Vienna-based Kiwwi CEE Holding AG completed a second round of financing in early April totalling euro41 million. Kiwwi’s primary focus is offering voice telephony services over Internet protocol to small to medium sized enterprises (SMEs) in Central and Eastern Europe. So far, the company says it has signed up around 4000 SMEs in the first three markets it has entered Czech Republic, Hungary and Slovakia.
This latest funding round was structured and led by Dresdner Kleinwort Capital, which is joined by two Austrian investment companies; Global Equity Partners and Go Equity. Kiwwi was founded in August last year by its chairman Oliver Schmalholz, CEO Arnaud Enee and investor Chuck DeHont, with the support of Georg Serentschy, managing director of Arthur D. Little, Austria. A group of four Californian private investors also contributed to the start up funding.
Kiwwi’s latest funding round stands out as one of the largest venture capital deals to be concluded in Austria. According to Vijai Gill, regional director of Central and Eastern European Private Equity at Dresdner Kleinwort Capital in London, the higher end of venture capital deals has tended to be around $20 million.
Kiwwi says in addition to the SMEs, it also has around 115,000 mainly residential customers in the Czech Republic, Hungary and Slovakia that are using its free access to the Internet. The euro41 million financing will be used to fund expansion into Kiwwi’s next target markets, Poland and Slovenia. These five countries are included in the first round of accession to the European Union of Central and Eastern European States. Accordingly, they are undergoing liberalisation of their domestic telecommunications markets, which offers ample opportunities to companies like Kiwwi, says Kiwwi’s chairman Oliver Schmalholz.
“The liberalisation of the telecommunications markets in Central and Eastern Europe will only happen once,” he says. “Therefore we have to seize the opportunities this presents and take action quickly today. Within just six months of our start-up we have established an international telecommunications network in three countries, which today already meets future technology standards.”
Lead manager Dresdner Kleinwort Capital took the lion’s share of the euro41 million financing round, through its specialist fund Dresdner Kleinwort Benson Emerging Europe, which has around $225 million invested in different companies in the region, according to Gill. The Kiwwi deal is the fifth investment for the firm’s fund. Gill notes that the fund has also invested in one other telecoms company and an Internet Service Provider.
Thomas Probst, partner at Global Equity Partners in Vienna, says his firm has a total of euro230 million invested, which includes a euro50 million high tech fund. From his firm’s perspective, the Kiwwi financing falls between a high tech and a sales company investment, reflecting the very nature of the telecom company’s business strategy.
Kiwwi’s US investors joined the company from its start, when it raised initial capitalisation of euro4 million. They are no strangers to telecoms investment with three of the four having participated in deals in Austria and the Benelux countries. Their relationship with Schmalholz dates back to September 1997 when he was running European Telecom and they participated in a similar financing round. Schmalholz sold the company in February 1999 to Telefonica of Spain and remained at the helm until June that year.
Kiwwi’s now valued at around euro70 million but the present round of financing took a little longer than Schmalholz had originally anticipated. As an interim solution, Kiwwi raised euro6.6 million through a bridge financing facility from Erste Bank, which was repaid through its latest equity injection.
Kiwwis board structure has been finalised with no one majority shareholder, but it represents all of its investors. Schmalholz is joined by Georg Serentschy, of Arthur D. Little, Chuck DeHont, representing the US investors, Dresdner Kleinwort Capital, Go Equity and Global Equity Partners. In line with the company’s business plan, Schmalholz says Kiwwi will be EBITA-positive in early 2003.
Although all of the investors in Kiwwi are committed to the business idea of competing in the liberalising telecoms markets in the region, the funds might not have been made available without Schmalholz’s strong track record in company start-ups and particularly the telecoms sector. “This is one of the largest transactions in the region. The management was critical,” says Gill.
The decision to invest involved extensive meeting with management not only at Kiwwi’s hub in Vienna but also at its 25 offices in Czech Republic, Hungary and Slovakia. “The management played a key element in our decision to invest. And all of them have been involved in this type of venture before,” explains Gill. What helped secure the investment was not just the experience but also the fact that European Telecom was successfully exited via a sale to Telefonica.
As well as experience, Kiwwi’s business plan benefits from a certain element of timeliness. “Central European telecoms is still at a stage which is a few years behind Western Europe. With relatively poor service from the incumbents in those countries, there is a lot of pent-up demand,” Gill adds.
Schmalholz’s view on the financing is pragmatic: “We were able to obtain the funding because of our management team, but we were in the right place at the right time. We won’t need any more money if we don’t go into any more markets or different product lines.”
Between now and September, Kiwwi will move into 10 new markets in Slovenia and Poland, bringing the total number of business centres where it offers its IP-based services to 35. Schmalholz says around 80 percent of the target market is in its five key markets totalling 66 million potential users.
“We target companies that do a lot of international calling,” says Schmalholz. Many of the SMEs that have signed up to Kiwwi’s services are involved in import/export activities, with relatively small workforces but with high telecoms needs. Apart from in the Czech Republic, which initiated telecoms liberalisation through its Telecommunications Act last year, Kiwwi’s other four target markets are still pre-liberalisation for fixed-line voice services, meaning competition in voice services can only be ventured through IP services. There is a trend in Central Europe to move from the old system of switch technology to IP-based services.
Kiwwi’s investors reiterate the need for timeliness in positioning in markets about to liberalise. The Kiwwi brand is being pushed in all of its business locations, appealing to the pent-up demand that the incumbent State-owned telecoms companies cannot supply. Also, because most of Kiwwi’s SME users access services during business hours, the residential use complements this as is generally subscribed to during the evenings.
While many new entrants into the telecoms markets in the region have tended to focus on one market, Kiwwi’s regional focus is seen as one of its primary business strengths. Its revenue streams do not rely on one particular economy. “What we’ve seen in the past is there are lots of companies that want to start up in one country and develop elsewhere later,” says Probst. “The special thing about Kiwwi is that it is targeting a group of countries.”
The first call on the Kiwwi network was made in the Czech Republic on September 1 last year. Kiwwi estimates that presently some one million minutes of call time is channelled through its network each day. Services in Hungary and Slovakia were launched in October last year. Kiwwi uses the same IP network technology in each of its markets, which allows the company to set up a network within three months.
The incumbents in Kiwwi’s five target markets have a 98 percent grip on total telecoms activity, according to Schmalholz. But new entrants are always considered a threat by the big State-owned telecoms giants. In Hungary, for example, Kiwwi may face pressure from State telecom Matav over revenue sharing.
Liberalising markets are always a tough place for new entrants, but the point about stimulating competition is about being focused in the right place at the best time. “Kiwwi has already managed high growth rates with very little money,” says Probst. “So we are looking forward to seeing much better growth rates with these new funds behind it.”