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Angel investor uses “50% voodoo, 50% experience”

Incubators

From the Budapest Business Journal print edition: Is Budapest missing from the world startup map? Can the city become a regional startup capital if they don't even speak English at the post office? Dr. Antal Károlyi, one of Hungary’s leading startup angel investors, doubts so. In an interview with BBJ, Károlyi weighs in on the country’s chances versus international competition and the nature of angel investment, among other topics.

BBJ: The startup hype seems to be penetrating conferences, media and even politics in Hungary these days. The election campaign was loud with the government’s promises concerning millions in funding for ‘future Prezis’, some even have visions of Budapest becoming the regional startup capital while there’s strong concern in the subject at an EU level, including the launch of the new Jeremie program. So what’s the big fuss about startup companies – Is this a major paradigm shift in doing business, a result of a technological boom, or just another bubble waiting to burst in our faces?
Károlyi: There is definitely something in the air. We don’t know yet exactly where this is going. The first Hungarian Jeremie investments were made around 2010, so soon we’ll see whether or not this is a ‘bubble’. But let me share a personal experience: my decision to work as a startup angel investor was almost a spontaneous one. It went just like that (snaps fingers). I didn’t jump on the startup train, sort of the opposite, the train just reached to the station where I was. I felt there is something happening, just like in the movie Close Encounters of the Third Kind when everyone felt they must go to the mountain.

I see three main reasons for the startup boom. One is definitely the speed of technological evolution. This is a time when we have democratic access to all kinds of devices, when two guys with a laptop have a chance. Secondly, the financial crisis resulted in a general disappointment in the ways we did business. We lost faith in the stability of multinational companies, which we thought were too big to fail. Those who lost their jobs thought, “Oh well then, I’ll do my own shit!” Similarly, those who have money to invest don’t dare to put it in banks or state bonds anymore; the stakes are too high. Take Greece: the state bonds went straight down the sewers. So why invest in bonds? The upside is limited, but the downside is not: you can lose everything.

In a startup investment it’s quite the opposite: the upside is unlimited. State funding and the European instruments, like Jeremie are also important boosters. In Hungary, there are several excited politicians, governmental institutions as well, which is cool, because the most successful startups always had state assistance behind them. The Hungarian government is on the right track, I support their idea of rather ‘greasing the system’, creating infrastructure instead of direct funding. The other boost came from the appearance of venture capital in Hungary.

Do you think it’s realistic for Hungary to become the startup capital of Central and Eastern Europe by 2020, as National Economy state minister Zoltán Cséfalvay said at a venture capital conference?
It’s not very likely, though not impossible. A lot depends on how we tackle general problems in the country, which are unrelated to the startup community. Like the lack of good English speakers. I know it’s trivial-sounding, but it really doesn’t help if an American colleague can’t even go to a post office in Budapest because nobody understands him.

We also need to create a favorable economical environment for startups, these vulnerable, week little embryos. I mean supportive taxes, low bureaucracy, effective financial instruments and so on. And this is way beyond guys like Mr. Cséfalvay. We need the foreign expertise and corporate culture. Budapest has a geological advantage, plus the city has developed a lot in the past years, so I’m pretty sure we have great potential, but it is not up to the startups whether we can benefit from this potential.

Despite these disadvantages, Hungarian startups like Prezi and Ustream still made it. Where do you see Hungary’s place in the world competition?
Hard to tell. Startups, as you know, offer solutions to existing problems, of which we have a vide variety. American startups typically solve the problems of a very narrow group: the average 25-year-old, Caucasian male, well educated, and with good living conditions. Hungary’s problems, and sociological groups are totally different. Take 5L, a Hungarian research state startup development, which limits your water usage in the shower to 5 liters. This is not something for that American who doesn’t give a damn about how much water his Jacuzzi wastes.

They also see we Hungarians in California as technologically skilled, strong in IT, but weak in sales. This is a returning pattern, and it’s a problem for the entire region. Also, the typical American startups have more fluff; we are kind of deeper, technologically speaking.

In a speech at the Budapest private banking summit, you said the decision of investing in certain startups is just a question of trust. “You don’t need to understand – you won’t, because most of these companies deal with new technology. You just need to trust the guy that at least he knows what he’s doing.” How can you say that? Nobody knew plasma or 3D would win the race.
It’s one part voodoo, one part experience. We hope, and we do everything we can to give the ‘startuppers’ a chance. Most startups don’t invent something radically new; they rather combine existing methods and technologies. This is why experience, expertise, matters so much. The startup community is still young; it could take another decade or so to gather the needed experience, with exits and falls behind us. But very few Hungarian startups have exited as yet.

As for the voodoo component, investors and startups also hope to find that gem, but it’s usually not about big ideas or miracles. It’s the methods, the strategies you apply that count. It’s very hard to see if it’s going to be plasma or something else. What you can do is to create an environment for the seeds, let them grow, inspire their work, as opposed to controlling and forcing them. If you can do this, and you have 15-20 teams and they are not complete idiots, someone will rise up. Which doesn’t mean we shoot blindfolded, but it’s blind luck whether or not you put your hands on the future’s technology.

Force and control is exactly what some angels fall back on to ensure they don’t fall, including enforcing managerial rights in their entrepreneurs’ companies.
The essence of angel investments is in the close relationship with the founders. The more experience you have, the more right you might feel to have control. But if you’re so smart, why not start your own stuff? Angels help in implementing someone else’s ideas, so it’s their world, we should respect that. It’s not healthy to create a hierarchical relationship with your entrepreneur, the best practices which we start to see now prove that. On the contrary, the cooperation of several angels, forming investor circles, where each brings in their own expertise and connections, this is the way to success.

Some angels see the startups’ place in the ecosystem in either generating competition between the bigger players, or creating something really new. Hungarian startups are capable of neither, which is why they might fail, together with their angels.
It’s a difficult question. Typically startups tend to think the investor is an asshole, and investors to think there are no really good startups. To quote my business partner Dr. Péter Kádas, Hungarian venture capital investors often push startups into such contract obligations that surely lead to a catastrophe. This is surely something the Hungarian investment market has to work on. If the contract terms are not transparent, what are we talking about? Another question we have to raise is why there are no Hungarian universities among the world’s top 300? I see a great danger in building on missing fundamentals; this can definitely lead the balloon to burst. Or rather we won’t have a lung big enough to blow it up in the first place.

Antal Károlyi is co-founder and partner at Traction Tribe, a tech, dot-com and healthcare startup accelerator located in both Budapest, Hungary and Los Angeles, California – that aims to take potentially global European startups and soft-land them on the U.S. market. He has been a seed investor since 2010. His interests as a business angel include a high-end loudspeaker maker, a travel guide application for smartphones, and a self-publishing site. Previously he worked for investment banks in Frankfurt and London as a derivatives trader. Károlyi holds a PhD in statistical physics.

-- interview by Máté Nyusztay

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