Publication: Manager Magazin
Provider: Manager magazin Budapest kiadó Kft.
Date: November 2, 2005

Eskimos and seals

BUSINESS ANGELS: Although international venture capital funds have made good business in Hungary over the years, national private and institutional investors remained unperturbed. Even though there's no shortage of promising enterprises, or of ready capital.

A vast number of venture capital funds are busy in Central Europe. The figures show that Hungary is quite popular (one out of four euros invested in Central Europe lands in Hungary), yet the classic venture capitalist is rare as a blue diamond. Meaning that there's no domestic fund willing to invest in a promising small enterprise, one that has little capital but has a good idea and a dedicated management. And not the least – an idea how to market it. When a few years ago the international dot-com bubble burst, it certainly did no good to the home market, where Internet companies were barely starting to operate. And it has left a mark on the general attitude of investors concerning the financial potentials of high-tech initiatives (although people are talking of a Dot-com 2.0 starting in Japan, financed by domestic capital). Although the market cannot operate very well without domestic investors, Hungarian private and institutional investors have grown pretty accustomed to low-risk high-profit opportunities during the past few years. "I can't very well tell a well-to-do Hungarian private investor to put money in a company where he has an 80% chance of loosing it. Those who have been present – either actively or passively – on this market over the past years, have spent effort and taken huge risks to support technology companies – well, they needed to be kind of fanatics, call it dedication." – summed up the general sentiment towards the market a manager working for one of the few national venture capital funds. However, there are a few examples of such people: Nobilis Kristóf, Kovács Gábor, Lantos Csaba, Futó Péter, Fast Ventures founders Várkonyi Attila and Fodor Péter, or lately, Albrecht Ottó of cashline has also invested some private equity in shepherding some promising companies.

Bruckner Zoltán, CEO for Primus Capital Partners is optimistic and believes that – "this is a market for investment just like others. There are some who do their job right, and make a lot of money, and some fail. But venture capital is essential to a well-functioning market in the medium to long term. It is like gardening, or forestry – you can't just keep selling and buying the larger companies. You need to plant new seed, you need to help the early stage companies grow larger".

Tzvetkov Julián, president of the Hungarian Venture and Private Equity Association (Magyar Kockázati és Magántôke Egyesület) is very confident: "the market works, there are investments, and of course, things could be better, but the number of investors is growing, global funds are coming, and with the expected reforms in government regulations maybe the domestic institutional investors will also start to buy into these funds". But certainly, there was a change in basic attitudes. Bedõ Balázs, from Fast Ventures, gives us some visual examples: "during the 90s, capital was literally chasing new technologies, but since that time, venture capitalists have become more interested in Excel presentations, not Powerpoints – this means that they are more willing to fund a business plan, than an idea. Pink haired entrepreneurs are not in any more, conservative gray is more in fashion". The word Internet pretty much became a swearword at most venture capital funds; international owners have announced an investment stop; and many have changed their investment strategies, dropping the promising, but loosing companies, and preferring instead to buy and sell companies that already show some profit (cash-cows).

THINKTANKS AND REALITY

Yet, the financing of startups has not disappeared. There are innumerable success stories in the US and the UK (which, in this aspect, is much more American than European). There are a few examples in Hungary too: several biotech companies, online media agencies and high-tech companies operate using venture capital. One of the investments managed by Primus Capital Partners helped Nebotrade Kft. to create the Micromedia brand, and is now the only producer of microbiological nutrient soil in the region. Micromedia has over 200 products, and supplies the National Public Health and Health Officers' Service (ANTSZ) and a number of hospitals with top quality grain and powdered soil. Over two-thirds of the company's sales are export sales; their products are used in Saudi Arabia, Brazil and China. The company also works in genetic diagnostics and have a running project with the Semmelweis Medical University which tries to identify the genetic tendency of hemophilia.

One of the biggest promises of the Fast Ventures' portfolio is AnaLogic Computers Kft. Experts of the Computer and Automation Research Institute of the Hungarian Academy of Sciences and of Berkeley University of California have created in a joint project an extremely fast method for image processing. While an image processing capability of 100-200 image/second is considered very fast, the AnaLogic is capable of processing up to 10000 images in just one second. This technology is so high-tech that it is being used by the US Army for the multiple target tracking capability of missile defense systems. 90% of AnaLogic's incomes originate from exports. Successful investments and companies do not however annul the limitations of the home market. If a company succeeds in inventing and producing something truly sensational, there probably will be no solvent demand for the product, or only minimal. The cost per unit of products manufactured in batches of mere hundreds is very high, while the output capacity and references remain laughably low in the eyes of the investors. Machine-to-machine communication is a highly fashionable topic today. M2M is when intelligent machines are capable of talking to each other, like the fridge that will send and SMS if you run out of milk. Hungarian engineers would be perfectly capable of producing such and similar chips, in view of the domestic demand, the cost per unit of the chip would be around USD 300, while it can be produced for $5 in Asia. This effectively 'kills' all national hardware initiatives. This is why most Hungarian initiatives are made in the area of software development, and almost all these projects are interdisciplinary, meaning that the results of various scientific fields are fused to produce a new development. However, solidarity and collaboration are not leading traits on this market. But this is not a Hungarian, rather a European problem. Even though the Lisbon agenda, equal development, the increase of European R&D are current topics, and even though European universities still deliver good education, technological breakthroughs are seldom transformed into actual products, and sold to customers.

PRIVATE EQUITY ADVENTURES

Instead of the complex venture capital market, private equity investments – i.e. private investments in private companies – are much more popular, mainly because this is a much more size-efficient business. The deals on this market go upwards from a minimal 5, but rather 10 million euros. The larger funds (managing over 100 million euros) do not spread their capital over more than 20 companies in their portfolio. They are looking for investment opportunities that you can just as well manage from a London office. Generally, target companies are in a more matured stage, and the managers of private equity funds don't have to take such an active part in the operations of the company. They are often competing in privatization tenders, or buy a few market actors and consolidate them. This is what happened on the Serbian bank market, on the Hungarian CATV market, or in the case of the Bulgarian telephone companies. A fund acquires several smaller companies, consolidates them, and sells them in a package whenever possible, since the larger size makes the acquisition more attracting to professional investors. A high transmission level of capital is characteristic in these deals, that is when the funds realize high profits with the use of credit investment. This will achieve an extremely high profit rate on the invested capital, although the risk of losses is also multiplied. Private equity was very successful in Hungary during the past 15 years; the main actors MAVA, Euroventures and Equinox have many good stories to tell (Elender, Avonmore, Synergon). Today, the international scene has changed, and the domestic markets have changed as well – country funds were replaced by the large London funds (Advent, AIG) who buy companies in good cash-position (Danubius Rádió, Waberer). Soon, the funds will run out of companies to buy, and will have to trade with the existing ones between themselves. Hungary has been 'overprivatized'. Those interested in this business have gone on to Romania and Bulgaria.

EXIT

A venture capitalist buys for the short or medium term. The funds' success is measured by the average annual profit, an index that not only demands good investment targeting, but also successful exits. In that short period of time when 'everybody was running around like maniacs' and some bigger Internet deals were made – well, there weren't many good exits. This has fundamentally determined the performance of the funds – the ones that were started between 1998 and 2000 have not produced any significant results, and if the start capital was preserved, it was to be considered a lucky investment. Many of the Internet start-ups went to the ground, and though a few portals are still capable of giving work to a handful of employees, there were no 'jackpots' to hit. The second exit window for the venture capitalist is the stock market. There weren't many examples to this either in Hungary, unlike in Poland, for instance, where stock market exits were a common sight. On the domestic market, NABI and Synergon have become rather negative examples of stock market exits in the eyes of small investors, since the exchange rates of the two stock are now fragments of their original value. Most exits were done through another venture capitalist, or a professional investor. What could revitalize the market? Difficult questions. Nobody will argue, that there are enough viable ideas and creativity in the country. Assisted by the government, cheaper funds have arrived to the companies, and if these funds are used efficiently, they will help the market. The first group of foreign investors (Americans, British and Arabs(!)) have been joined by the Europeans.

The interest rate is decreasing, regulations are changing, institutional investors are more motivated and free. Still, the companies and their mentalities need to change fundamentally – very few companies are able to project an image today, that is attractive to the investor, even though this industry is all about trust. A risk-taking attitude still needs to be developed, as Primus' Bruckner said: "All those smart people could be a little more enterpreneurial. OK, I concede, a multinational can give you a secure job, a company car and a mobile, but is everybody sure this lukewarm life is enough? I don't think people have to be satisfied with this life – if you have experience, and a faint feeling of something missing, but are afraid of the risks: do it in part time, do it in your free time, but go out, and start realizing your own idea! And as to the investors of the international funds – sooner or later they should start looking for some 'venture' to go with the capital they have been trusted to manage. ..."
– Manager Magazine, December 2005

« BACK