Development Prospects for the Market of Venture
Capital Funds in Poland
REPORT ON THE WORKSHOP
AND
PROPOSED LEGISLATIVE CHANGES
Second Workshop
Wednesday, October 03, 2012
Prepared by:
Rafał T. Stroiński, LL.M., Ph.D.
Izabela Prager
1
Introduction
This report, being a continuation of the Report on the First Workshop (which took place on June
14, 2012 in Warsaw), was prepared on the request of the Polish Agency for Enterprise
Development (PARP) and records the discussion held during the second workshop under the
"Development Prospects for the Market of Venture Capital Funds in Poland" series which took
place in Warsaw on October 3, 2012.
The report is a compilation of views presented by its participants, prepared on the basis of
materials provided by the Polish Agency for Enterprise Development. The report relates solely to
the issues raised during the workshops. No part of the report, in particular recommendations, is
binding or constitutes a legal opinion. It does not constitute a comprehensive presentation of all
issues related to the venture capital market in Poland. Views and recommendations presented in
the report are those of the workshop participants and not an independent expert legal opinion.
2
Table of Contents
Glossary of terms........................................................................................................................................... 4
Part I. Report on the workshop ..................................................................................................................... 5
Panel 1. Regulations concerning the venture capital market ................................................................. 10
Panel 2. Capital market today, opportunities, prospects ........................................................................ 13
Panel 3. Italian experience ...................................................................................................................... 15
Panel 4. The market for cooperation of business incubators, the network of business angels versus
venture capital funds............................................................................................................................... 16
Part II Proposed legislative and institutional changes and changes concerning activities of participants of
the venture capital market ........................................................................................................................... 18
Area 1. Legal barriers .............................................................................................................................. 18
Area 2. Institutional and behavioral barriers ........................................................................................... 22
3
Glossary of terms1
business angel
a private investor who provides both finance and business
expertise to a company at its very early stage of development;
seed [stage]
a phase of the company's development which comprises
financing of initial, potentially profitable concepts, before a
business has reached the start-up phase; funds are usually used
for research, assessment and development of the business
concept up to its commercial phase;
start-up [phase]
a phase of the company's development which comprises
financing of product development and initial marketing;
[business] incubator
a designated place where a large number of newly established
companies and, most often, an institution or organization
supporting their development are concentrated on a limited
space;
Private equity
a form of investment on non-public capital market in order to
generate medium and long-term profit; One of the subsets of
private equity is venture capital;
venture capital
a form of financing of innovative investment projects involving
high risk which are in early stages of development.
1
Prepared on the basis of: http://www.psik.org.pl/slowniczek.html.
4
On October 3, 2012, at the initiative of the Polish Agency for Enterprise development
and the Polish National Contact Point for Competitiveness and Innovation
Framework Programme (CIP) for the Polish financial market, the second workshop
took place in the series of workshops dedicated to the prospects of the development of
venture capital funds in Poland under the Honorary Patronage of the President of the
Republic of Poland Bronisław Komorowski. The meeting was attended by 54
participants, including representatives of the meeting organizers, i.e. the Polish
Agency for Enterprise Development and the Polish National Contact Point for CIP,
the Cabinet of the President, the European Investment Fund, the National Capital
Fund, the Foundation for Polish Science, the Polish Private Equity and Venture
Capital Association, the National Center for Research and Development, the Ministry
of Regional Development, the US-Polish Trade Council and investors, traders, and
also legal and tax advisors. The meeting was a continuation of the workshop held on
June 14, 2012 and opened a discussion on the development of the venture capital
market among participants of this market.
Part I. Report on the workshop
The workshop was opened on behalf of the organizers by Dr. Michał Bańka, Director of the
Department of Business Environment Institutions Support at the Polish Agency for Enterprise
Development, who was followed by Olgierd Dziekoński, Secretary of State in the Cabinet of the
President of the Republic of Poland. The Minister expressed his appreciation for the formula of
the workshop and stressed that the meeting attended by us was an expression of the idea which
was initiated during a meeting of the President Bronisław Komorowski with representatives of
the US-Polish Trade Council in Washington, D.C. The purpose of the workshop, in accordance
with the objectives adopted at that time, is to identify technical, organizational and environmental
conditions that will enable a better functioning of the venture capital formula in Poland, also in
the context of its membership in the European Union. The Minister thanked the Polish Agency
for Enterprise Development for its contribution to organizing the forum that is so important to the
entire venture capital environment and also expressed the hope that the meeting will allow for
better identification of institutional barriers to the functioning of the market. He noted that today,
when we question the functioning of capital markets, venture capital investments are a real
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demonstration of building a better, innovative reality. He suggested that this meeting be treated as
a moment of reflection on the nature of the institution of investment in the economic, scientific
and technical development but also a reflection on building an innovative reality, related to
technological progress. He stressed the actual impact of the arrangements made during the
workshop on changes in regulations as well as in attitudes and expectations of market
participants.
Then, Bożena Lublińska-Kasprzak, President of PARP, spoke, thanking the Minister for the
support and inspiration. She welcomed the guests on behalf of the PARP and reminded them of
the objectives and purposes of the series of meetings. She stressed that the idea of the workshop
becomes a part of the activities, goals and plans of the PARP, which include in particular
financing of new projects, young companies and start-ups, but also the analytical activity. This
branch of the PARP's mission focuses on the identification of barriers and gaps in the
development of entrepreneurship and innovation in Poland. Therefore, proposals and demands
from the first and second workshop will be forwarded to the participants of the workshops,
government authorities and market participants – and this is the purpose of this report.
Having invited the participants to the discussion, the President of PARP gave the floor to
Arkadiusz Lewicki, the Director of the National Contact Point CIP (KPK CIP) for the Polish
financial market who welcomed the guests on behalf of the institution represented by him and
stressed that the market development prospects depend largely on EU funds; and Polish funds
may use funds from the European Investment Fund even in the current financial perspective.
Next, Minister Olgierd Dziekoński presented several of the most important threads that should
be developed during panel discussions. He stated that the most important question is to what
extent the public authority – with reference to the allocation of funds – and to what extent the
private market – through the investors' ability to take risk and their capital resources – is to
participate in the venture capital investment process. He noted that in capital markets of the
European Union we are trying to build walls to increase the level of safety and the price for it is
the reduction of the level of the economy innovation. He stressed that it is time to find the answer
to the question whether and how public funds are to participate in the investment process; how
should they do it without interfering with the ability of other market participants to take risks.
The Minister emphasized that a decision should be made whether we trust in procedures or in a
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particular person and he pointed to the second part of this alternative.
As a contribution to the discussion, Dr. Michał Bańka presented conclusions and
recommendations from the first workshop2, presented in the Report prepared by Dr. Rafał
Stroiński, lecturer at the University of Warsaw and partner in Jankowski, Stroiński i Partnerzy
JSLegal law firm. Conclusions were divided into two main groups: concerning legal and
regulatory barriers and recommendations of activities of market participants.
I.
LEGAL RECOMMENDATIONS – COMMERCIAL LAW
PROBLEM
PROVISION
RECOMMENDATION
1.
Limited freedom in creating
preferred shares and difficulty
of adapting their structure to the
Polish legal system.
Article 196 of
the Code of
Commercial
Companies;
Article 353 of
the Code of
Commercial
Companies
To introduce the possibility of such a preference
of shares under which their holder will enjoy the
priority of satisfaction at the payment of dividend
and to abolish (in respect of shares in both,
limited liability companies and joint-stock
companies) a proportional reduction of the
preference. This solution will allow the investor a
greater freedom in terms of shaping the
relationship between the risk of the investment
and the expected rate of return.
2.
It is necessary to extend the
scope of freedom of contract in
shaping the articles of
association of a joint-stock
company, which will allow a
greater flexibility in shaping a
legal relationship between the
investor and the entrepreneur
and a better reflection of the
provisions of the investment
agreement in the company's
articles of association, which in
turn reduces the risk of the
parties associated with the
investment.
Article 304 of
the Code of
Commercial
Companies
§ 3 and 4
In the Polish model of joint-stock companies,
where the shareholding structure is not dispersed
– particularly in companies where the major
investor is a venture capital fund – there is no
need to protect minority shareholders with such a
strong measure as the presumption of binding
nature of provisions governing a joint-stock
company. This is mainly because the fund, when
making investments, becomes a shareholder in a
company which already exists, whose articles of
association are subsequently amended to reflect
the provisions of the investment agreement
previously negotiated between the investor and
the entrepreneur. A modification of the analyzed
provision would allow to ensure full consistency
between the investment agreement and the
articles of association and thus to increase the
security of the parties, minimize the risk of legal
disputes and to make this legal form of venture
capital and seed investment more flexible.
2
[]
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II.
1.
2.
3.
III.
LEGAL RECOMMENDATIONS – TAX LAW
PROBLEM
PROVISION
RECOMMENDATION
A contribution in-kind in the
form of industrial property
rights is taxed at the same rate
as a contribution in-kind in the
form of, for instance, real estate.
An industrial property right
contributed to the company is in
this case the highest value asset
in this company, save that this
right will bring the expected
income only in the future.
Taxation of this contribution inkind already at the time of
transferring it to the company
reduces the attractiveness of the
venture capital investment.
Inefficient distribution of
dividend to natural persons.
Article 12
clause 1 item
7 of the CIT
Act
Exemption of this type of contribution in-kind, the
same as in the case of an organized part of the
enterprise, would eliminate negative incentives for
the investment.
Stringent provisions concerning
tax capital groups restrict in
practice the ability of companies
to use this instrument.
Article 1a.
clause 2 of the
CIT Act
A movement of the point of taxation from the date
of transfer of the contribution in-kind to the date of
a sale of shares may be an alternative.
Article 17
clause 1 item
4 of the PIT
Act
To remove the provision causing in fact double
taxation of dividends (consisting in the fact that the
profit achieved by a capital company is taxed with
corporate income tax and subsequently a payment
of the dividend to shareholders of the company is
taxed).
To reduce formal requirements for the creation of
tax capital groups, and especially to reduce the
minimum share capital per each company
comprising the group (currently PLN 1,000,000),
to reduce the minimum level of tax profitability
(currently: 3%) and the minimum share of the
parent company in the share capital of a subsidiary
(currently: 95%). Owing to the reduction of those
requirements, tax capital groups that create, among
other things, a possibility to immediately cover
losses of some companies with revenues of the
remaining companies, would become a far more
accessible vehicle.
PROPOSED ACTIVITIES WITHIN THE MARKET
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1.
PHENOMENON
No real integration of the business
community and universities.
2.
Poor quality of start-up projects and no
flow of experience between start-ups.
3.
A relatively easy access to the financing
of class 8.1 or 3.1 projects and frequent
situations where projects do not reach the
market stage.
RECOMMENDATION
To break the psychological barrier that is characteristic of
the scientific community in relations with the business
community; to sign agreements between the university and
investment funds, but also to establish informal relations,
consisting in, for instance, delegating managers to
universities in the capacity of 'in residence'.
Persons with experience in the venture capital sector and
business angels should conduct mentoring and coaching for
new market participants.
The grant of subsidies should be subject to the possession
of a conditional agreement on the continuation of the
financing with a commercial fund.
To introduce in the market a co-investment fund that will
help start-ups to acquire the second round of the financing.
5.
Venture capital funds operating in
Poland are interested in companies in
their growth stage, rather than those in
the seed stage.
To introduce activities proposed by Business Incubators
that would allow debt financing of innovative companies.
An economic factor which can increase the interest of
venture capital funds in the earlier stages of the
development of companies is a reduction of the expected
rate of return on investment in the sector of growth
companies. Competition between companies investing in
this segment should be increased. This may be achieved for
instance by eliminating extralegal barriers which
discourage Open Pension Funds (OFE) from private equity
investments.
To introduce co-investment instruments in Poland
operating in the model where at least three individual
investors (business angels) would risk their funds by
investing in start-ups.
6.
No positive PR of the venture capital
market.
7.
Low visibility of the Polish venture
capital market in the international arena.
To introduce debt financing also in the operations of
incubators. The incubator could receive its money under
this model without waiting until the company makes a
profit.
To work on the perception of the venture capital market,
not only through the media activities, but also by
promoting talents (for instance funding grants in Silicon
Valley).
To improve the image of the Polish venture capital market
in the world, for example by creating "visas for start-ups",
funding grants, promoting successes of Polish start-ups,
especially those that are successful outside of the country.
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Dr. Michał Bańka also announced that as a result of the inspiration from the first workshop,
PARP undertakes, still in the financial framework 2007-2013, as part of the Innovative Economy
Operational Programme, to create a co-investment fund. Next, Izabela Banaś, Deputy Director
of PARP, presented the objectives of the new measure – "Support for the first implementation of
the invention" of the Innovative Economy Operational Programme, 2007-2013. Under this
measure entrepreneurs may obtain funding for investments related to the first implementation of
the invention in their business activity and the substantive assessment of projects will be
performed by a panel of experts. The following aspects of the assessment will be taken into
account: innovation, social utility, cost effectiveness, chances of the product implementation,
competitiveness. The selection board will consist of representatives of the Polish Bank
Association, the Ministry of Economy and also representatives of venture capital funds.
Panel 1. Regulations concerning the venture capital market
A discussion on the institutional environment of the venture capital market was led by Dr. Rafał
Stroiński, partner at Jankowski, Stroiński i Partnerzy JSLegal law firm, director at the US-Polish
Trade Council, lecturer at the Faculty of Law and Administration at the University of Warsaw,
expert on the venture capital and private equity sector. That debate being a direct continuation of
the discussion concerning the most important legal and tax barriers to venture capital
transactions, transaction costs of reaching an agreement between the fund and the entrepreneur,
institutional obstacles in exits and the availability of vehicles for the creation of funds in Poland,
focused, in addition to these issues, on institutional barriers to cooperation between universities
and the business community, legal conditions for the emergence of Polish start-ups on the global
stage and the latest tax law issues.
The first speaker was Mark Iwanowski, US-Polish Trade Council, whose answer to the question
about the place of young Polish companies on the global stage started with a reference to his own
experience. Prior to becoming an investor he was an entrepreneur, therefore he was able to learn
how to succeed at an early stage of development already at the beginning of his career. In his
opinion, the willingness to take risks is most important. The risk itself is a component of the
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definition of the entrepreneur, however this risk must be reasonably balanced. An investment
fund must manage the risk at a portfolio level and learn to accept failures. He stressed that only
approximately 25% of VC companies achieve a 30% return on investment – the remaining
companies do not achieve such a considerable success. But what can we do to be competitive on
the global market? Innovation is the result of the optimization of the risk taking process, therefore
the government should consider facilitation – where transaction costs are the lowest. It should be
remembered that too great an involvement of the government is inefficient – the management of
the venture capital market is efficient if this market is controlled by private actors.
In response to the question about the role of the academic entrepreneurship, Dr. Tomasz
Perkowski, Member of the Management Board of the Foundation for Polish Science, warned
against the myth of the "useful science" at the time when there is a thesis that in the next financial
framework the European Union will support useful research. He emphasized that it is important
to support incremental innovations, however universities should not be used for this purpose
because they do not have an adequate system of evaluation and they are not the right place for
such changes. He pointed out that we cannot move away from supporting fundamental science,
because it is in this field of research that significant changes in the functioning of the world
occur. Another myth is that universities are sources of inventions – universities do not produce
inventions but the people who create them. Therefore, we should promote academic
entrepreneurship: risk-seeking companies of PhD students and regular students and not riskaverse companies of professors. As far as the functioning of universities is concerned, we should
strike a balance between the desire for the world-class quality and for evening out social
differences. Our goal should be for one or two Polish universities to reach the global level. He
stressed that the existing curricula should focus not on education in the field of management, but
on including management skills in biology and chemistry curricula. He noted that universities
need money for the development of business incubators and accelerators, however they do not
have the tools to manage industrial property rights. As a solution to this situation he proposed to
create intellectual property management funds at universities. Such a fund should accumulate
shares of companies to whom industrial property created in incubators will be sold.
In response to the question of the panel leader about PSIK opinion on the methods of eliminating
transaction costs, Barbara Nowakowska, Director of the Polish Private Equity Association
11
(PSIK), stressed that the saying that the devil's in the detail applies greatly to the venture capital
market. She emphasized that venture capital is a specific, niche instrument used at a small scale
in the economy as a whole. In Europe it is not a large market, however in the model venture
capital market, i.e. the USA, the role of the regulator is insignificant. Since Europe does not have
a lot of experience in this sector yet, instruments used for regulating other segments of the capital
market are used in the UE per analogiam to regulate the venture capital sector. However, this
reasoning is subject to a material error because the purpose of public market funds is to protect
investors. The model of the venture capital market was developed in the process of a long clash
of interests of investors and managers. A venture capital fund which employs a manager, rewards
him with a share in the profit – investment bankers are not rewarded in this way, this is not a
method typical for financial markets. Remuneration depends on long-term financial results. Such
a mechanism results from a strong position of the investor and minimization of risk incurred by
the investor. All this shows how difficult venture capital is. The employer attempts to pass on this
instrument well known institutions. We observed this in the works on the establishment of the
National Capital Fund (KFK) when a mechanism complying with the requirements of the Polish
law and meeting the requirements of the pace of the venture capital market was worked out
successfully. KFK considers the money to have been spent only when it is received by the
company, however according to the opinion presented by the Director, its role ends upon signing
an agreement with the fund. From the perspective of the State Treasury it would be more efficient
if those funds were considered spent already at that point. Another issue raised by the Director
was the planned taxation of a partnership limited by shares. The venture capital market needs a
pooled-investment vehicle, which must be transparent for tax purposes. After the recent
interpretation of the Ministry of Finance a partnership limited by shares meets those
characteristics and any changes in its form will be undesirable. Another issue is taxation of a
contribution in kind in the form of industrial property rights. Everything is a matter of minor
problems whose solution may change the situation in the market drastically.
Szymon Kołecki, tax advisor, KMDP Kołecki Małkiewicz Doradcy Podatkowi, took the floor
last. He started his speech with the assessment of the proposed taxation of a limited joint-stock
partnership. He stressed that this partnership is taxed only upon withdrawal of invested funds
from it. Owing to this solution, companies which preferred to be incorporated in Cyprus, come
12
back to Poland. However, only several months after this favorable interpretation a bill appeared
which treats a partnership limited by shares as an ordinary payer of corporate income tax. If the
bill enters into force in the proposed form, it will cause a transfer of income tax to other
countries. In addition, such an amendment will consolidate our image of a country where tax law
changes constantly. A relief for new technologies was the next issue under discussion. The
justification for this regulation is to introduce an incentive to incur expenditure on the acquisition
and development of technologies. In practice, under the current legislation, owing to the tax relief
we can deduct only expenditure on the acquisition of a new technology – development of own
technology is not covered by the tax relief. Therefore, for instance a manufacturer on the
pharmaceutical market is interested in incurring expenditure on the development of new
technologies but cannot take advantage of this relief.
With regard to the taxation of a contribution in-kind in the form of intellectual property, Szymon
Kołecki stated that owing to tax optimization the knowledge may be transferred to a capital
company but in order to solve problems we need a vehicle allowing to pay tax at the time of a
sale and not subscription of shares.
Summarizing this part of the discussion, dr Rafał Stroiński pointed again to the need to
minimize transaction costs in the venture capital sector and stressed how minor changes could
significantly improve the condition of the market.
Panel 2. Capital market today, opportunities, prospects
The next panel was led by Adam Purwin, financial sector expert. The discussion, being the
elaboration of the previous meeting, concerned the volume, the structure of supply and demand
for capital, whether the previously adopted solutions for the market structure turned out to be
long-lasting, how they changed the market, what it looks like now and what further prospects of
its development are.
Anna Hejka, Managing Director of HCM Group, spoke the first, stating that despite the lack of
fulfillment of the formal conditions for recession (we do not have two quarters of negative
growth behind us), the growth at 2% of GDP in comparison with 5% means in fact that we may
be dealing with it. She pointed out that we should not waste the opportunities afforded by the
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crisis – because this is the time when innovative companies willing to take risks enter the market.
Apple, Google, Disney, CNN, these are all companies which entered the market during the crisis.
So if we lose this moment, the entry of Polish companies on the international market will be more
difficult – if we are not able to show at the global scale an appropriately high growth, investors
from abroad will avoid Poland. She identified unethical conduct of some venture capital funds to
be another problem of the market. She stressed that investors have to protect themselves,
however it should be done in a balanced manner. It is important here to educate entrepreneurs in
the area of good practice and to make them aware that certain provisions of investment
agreements do not constitute a trap but have their logical meaning. She also stressed that
unfortunately English language is still a barrier. However, the most important problem of the
whole market – and the Polish society in general – is the fact that we cannot dream and if we do
dream, we do it with a fear. We must simplify procedures and believe in people.
Krzysztof Kowalczyk, manager of Hardgamma fund, commented on the flexibility of seed
capital. He noted that despite access to many well funded vehicles, acquisition of capital at the
early stage is still complicated. He gave an example of the Enterprise Investment Scheme
functioning in the United Kingdom – a mechanism encouraging persons with high personal
income to invest in young companies. The program allows an individual with no more than a
30% interest in the company to deduct his income tax liability by specified amounts. The
introduction of this mechanism in the European Union would be excellent for investments at an
early stage of company development.
Joanna Dąbrowska, KPK CIP, talked about the Competitiveness and Innovation Framework
Programme (CIP) conducted by the European Investment Fund. EIF runs a number of
programmes to execute equity transactions. EUR 600 million is to be used in the 2007-2013
financial framework under CIP and only two thirds of this amount was allocated by the end of
2011. Therefore, the amount of EUR 200 million is left for 2012-2013. Call for applications to
the Programme is conducted continuously and the allocation of funds – annually. So far no fund
with Polish roots applied successfully under the CIP Programme. This is probably partially due to
the fact that at the same time the National Capital Fund (KFK) operates in Poland and chances of
a fund which already received a subsidy are lower when it submits an investment proposal to EIF.
EIF operates as a market investor: the less public money is already in the fund, the more scores
14
the fund will receive at the assessment. The fundamental principles followed by the EIF are 'buy
and build' and 'avoid buy-outs' principles.
Professor Piotr Moncarz, US-Polish Trade Council, Stanford University, was the last to speak.
He answered the question of the panel leader about how to learn from the American market and
what practices from the Silicon Valley we should transplant onto Poland. The Professor noted
that understanding of the US market and the knowledge how to achieve success are of key
importance. He stressed the distinction between the knowledge of American culture of
entrepreneurship and the knowledge of the language, which is not obvious to entrepreneurs. He
confirmed that without a strong scientific background there is no chance of the emergence of
innovative ideas. He also pointed out how important the teamwork is in view of the
overwhelming Polish individualism. He reminded of the importance of risk taking, the ability to
accept failures and – what is equally important – to celebrate the success. All this takes a lot of
time but the economic and cultural acceleration progresses, so we can count on notable results.
Next, the Professor outlined the US-Poland Innovation Hub project, one of the ways to learn best
practices in the market and global thinking. The Programme includes a series of training classes
for seven selected companies which not only learn the culture of venture capital but also are
forced to answer the questions: why do they want to enter the global market, how do they want to
get involved with an investment partner, are they ready to transfer the management board of their
company to the US etc.
Panel 3. Italian experience
Later in the workshop, Francesca Natali, Zernike Meta Ventures, spoke about the Italian
experiences in financing investments that are at the meeting of business angels and venture
capital funds. The experiences from the practice of the functioning of the venture capital market
in Italy show that the key investment criterion are people. The Italian market is small and weak,
the role of the actor accumulating capital is difficult, and the collection of private funds is even
more difficult. Thus, there is a mechanism under which at the beginning public money should be
invested and then the level of public and private funds should be evened out. There is a chance
15
that this situation will be changed by the new act (decreto-legge) of October 18, 20123 which
regulates the situation of start-ups. Among other things, the act offers reliefs to private investors
investing in innovative start-ups.
Panel 4. The market for cooperation of business incubators, the network of
business angels versus venture capital funds
The last panel discussion was led by Dr. Michał Bańka, Director of the Department of Business
Environment Institutions Support at the Polish Agency for Enterprise Development (PARP). It
focused on the following issues: creation of a co-investment fund in PARP, the idea of lean startup, the future and prospects of the development of incubators. Dr. Michał Bańka talked about
the co-investment fund project and pointed out that there is a huge disproportion between
measure 3.1 and measure 3.2. During the discussion he was looking for the answer to the
question whether the gap between the financing of early stages of development and financing of
further stages is visible and also what the opinion of market participants on this disproportion and
exposure of start-ups for venture capital funds is. Jacek Błoński, President of Lewiatan Business
Angels, confirmed that business angel networks realize the existence of this gap and pointed out
that the basic problem is the financing of the middle, i.e. the place for business angels. Therefore,
the new instrument proposed by the PARP fits perfectly in the system of financing of
innovations, the more so because today we do not have in Poland any incentives for private
equity investments (such as under Enterprise Investment Scheme in the UK). He recalled that for
example in Portugal where the venture capital market functions similarly to the Polish market,
incubators, business angels, venture capital funds and the fund of funds operate on that market,
save that venture capital funds demonstrate a relatively high risk aversion. We need an instrument
which will provide liquidity of the incubator-angels-venture capital process. Then, the panel
leader addressed Wojciech Przyłęcki, President of the Management Board of InQbe, who spoke
about potential contraindications against the establishment of an investment fund from the
perspective of incubators. Wojciech Przyłęcki pointed out that the primary difficulty in the
financing of projects under measure 3.1. comes down to finding private capital because funds
3
Decreto-legge, 18 ottobre 2012, n. 179. Ulteriori misure urgenti per la crescita del Paese, Gazzetta Ufficiale della
Republica Italiana, 19 ottobre 2012.
16
derived from inventors are usually insufficient (because it is difficult to value a contribution in
kind in the form of intellectual property rights so highly). That is why we look for capital among
private investors – who bring to the company not only capital but also the knowledge, experience
and contacts. Mariusz Sperczyński, President of the Management Board of Technoboard, called
for protection of human resources and investments in people who already proved themselves
when designing new investment instruments. Piotr Wilam, InnovationNest, stated that a coinvestment fund would also meet with the interest from venture capital funds. He added that all
activities of this type that will cause the potential of funds in the market to be greater are good for
the ecosystem. He stressed that despite the advantages of the instrument discussed, we should
look for solutions owing to which Poland will be more open to global markets. Therefore, we
need to take care for the entire ecosystem to be diversified and we also have to know what
branches of the innovation market we want to develop. While innovative companies in Poland
can be divided into companies from the IT and biotechnology industry, the essential part of
innovation in Poland is the IT industry. Polish economy has come to a point where we know that
our market is too small to create companies of at least a medium size – that is why we have to
make informed decisions regarding branches we want to develop.
The next topic was the role of incubators in the market. Wojciech Przyłęcki noticed that
incubators should be allowed to finance start-ups with debt or at least to finance with debt the
next stages of investment because it would be much easier to develop a prototype of an invention
in the incubator than after the establishment of a company. Today incubators may invest only in
newly established companies. He proposed to invest also in existing companies, however not by
purchasing shares but by participating in the increased share capital. Amendments are also
necessary in the corporate income tax act – it is ineffective that the moment of a sale of shares
belonging to the incubator involves the need to pay tax on the entire sale amount and amounts
spent on a purchase of those shares cannot be classified as tax-deductible expenses.
Dariusz
Żuk,
President
of
the
Management
Board
of
Akademickie
Inkubatory
Przedsiębiorczości commented on the forms of support which should be provided by incubators,
starting by saying that we live in interesting times – also for the venture capital market. The
global market goes in the direction of reducing the influence of corporations to the advantage of
start-ups – corporations must invest in them, as done for example by Starbucks and BMW. State-
17
owned enterprises will also be able to notice this area. He pointed out that first of all the
nomenclature should be changed – instead of the concept of "incubators", we have four separate
elements: accelerators, seed funds, venture capital funds, private equity funds. He added that in
the new financial framework, we should initiate first of all the area of accelerators. He also
pointed out that under Program 3.1 currently there is no post-project measure and mentoring and
meetings with investors are of key importance. As Piotr Wilam noted, it is the formal stiffening
that causes the financing gap to be filled in by foreign incubators – the best projects leave Poland
at a very early stage of development. He also recalled that the first great wave of Internet
innovation ended with a huge number of unnecessary, unsellable products. The Silicon Valley
environment processed those experiences, creating a customer development start-up philosophy
and this should also be the development path of the Polish market.
After the end of the panel discussion, an open discussion took place among workshop participants
concerning especially paths of the internationalization of the technological stage and the
importance of attracting foreign capital to Poland as well as possible methods of taxing a
partnership limited by shares. A conclusion of Dr. Tomasz Perkowski was clear – and inspiring
– we must develop fast in order not to remain on the margin. It was this approach that was
emphasized by Bożena Lublińska-Kasprzak, President of the Management Board of the
PARP and Dr. Michał Bańka when closing the second workshop on development prospects of
the market of venture capital funds in Poland.
Part II Proposed legislative and institutional changes and changes concerning
activities of participants of the venture capital market
Area 1. Legal barriers
Both during the first workshop devoted to the development prospects of the market of venture
capital funds in Poland and during the second meeting being its continuation, the participants of
the venture capital market pointed to a number of legal barriers restricting the efficiency of this
market. The most important system problem results from (i) risk aversion and (ii) a lack of
18
flexibility of public institutions and (iii) an unmodified application of instruments regulating
capital markets to venture capital market. The above phenomena cause other market failures.
A separate, but extremely important, issue is the necessity to incur high transaction costs by
private actors, which results from the information asymmetry on the functioning of an unstable
tax system, as illustrated by the discussion on the planned change in the principles of taxation of
a partnership limited by shares.
PROBLEM
PROVISION
RECOMMENDATION
1.
In accordance with the Bill
amending the Corporate
Income Tax Act, Personal
Income Tax Act and certain
other acts of August 24,
20124, a partnership limited
by shares, the basic vehicle
for venture capital
investments, will be subject
to corporate income tax.
This means that a
partnership limited by shares
will be treated equally to
capital companies as defined
by the Code of Commercial
Companies, which makes
the proposed provision
incoherent with the
abovementioned act.
The Bill amending the Corporate
Income Tax Act, \ Personal
Income Tax Act and certain other
acts of August 24, 2012
2.
A relief for new
technologies provided for
both in the Personal Income
Article 18b. of the CIT Act
1. Expenses incurred by the
taxpayer on an acquisition of new
According to the Bill justification
"the bill focuses on "tightening
up" the income tax system, with
the aim to limit the existing tax
optimization mechanisms and to
refine provisions that raise
doubts in the judicature. A
fundamental change provided for
in the bill is taxation of a
partnership limited by shares, i.e.
giving to it the subjectivity under
corporate income tax".
Such a change would result in,
among other things,
discrimination of investors taking
advantage of collective
investment schemes in relation to
investors investing directly. The
introduction of regulations that
will treat partnerships limited by
shares as any other partnerships ,
taxed monthly at the level of the
partners, should be considered.
This will allow to preserve the
rationality of tax structures using
for instance closed-end
investment funds (FIZ) and at the
same time it will curb aggressive
tax optimizations implemented
outside those funds.
A change of the definition of an
"acquisition of a new technology"
into "creation of the technological
4
Source: http://legislacja.rcl.gov.pl/lista/2/projekt/59396/katalog/59405 (last visit: 13.11.2012).
19
Tax Act and Corporate
Income Tax Act covers only
an acquisition of a
technology from another
entity and thus it does not
include an independent
creation of a technology,
which is often chosen by
innovative companies.
technologies are deducted from the
tax base, determined in accordance
with Article 18.
2. New technologies, within the
meaning of clause 1, are deemed to
be technological knowledge in the
form of intangible assets, in
particular results of the research
and development work, which
enables the production of new or
improved products or services and
which has not been used in the
world for more than the past five
years, as confirmed by the opinion
of a scientific unit independent of
the taxpayer within the meaning of
the Act on Principles of Financing
the Science of April 30, 2010
(Journals of Laws No. 96, item
615).
2a. An acquisition of a new
technology means an acquisition of
rights to the technological
knowledge referred to in clause 2,
by means of an agreement on their
transfer, as well as the use of these
rights.
knowledge referred to in clause 2,
or an acquisition of rights to the
technological knowledge referred
to in clause 2, by means of an
agreement on their transfer, as
well as the use of these rights".
Article 26c. of the PIT Act
1. Expenses incurred by the
taxpayer on an acquisition of new
technologies are deducted from the
tax calculation base (tax base),
determined in accordance with
Article 26 clause 1.
2. New technologies, within the
meaning of clause 1, are deemed to
be technological knowledge in the
form of intangible assets, in
particular results of the research
and development work, which
enables the production of new or
improved products or services and
which has not been used in the
world for more than the past 5
years, as confirmed by the opinion
of a scientific unit independent of
the taxpayer within the meaning of
the Act on Principles of Financing
the Science of April 30, 2010
20
(Journals of Laws No. 96, item 615
and of 2011 No. 84, item 455 and
No. 185, item 1092).
2a. An acquisition of a new
technology means an acquisition of
rights to the technological
knowledge referred to in clause 2,
by means of an agreement on their
transfer, as well as the use of these
rights.
3.
The regulation of the
Minister of Economy on the
financial support provided
by the National Capital Fund
does not take fully into
account EU regulations on
public aid which not only
determine an annual – and
not one-off – limit of aid
granted per one enterprise,
but also allow to transfer an
annual aid tranche which is
greater by EUR 1 million
than the amount stated in the
regulation.
Relevant laws:
Community guidelines on
state aid to promote risk
capital investments in
small and medium-sized
enterprises (2006/C 194/02)
4.3.1 Maximum level of
investment tranches
The risk capital measure
must provide for tranches of
finance, whether wholly or
partly financed through State
aid, not exceeding EUR 1.5
million per target SME over
each period of 12 months.
§ 2 of the Regulation of the
Minister of Economy of June 15,
2007 on the financial support
provided by the National Capital
Fund
4. The total value of funds of equity
funds benefiting from the financial
support from public funds as part of
the measures implemented with the
use of venture capital engaged in
the same entrepreneur and its
related entities within the meaning
of the provisions of the Act of
September 29, 1994 (Journal of
Laws of 2002 No. 76, item 694, as
amended 6), may not exceed the
PLN equivalent of EUR 1,500,000
in accordance with the average
exchange rate published by the
National Bank of Poland on the day
preceding the date of signing the
investment agreement between the
equity fund and entrepreneur.
It is advisable to adapt the limit
of public aid from funds of the
National Capital Fund to the limit
imposed in the amendment to the
Community guidelines on State
aid to promote risk capital
investments in small and
medium-sized enterprises.
Communication from the
Commission amending the
Community guidelines on
State aid to promote risk
capital investments in
small and medium-sized
21
enterprises (2010/C 329/05)
2. AMENDMENTS TO THE
GUIDELINES
1) Point 4.3.1 is replaced by
the following:
"4.3.1. Maximum level of
investment tranches
The risk capital measure must
provide for tranches of
finance, whether wholly or
partly financed through State
aid, not exceeding EUR 2.5
million per target SME over
each period of 12 months."
Area 2. Institutional and behavioral barriers
During the workshop a group of institutional, but extralegal, facilities which could improve the
functioning of the venture capital market was identified. The most important facilities included
recommendations on the internationalization of the Polish market of innovation and creation of
new investment instruments – especially a co-investment fund being prepared by the PARP.
There is also a group of behavioral problems identified by venture capital market participants,
representing both the private and public sector. Their statements give rise to the picture of the
market whose functioning can be improved at a relatively low cost of introducing best practices
which would regulate this market at grass-roots level.
PHENOMENON
1. Gap in investment between the seed and venture
capital stage.
2. Low ability of universities
intellectual property rights.
to
manage
RECOMMENDATION
To establish a co-investment fund.
To create a mechanism encouraging persons with high
personal income to invest in young companies, similar
to the Enterprise Investment Scheme or mechanisms of
the Italian decreto-legge of October 18, 2012.
To create intellectual property management funds at
universities. Such a fund should accumulate shares of
companies to whom industrial property created in
incubators will be sold.
22
3. Unethical activities of certain venture capital
funds.
4. Risk of the presence on the market of a large
number of products that are unattractive to
consumers and investors.
5. No aptitude for teamwork, no knowledge of the
culture of the US venture capital market.
6. A need to
universities.
support
ideas
emerging
at
7. Relatively low quality of Polish universities and
their low visibility at the international scale.
To develop best practices in the market, combined
however with the introduction of full information
among entrepreneurs on standard provisions of
investment agreements.
To adopt customer development start-up philosophy – to
adjust the bill to market needs.
Training projects, education of the entire market, for
example through the exchange of experiences, programs
supporting entrepreneurship and internationalization of
companies.
To promote academic entrepreneurship – companies of
PhD students and regular students demonstrating risk
appetite and not companies of professors which
demonstrate risk aversion.
To bring one or two Polish universities to the worldclass level.
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