Publication: FIGYELŐ Magazine (Hungary’s Business Week), pp 46-7
Date: January 4-10, 2007

Guided Growth
Funding assistance for mid-sized companies

Investors are no longer seeking just really small start-ups or large companies requiring venture capital – now there’s a segment serving the space in between.

Krisztina Novotta saw her program and lifestyle magazine as filling a gap in the market – and the four-month trial period did not disappoint. The biweekly, 75,000-issue English-language Budapest Funzine immediately appealed to expats and tourists alike. This set the founders, with background in media and marketing, to some hard work and put the company on a fast growth track. At the same time, it soon became clear that the company’s capital needs outstripped their own funding possibilities.

"We got in touch with Primus Capital Partners, which invests exclusively in early-stage companies, through informal contacts, and at the beginning of 2006 they invested an initial half a million euros," remembers Novotta. That the companies were able to agree within two months was largely due to the fact that Primus "doesn’t invest in an Excel spreadsheet," but rather took into account the personal qualities of the founders, their commitment and vision. "The presence of an investor in itself is a great help, because it’s easier to avoid mistakes and make strategic decisions based on stronger foundations," continues Novotta, who doesn’t deny that they were lucky. Many other small companies, despite a good start by the founder or with the help of an angel investor, see funding sources dry up, meaning plans to break into the big time remain just a dream.

Angel investors offer financing to the smallest start-ups, to an upper limit of about 50 million forint, while the traditional venture capital funds finance larger companies with amounts above a half a billion forint, and bank financing is only possible in this size range. There’s a yawning gap between the two. Primus, as mentioned, and Kirium, with British backers and in business since September, offer a solution. "We’re more than angel investors, because we offer more funding," explains Csaba Jancsovics of Kirium Zrt. Individual investors with "appropriate financial means" are the backbone of the London-based parent company. They release a certain amount of their funding exclusively to Hungarian projects, in an organized manner. This means between 100 and 400 million forint is possible per project, and if more is needed, a solution can be found. For example, they could cooperate with Primus Capital Partners, 60 percent-owned by US private investors and 40 percent-owned by US institutional investors, whose representative, Zoltán Bruckner, says he’s willing to work together. He says that building early-stage investments requires long-term commitments, and the investors’ combined experience and connections reduce the risks for all involved, and raise the chances for success.

Primus – in contrast to Kirium – is not new to the market: the company began at the end of 2003 thanks to the fact that the large funds, those with 50-70 million euro to invest, put the brakes on investing after the bursting of the Internet bubble, leaving a huge gap in financing. The government is also trying to fill that gap, through the Corvinus Venture Capital Management Zrt. and the Small Enterprise Development Investment Company Zrt. "Primus has so far invested amounts of between 20 million and 100 million forint in six early-stage technology companies," says Bruckner. He maintains that this is an investment amount tailored to the Hungarian market, but expansion internationally will necessitate larger investments.

In terms of scale, these investors resemble the business angels, but their operations are more similar to the classic venture capital funds. The difference is, like the venture capital funds, they have high expectations for their investment and the exit. Institutional investors require the investee companies to follow a specified pace of growth. They typically think in a time frame of 10 years, within which 2-3 years is the investment period, they hold the investment for a maximum of 5 years, and the remaining 2-3 years is the time to exit, on the best possible terms. In Kirium’s case it’s easy to convince the individual investors that it’s better to look around for a few more months rather than to invest money and energy into a project that’s not 100 percent certain. Exits are also more flexible, because the investors don’t expect an exit during the agreed time period at any price. "We don’t want to be owners forever either, but we can be flexible," says Jancsovics. Primus plans its investments on a time horizon of 3-5 years, and during this time it cooperates intensively with the management of the portfolio companies. "The goal of the investments is to ensure fast, but stable growth, and that’s why we support the companies on the strategic and operative level in addition to the financial," adds Bruckner.

The larger, often regionally focused investors mainly don’t see the investment parameters of Primus or Kirium as attractive because the work involved doesn’t always match the returns. Start-up companies suffer from a lack of resources that can only be solved at the cost of huge effort: often they have no financial plan, don’t understand marketing, and sometimes they survive thanks only to luck and enthusiasm. It’s no accident that knowledge transfer is as important for their investors as for angel investors. "We’re talking about a kind of employment insurance, when the investor helps not only with funding but with its experienced professionals, be it in finance or marketing management or a controlling function,"says Csaba Jancsovics of the advantages offered by the professional background. Also at Primus, a broad group of advisors help ease companies’ growing pains, in the areas of HR, sales techniques, management coaching, or financial planning.

CORPORATE FUNDING MODELS

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