura Opakowania Papier (8x).

Until 2015, our strategy could be described as opportunistic. We had no defined sector criteria, and our investments included both restructurings and growth companies. Since 2015, after Krzysztof Dziewicki and Przemek Danowski took over responsibility for WEG’s development, we decided to exclude restructurings from our strategy. We focused on cleaning up our existing portfolio and worked intensively with our growth companies. Until 2020, we primarily pursued follow-ons. In addition, we made investments in two new companies.

During the 2015-2020 period, we also refined the operating model and services offered to our companies. Our entrepreneurial approach in working with companies has evolved into a strategy that we call ‘Partners for Growth’. In this new strategy, we have placed a great emphasis on a partnership-based approach and openness that allows us to communicate effectively and overcome challenges that arise – together. We have also decided to invest exclusively in growth companies, supporting them with our team’s unique set of skills, which they have developed doing business on various markets (including Poland, USA, UK and China), in private equity and venture capital investing as well as the consulting and investment banking industries.

WEG’s business model

Our model for building the value of our portfolio companies is built on three pillars: Business, Human Capital and Community.

In the Business pillar, we provide the capital needed to execute a growth strategy, while focusing strongly on strategic development, setting objectives, executing initiatives and preparing the organization for scaling. We then support it in achieving the highest possible efficiency in key processes.

A pillar that we consider absolutely critical to success is Human Capital. As part of this pilar, we help select talent best suited to specific strategic implementations, build organizational culture and support leaders in their individual development i.e. through a mentoring programs. Dawid Bienkowski is the person responsible for this part of the puzzle in our team.

We complement our offer by building a community – enlisting experts and advisors who can support the implementation of a companies’ strategy using their insight, contacts and knowledge of best practices in a given industry/on a given market.

Our investment focus

The changes implemented have resulted in dynamic growth of our organization, which has allowed us to take another step in the evolution of our investment criteria.

We currently manage more than PLN 600 million and execute our ‘Partners for Growth’ strategy by investing in companies at various stages of development, investing from PLN 4 to 40 million in CEE growth companies. In the venture capital segment, we invest from PLN 4 to 20 million, while in the PE growth equity strategy we invest from PLN 20 to 40 million.

In the venture capital segment, we invest in late seed/series A companies experiencing dynamic growth with recurring revenues of at least EUR 50 thousand MRR, in the case of software, or EUR 50 thousand first margin in the case of hardware. In the PE growth equity segment, we invest in companies with lower growth rates, but with sufficient scale to build a growing yet profitable business.

In the pre-seed and seed segments, we make investments using the ‘fund of funds’ formula. We assume an investment in one fund of 1 to 3 million EUR and gain exposure through 5-7 funds to 200 projects that are at a very early stage of development.

In the first half of 2022, we invested about PLN 20 million in 2 projects. We plan to invest another PLN 200 million in 10-20 projects over the next 2-3 years – with a decisive focus on automation and sustainability in our strategy.

In the first of these segment, we are investing in projects and technologies that automate processes in companies and increase their efficiency. We believe that the trend of automation and efficiency-seeking will become increasingly important, particularly as companies struggle to remain competitive in a market where more and more technologically advanced products will be available, and access to an employee, especially one who performs repetitive tasks, will be increasingly limited – particularly at reasonable rates that make sense in economic terms – for an existing business.

In the second segment, we are investing in projects designed to achieve a positive environmental and social impact. Increasing public awareness and simultaneous activities, including legal regulations, to reduce carbon emissions will result in the development and bringing to market of appropriate technologies. At the same time, these ventures will require more patience from investors. Investors’ expectations (rate of growth in the initial post-investment phase, investment horizon, level of risk, etc.) will have to evolve. We believe that, as an investor with private capital, we are predestined and at the same time responsible for participating in the implementation of these kinds of investments.

Softwarehouses with products related to automation or sustainability are also in the spectrum of our interests – these are bootstrapping businesses with an appetite for continued dynamic growth. We also invest in more mature companies that are on the IPO path, 2-3 years before the IPO.

We want to invest in projects that have the potential to achieve, at the time of our exit, depending on the strategy, valuations ranging from a large few hundred million PLN to several hundred million USD. Such a defined approach allows us to think flexibly about financing company strategies, reduce the risk of failure and thus decrease the pressure of us chasing unicorns.

We have decided to specialize in the above segments. Additionally, to become a better ‘Partners for Growth’, we decided that our team should become more specialized. Pawel Maj is responsible for the venture capital segment, and Arvin Khanchandani is responsible for sustainability. Further specialization will allow us to add more value in cooperation with the entrepreneurs, founders and shareholders of our portfolio companies.

Private equity and venture capital investment will increase in Poland and CEE

Although the private equity / veture capital market has developed significantly in Poland as well as CEE as a whole, there is still a large gap between this region and the most developed markets or the European average. Treating Poland as a representative of the CEE region, we see on the basis of Invest Europe data that in 2021 venture capital and private equity investments accounted for 0.015% and 0.19% of GDP, respectively, while the European average is 0.1% and 0.762% (for the UK these ratios are 0.262% and 2.474%, respectively). Thus, in Poland and the region as whole, there is a very large range of 4-6 times in comparison to the European average and 13-17 times when compared to the UK – the European leader in this respect. This difference should decrease thanks to the emergence of new local funds as well as the increased activity of foreign funds in the region. Competition among funds will grow significantly and, in our view, generic venture capital business models will have to modify over time – especially given the fact that the era of cheap money

has come to an end in this cycle. Already today we see that out of just over 100 active venture capital funds in Poland, 150 foreign funds have made at least one investment in our country.

In 2018-21, there was an undoubted boom in the private equity/venture capital market and inflated valuations caused led to an abundance of cheap money on the market. Under these circumstances, the dominant venture capital strategy was the “founder friendly at the stage of investment approach” approach – one that accepts a very high valuations and extremely liberal transaction terms. This was when venture capital funds, among others, attempted to secure access to the best companies – which defined as those with the potential for dozens of times return on capital and the potential to achieve unicorn status – in other words companies which fit the standard pattern of venture capital investment and portfolio construction.

In our opinion, this approach will change in the coming years and venture capital funds will take a more active role in securing their rate of return. Models that will be “founder friendly” from business development to exit will prevail. These will require quite a bit of work from the management teams and a relatively large amount of support – also for those companies that may not reach unicorn status. WEG already offers this kind of cooperation model today.