January 13, 2021
2020 is a year that won’t go unnoticed in the annals of history. It was a year full of uncertainty and anxiety, as COVID-19 changed our lives in ways we couldn’t have imagined before. However, it was also a year of unprecedented progress and innovation, best exemplified by a record-breaking coronavirus vaccine discovery process.
It was also quite a decent year for the European tech scene. Despite the global pandemic, VCs invested USD 46 billion on the old continent as of mid-December, beating last year’s record of USD 41.8 billion, according to PitchBook data. The unicorn pipeline continues to be robust, with 18 new unicorns in the previous twelve months (14 in 2019). We now have 115 VC-backed unicorns in Europe and the appetite for more.
To determine, if 2020 was as good for the Polish ecosystem, as it seems to have been for the entire European tech landscape, we referred to the latest State of European Tech report („Report”), compared it with our own experience, and drew our conclusions.
Consistently with the PitchBook data presented above, the Report states that capital invested in Europe will hit at least USD 35 billion in 2020, with the potential to exceed USD 41 billion when adjusted for reporting lag. The picture for Poland is a bit more blurry, though. Due to varying methodologies, it’s unclear whether this was a record year for Poland too or whether we have seen a substantial drop.
For instance, with EUR 125 million invested in 2020 (compared to EUR 229 million a year before), Poland has reported a 45% drop in VC capital invested, according to Dealroom. This number is inconsistent with the domestic sources that claim EUR 331 million invested over the last year. We are looking forward to a more granular publication on that topic. However, we suspect that the main difference lies in a different methodological approach to geographic attribution of mega-rounds raised by Iceye (approx. EUR 73 million) and Brainly (approx. EUR 64 million).
If we look at the five-year trend, it becomes apparent that we are still lagging far behind the European leaders regarding the level of capital invested. With USD 772 million invested cumulatively since 2016, Poland occupies the 17th spot in Europe. Even if we account for the difference in reporting mentioned above, it will only move us one notch upwards to the 16th position, beating Austria (EUR 790 million invested over the last five years). In comparison, capital invested in UK tech companies amounts to almost EUR 50 billion (!), more than twice the capital invested in Germany (USD 23 billion) and France (USD 19 billion).
When we analyze the cumulative capital invested since 2016 on a per capita basis, the differences are even starker. With USD 19 invested per capita in Poland since 2016, Poland holds the 24th spot (out of 30), beating only Bulgaria, Russia, Slovakia, Belarus, Czech Republic, and Albania. The top spots are occupied by Sweden (USD 910), Ireland (USD 668), and the United Kingdom (USD 658), while the European average is at USD 172.
However, it is interesting to look at how investment levels have trended over the years. For instance, the authors have grouped countries into quartiles based on the most current per capita investment levels. Though the difference between the top and bottom quartile is still striking, the graphs also demonstrate that things can change quickly.
The authors note that the per capita investment levels in the third quartile already exceeded the top quartile countries’ ones from just five years ago. Simultaneously, the bottom quartile trajectory serves as a warning to those who don’t fully appreciate the power of governmental interventions in boosting the levels of capital invested in a country.
The Report estimates the median fund size in the first half of 2020 was USD 133 million for follow-on VC and 60 million for first-time VC. It is substantially more than what the vast majority of funds in Poland have at their disposal. Only three VC funds with management headquartered in Poland have announced funds of more than USD 60 million in the last 2 years (OTB Ventures, Innovation Nest, and Avia Capital).
At least three more (OXX, Finch Capital, and ICOS Capital), which are focused on Poland but headquartered elsewhere, could report more than USD 60 million in commitments. It’s better than it used to be. Still, it’s not nearly enough, especially with median seed round size growing from USD 1.1 million in 2019 to USD 1.2 million in 2020 and median Series A round size growing from USD 4.9 million to USD 6.6 million in the same period.
The total of government agency funds invested into European VCs topped USD 2.5 billion in 2019, growing more than two times between 2015 and 2019. The share of VC funding from government agencies is declining (with the notable exception of France and the Benelux, where government institutions have been supporting VC funds for a long time). It now accounts for less than 10% of VC funds raised in Europe’s most mature markets.
However, the situation is different in the less mature European markets. For instance, the CEE region is much more dependent on government funding (37% of VC funds raised). It is consistent with the findings of the Ecosystem Profile Picture: Poland published by VCLeaders in September 2019.
On its first day of trading, Allegro reached a market cap of USD 19 billion and became Europe’s largest tech IPO in 2020. The IPOs of Allegro and the Hut Group alone raised a combined USD 4.8 billion in proceeds, equating to more than 70% of all proceeds raised by tech companies at IPO in Europe last year.
The Polish publicly-noted tech companies’ market cap was estimated at USD 34.3 billion, which secured the 7th spot for the Warsaw Stock Exchange in the ranking of the best public markets in Europe. The Netherlands top the list, driven by a small number of huge companies, including Prosus, ASML, and Adyen. Germany ranks second, driven by the scale of companies such as SAP, Infineon, Zalando, and Delivery Hero.
It is worth noting that in each country, the public market scale is typically driven by a small number of large tech companies. For instance, in the Netherlands, 80.4% of the total market cap comes from the top three companies with a local HQ. In Poland, this ratio was estimated at 88.1%. It should be mentioned, that the estimations for Poland come from the time before a substantial drop in CD Projekt Red’s stock price.
The majority of European tech IPOs involve companies that didn’t raise VC funding. VC-backed companies conduct only 26% of all tech IPOs in Europe. It is worth noting since such companies typically have a different growth profile. The authors of the Report exemplify this with the aggregate market cap of VC-backed tech IPOs since 2016.
On the first day of trading, the capitalization of VC-backed companies was USD 63 billion compared to USD 61 billion for non-VC-backed companies. However, between their respective IPOs and 31 October 2020, VC-backed companies have added USD 77 billion in market cap versus just USD 32 billion for non-VC-backed companies.
Neither Allegro nor CDProjekt Red - our two most valuable publicly traded companies - were VC backed, which (at least in CDPR’s case) did not hamper their growth. Yet, in terms of the role that VC-backed tech companies play from a growth perspective, the argument is still valid.
With only 51 startups per capita, Poland ranks 27th out of 36 in Europe. We beat Macedonia, Serbia, Ukraine, Russia, Belarus, Bosnia, Albania, Moldavia, and Georgia. Though we consider ourselves an entrepreneurial country, we have almost four times fewer startups per capita than the European average (190) and nearly twenty times fewer than Estonia, which leads the ranking with 865 startups per capita.
Another conclusion, which shouldn’t be a surprise, is that the higher the relative number of startups within a country, the greater the per capita investment level. This is why we need to educate about and promote tech entrepreneurship more!
Even though the data above might give you a different picture, we think Warsaw can join the list of top 20 European VC hubs soon. For now, there are at least two factors that contribute to that.
First off: cost base. Although office space is not a top priority for founders right now, prime rent in Warsaw is currently at EUR 300 per square meter per year - almost EUR 100 less than in Barcelona, nearly EUR 250 less than in Berlin, and more than EUR 500 less than in Stockholm.
Secondly: access to talent. Talent is everything when it comes to achieving success in tech startups. Unsurprisingly, it tops the list for founders when asked to share the most critical factors they considered when choosing where to locate their companies. Coronavirus might have changed how we approach successfully attracting talent, but the fact is that access to large talent pools is still one of the critical success factors in startups.
Poland has almost 3,000 software developers per 1 million inhabitants, more than France, Norway or Italy. We would argue that wages in IT are still competitive compared to Western Europe, which makes this talent base even more interesting. Another fact is that CEE countries - including Poland - are underserved from the perspective of VC money, especially given the relative depth of their talent pool.
Finally, in the Report, founders were asked about the most important business consideration for them when choosing where to locate their company when they founded it. Access to talent topped the list by far. While only 19% of the first-time founders named it the most critical factor, one-third of the repeat founders with significant experience in scaling a company said it is vital. In short: attracting and investing in talent is crucial if we want to have an edge as an ecosystem.
European Tech ecosystem value is estimated at USD 200 billion, which is about five times smaller than Google’s market cap. To some, it might sound like a discouragement, to others like an invitation to play. At COBIN Angels, we’d like to see ourselves in the latter group.
We believe that the flywheel has just started turning and will move much faster in the coming years. We heard some defeatist voices, emphasizing only the flaws and not seeing the chance presented by our still young ecosystem. We encourage all the pessimists to see an emerging opportunity and join forces supporting our country’s entrepreneurial revolution.