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Riding Waves or Creating Them? SMOK VC’s Borys Musielak on Investing Amidst the AI Hype

In an interview for The Recursive, Borys Musielak reflects on how the AI investment landscape has changed after this year’s hype, and CEE perspectives for the AI industry.
Image credit: SMOK Ventures
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Borys Musielak has a long history in the Polish entrepreneurial world – he co-founded Poland’s first coworking space for startups, Reaktor, the first private acceleration program, ReaktorX, and the biggest tech think tank, Startup Poland. All of this while also selling his own startup Filmaster to Samba TV in 2015 to build the company’s European business.

Today, Musielak is a part of SMOK Ventures as a managing partner. The Poland-based VC is making investments ranging from $100K and up to $1M in early-stage software startups in Central and Eastern Europe.

In an interview for The Recursive, he reflects on how the AI investment landscape has changed after this year’s hype,  whether it is actually a hype or not, the issues that are out there for Generative AI, and how CEE countries can attract investments in the industry.

The following interview was conducted as a part of The Recursive’s “State of AI in CEE” report. Download the full report with insights from 40+ experts and an analysis of 900 AI product companies from CEE here.

The Recursive: How would you describe the current landscape of AI investment in the VC industry in CEE?

Borys Musielak: The landscape changed a lot from before the hype and after the hype. Before, the hype was fun. When there was the hype for web3 and everyone was doing web3 I was doing AI. It was fun, because no one else was interested, rounds weren’t oversubscribed, you could actually choose and the valuations were okay. Suddenly web3 wasn’t a thing anymore, and you could see a lot of companies pivoting from web3 to AI. Which is not really always a bad thing, because sometimes the best entrepreneurs follow the waves and they want to be the best. 

However my thinking is as CEE, we are an obscure market. We are not a market that attracts a lot of money and historically there haven’t been really a lot of winners in Eastern Europe in the sense of being the best-funded startups in the world. Even those that have been the best-funded startups in the region, are still way less funded than Lyft and Uber. And when there is hype and a lot of entrepreneurs are working on something and the amount of money they are able to attract, usually those winners are in the US and China, unfortunately.

So that’s why my investment thesis is to stay away from the hype and if there’s a hype, so it’s extremely unlikely there’s going to be a winner from the CEE region, but rather from a place like Silicon Valley where they can attract the most money and talent to win in those hyped markets. In Eastern Europe we like those weird markets no one cares about and I think it’s beautiful.  That’s why our only generative AI startup is L.A.-based, with a founder who is really well-connected and he’s only fundraisers in California. The only reason we’re here is because of the personal connection between him and our co-founder Paul, also from California. So he convinced Paul to invest in Poland and to hire in Poland for cheaper and better labor, for better or quicker access to talent. That’s the only reason that we kind of sneak into this deal. 

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And we do a lot of those deals – a California-based founder, American team, but they want to hire a CTO and team in Poland, sometimes Ukraine, or elsewhere in Eastern Europe. We’re just doing a Bosnian team for example, with a founder of one of the biggest mobile gaming companies in the world.

So in that sense, we wouldn’t be fighting for top California generic API carriers companies for example, since there’s no way we can win deals like that without a good way in. So I’m kind of excited in general because this is changing how we live our lives. But investment-wise, I’m very skeptical. However, my thoughts are that there are not going to be a lot of Eastern European startups that become leaders in the hot spaces.

What types of AI technologies or applications do you see as most promising for investment in the near future?

One of the biggest problems right now, especially in generative AI is that it makes things up all the time. So I’m looking at a lot of companies that try to improve their explainability – how it helps you, how they’ve come up with that solution, and so on. So it can still be generative AI but it needs to point to sources you can trust because people stopped trusting ChatGPT-similar solutions because they were just making things up. I’ve been seeing a lot of companies like, for example, there is one guy in Poland who’s working on a legal tech solution that tries to use GenAI to come up with contracts for the clauses or explain clauses by quoting specific documents. It still does use GenAI to explain and to generate content, and there are always ways to double verify, or AI to verify itself if something is made up. 

So someone who cracks that is going to be very rich and I think that this is going to be the case for every domain. There’s going to be a specific AI model or a very specific AI solution that is relied upon in that region. 

Then, there is also the AI on the edge – so in the devices sphere, synthetic data, and multimodal systems. Those are the theoretical applications of AI that are now becoming more possible because of the advancements of AI in general. 

But on the business side, especially on the GenAI hype, the biggest one is to “just make trust it”.  If someone creates AI that’s like a filter for the available models and that you can trust for a specific domain, they can grow very fast. There’s a general need that people can have based on the fact that every domain is going to be disrupted by this.

How many companies in your portfolio develop and sell AI-powered software or hardware products? Can you give examples of the most successful ones and why do you consider them as exemplary?

It’s kind of hard to say because almost everyone is doing something now. It’s like the least they can do is try to automate stuff that was hard to automate before. So, we had a company for example that is able to cut the costs significantly in half by just employing AI for customer service. 

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Another one that is AI-focused at its core, is MX Labs. It’s AI in health and they analyse your face based on video and they tell you how sick you are. They distinguish some stuff like they measure your blood pressure and your pulse and blood fluctuations of your face. They can measure the first symptoms of depression, stress level. It’s a very scientific company that just wouldn’t work without AI, computer vision, and algorithms for understanding how to make sense of the data.

There’s another one that we’ve invested in last year called Gemelo – they are in the GenAi hype, and it’s a Delaware company, but with a Polish office. They allow you to digitally clone yourself – you record yourself on video and you record your voice and they make a clone of yourself that can speak, that can look like yourself in the video. It can know what you know, and talk to people, and so on. They have both speech technology and the video technology, and only the text for now is outsourced.

There is also Bitskout, Belarusian founders, who are like a super tiny UiPath just for automating CRM, and data entry into CRM. We also have one more that’s a kind of workflow automation for fintechs. So, the four of them are the ones that have the most AI at their core or have some type of AI that they use.

What are your thoughts on the EU’s AI Act and the effect it would have on the industry?

You cannot stop innovation by regulation – you can stop at some point when they regulate when the company becomes really big, but it doesn’t matter, because by then they already scaled, and they now can afford to comply. 

It’s like, you can think of being compliant when you find a business model that works and you find the customer, etc, and there’s so many other reasons to kill a startup. I haven’t seen many startups killed by regulation. So I just don’t see how AI regulation can actually help. It can actually hurt most  European companies because we always have the toughest regulations compared to China and the US. And for entrepreneurs, if it’s too hard to build stuff here, they don’t need to build in Europe, they can build elsewhere and they will build elsewhere.

What are the opportunities that you are seeing for cross-industry collaborations or partnerships in AI innovation in our region, particularly regarding VC investments?

Historically, we haven’t been really good at commercializing inventions from academia. Frankly and unfortunately, we have zero reputable universities in the region. So anyone who’s super smart goes to either the UK or the US, that’s how it works. Polish scientists that I know are at UCLA, Imperial, Cambridge, and Oxford. I don’t see much innovation happening in Central Eastern European universities. Also, the regulations sometimes don’t even allow them to commercialize in Poland, it’s just almost impossible for professors to be entrepreneurs and stay professors. 

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So I think the biggest chance for CEE is that we have a lot of IT talent and they are locked in software houses or corporations. It used to be fun and cool to work for those companies, but I don’t think it’s that much fun anymore. They’re not as cool anymore. So a lot of people are rethinking their careers. 

There are a lot of people who work on really big products, but not their own products that they learned so I think the biggest opportunity for them is to quit to start working on their own stuff and we are funding a lot of those companies. 

So we have a lot of talent that is put in the wrong places. And when there is just enough funding, Poland is a great example – the government helps to set up new VC funds, and suddenly the number of startups imploded, it was like 10x. 

So if we show them that there is enough funding in the ecosystem, a lot of those people are gonna be working on new stuff, so the potential is there and this is the biggest advantage that we have. 

Which factors will have the biggest impact on improving the outlook for AI-powered innovation in the CEE region?

That’s our only competitive advantage, frankly. So what would I do if I was the head of the Central Eastern European government for example? I would just get all those countries together and market as one – the Americans don’t care if you’re in Bosnia, Macedonia, Poland or you know, Hungary. For them, it is just one region – and it first needs to be on their mind, because right now it is not. 

All of those things influence how we are seen and how our innovation is seen, because we need their capital. For example, what we do is invite a lot of Polish-Americans who have never been to Poland, and they are surprised to see how safe and thriving the place is.  

We should be doing a lot of marketing, and we shouldn’t be doing national marketing because no one cares about Poland or Bulgaria, but if you say that all the governments come together, then this is in our interest. So we should market the region, just like Southeast Asia managed to market itself. As entrepreneurs we should try to connect the CEE region together because we have what it takes – we have the engineering talent, we have more and more entrepreneurs and we should be definitely more patriotic, but in a regional way. 

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https://therecursive.com/author/bojanstojkovski/

Bojan is The Recursive’s Western Balkans Editor, covering tech, innovation, and business for more than a decade. He’s currently exploring blockchain, Industry 4.0, AI, and is always open to covering diverse and exciting topics in the Western Balkans countries. His work has been featured in global media outlets such as Foreign Policy, WSJ, ZDNet, and Balkan Insight.