Private investor Michael Poplar had to cancel his holiday this year. “This was the craziest summer I have ever seen,” he says when asked if this is a good time to invest. “We have not had this much work in the last eight years.” He looks a bit tired, but otherwise he apparently is in his element.
And he is not alone. All business angels involved in risky investments in emerging companies are excited when talking about the ongoing economic crisis.
“The crisis is wonderful,” says Eduard Míka, who currently participates in four angel investments, including, for example, InternetMall.
Many angels such as Míka come from the IT sector and focus in particular on the internet. “They made money there in the past, and it is the only sector where adventurous people move,” the private investor and former IT Minister Dana Bérová says.
By contrast, “branches of the industry” such as pornography, gambling and arms are taboo for angel investors. “Actually, in those one can make the largest amount of money,” one backer laughs.
The optimism of Czech investors has now gone so far that, for the first time ever, they have decided to team up to create an “angel bank”: a fund called Credo Ventures, which should launch at the beginning of next year.
“We feel that something like that is missing here and that it makes sense to pursue risky investments in a really goal-directed way,” says one of the fund’s founders, Ondřej Bartoš.
Another impulse comes from the fact that there are plenty of potential opportunities in the Czech Republic that require investments ranging from millions to dozens of millions of crowns. And that is the purpose that the fund should serve.
The fund’s founders, who include Tomáš Orlík (a successful entrepreneur who established and sold the company GCWare) and Jan Habermann (who co-founded and managed several businesses, including Acron Communications), will begin addressing potential investors in a few weeks’ time.
“We want hundreds of millions of crowns for the fund, ideally half a billion,” Bartoš says. “We should raise the money both from private and institutional investors.”
Although the angels haven’t made their fund completely public yet, people are already asking whether they can participate in it. Some would “only” put money into it and act as silent partners, while others are willing to share their time and knowledge.
Money not the biggest problem
Besides finance, Credo Ventures should also offer emerging enterprises consulting, mentoring, contacts and general business assistance.
“For example my experience over the last years is that money is a smaller problem than defining the business itself, its plan,” says ex-IT Minister Bérová, who is not going to enter the fund for the time being.
Pavel Šťovíček, who with his partners sold the technological company Logos last year, and the investor Míka are members of the fund’s supervisory board. The latter does not know yet whether he will put money into it, but he has not ruled it out, either.
The potential millions of crowns from the fund would not go to emerging domestic entrepreneurs only. The co-founder Bartoš wants the fund to focus on all of central Europe. “We can see a lot of talent and entrepreneurial vigour in Poland, Romania; we want to enter Austria and Germany,” he said. “On the other hand, we are not interested in Ukraine and Russia at all.”
The Czech Republic, however, should be the core of the fund’s activity. The reason is simple: People know one another and it is easy to get references for individual entrepreneurs.
They can “take a look” for instance at Ivan Vrba. He is now searching for an angel to bring in some CZK 5 million. Vrba would use the money to modernise his security agency and cover wages for its first month of operation.
“We’ve been on the market for 17 years already, we employ 90 people, and we don’t have many competitors in our region,” says Vrba, who has met many potential investors, even a foreign one, but has thus far be unsuccessful in his search.
“Most of them were various fraudulent firms, which I detected before it was too late, also thanks to our focus on security,” Vrba says. “Their help would have made me go bankrupt very quickly.”
Besides money, however, he wants yet another thing from his future investor: criticism. “But the constructive kind,” Vrba says. “I am not infallible. And, then, I would be grateful for contacts for future or potential customers.”
Angel as a friend on the phone
Vrba did not comment, however, on what profit an investor would make after backing his agency for a few years. And Credo Ventures does not want to talk either about whether and to which investors the fund would promise any profit. It is not public information.
“Moreover, we are not going to promise anything, and we are not going to guarantee any yield either,” Bartoš says. “It is simply a risky investment. At most, we will indicate how much we think that investors should make, but we won’t promise anything.”
Unlike institutions, business angels will put money into small emerging firms, ideally startups, and offer them not just finance, but time and knowledge.
“They can call us night and day and ask for advice,” the supervisory board’s Šťovíček says. “And they do. When they are writing a contract, they call us and ask. The investor is a kind of friend waiting by the phone.”
Such businesses then should be mostly successful because angel investors choose the recipients of their money very carefully. “Out of a hundred projects that I receive by email, I make appointments with about 10 and invest in one or two,” Bartoš says.
And offers are now pouring in. “I am getting four to five offers a month,” says Bérová, who currently has money in 15 active projects. “The crisis forces people who would not think of starting businesses under normal circumstances into creativity and entrepreneurship.”
Over the last six years, she has successfully “left” six businesses. For instance Plastika Kroměříž, which was involved in the production of computer cases for FujitsuSiemens and later in the production of plastic components for the car industry. “Fortunately, we sold it in time,” Bérová says, pointing to the current crisis.
But private investors are not infallible either: One of Bérová’s most conservative acquisitions was Icelandic bonds. But that market collapsed owing to the crisis. “So my most safe money is now my biggest trouble,” she laughs.
No longer cutting grass
The growing number of amateur entrepreneurs with ideas is not the only positive result of the crisis. Among the others is a decline in prices that can reach as much as 20% to 30%.
“Businesses’ values are falling, and more companies need external financing,” Bartoš says. “Moreover, banks are now even more conservative than usual, so access to loans is more difficult.”
But new investors are emerging as well. “Literally I would say they are coming out of their holes after 10 years, for the first time looking at something that makes sense,” says Poplar, an investor who is now more than satisfied with his business: mediating the sales and acquisitions of various companies. The volume of deals has dropped by one-fifth or one-third compared with last year, but the activity has increased markedly, he says.
“Many people had money deposited somewhere and thought that it would remain there until the end of their lives,” Bérová says. “They made a hundred million crowns, but, owing to the crisis, that hundred has shrunk to let’s say 80 or even 60 million, and now they fear they won’t have enough. So they are looking for different types of investments.”
And she gives one more explanation: Entrepreneurs who made money after working hard for 10 or 15 years and who have been relaxing for the last four years. But they no longer feel like cutting the grass around their villas and have begun to search for new enterprises. For example in the form of angel investments.
Dragons’ Den phenomenon
The term “business angel” has its weight abroad. But, in the Czech Republic, these men and women are still a bit wrapped in mystery. Most of them are lone wolves who do not become associated with any groups. Moreover, as one of them says, there is no tradition of angel investors in the Czech Republic.
“Actually, there is just one type of backer here, who puts in between a few million and a billion,” says Michal Zahradníček of the investment company Prime Rate. “And it’s still the same group of people. There are no groups of business angels and venture capitalists here … Abroad, they have simply created investment structures over the years for each stage of a company’s life, structures that work. We don’t have that here yet.”
Another problem rests in the fact that the vast majority of Czech investors come from the IT sector and do not understand other branches too much. By contrast, in other countries there are also business angels for the food industry and for agriculture, for example.
Apart from that, most of the investors, perhaps only excluding Bartoš and Tomio Okamura, avoid media publicity. Their desire to be incognito has been partially disrupted by Czech Television’s entertaining and educational programme Den D (D Day), in which several domestic backers choose from selected investment opportunities. The programme is the local version of Dragons’ Den, broadcast for years in Great Britain.
“The way it is done and the ideas in Den D are poor compared with the British version,” says Míka, who adds that this is not any fundamental criticism.
“It is a very meritorious thing,” Míka says. “It is the first step to explain to the population how the process of raising capital works and what it requires.”
Investors agree that we have quite good business ideas in the Czech Republic. There just could be more of them, and the other thing is that only a few know how to sell these ideas.
But what they perceive as the biggest problem is giving the ideas some formal shape: having at least a business plan worked out. “Most people think they are entitled to the investment because they have come up with a great idea,” Bérová says. “And then they are surprised when they don’t get the money.”
Bérová distinguishes among several types of applicants. First are those who come from the “real world”, but have no knowledge of the theoretical aspects of doing business: For example, they do not know how to compile a budget.
Another group is scientists, especially those who come from the technology sector.
“They are used to the government system of financing,” Bérová says. “Their feeling is that they are entitled to money from the state or from an investor. But they think that the backer does not have the right to ask how and why he should invest in the business. And by no means should he want some return, because the activity is in the public interest. And, on top of that, plenty of them fear doing business.”
The last type of applicant for funds is the superficial youngsters who mainly want to have a trendy car and an office because they cannot work from home: That would be below their standards. “When I tell them that I do half of my work from home, they don’t understand why I economise so much,” Bérová says.
A country without entrepreneurs
Czechs simply lack the general knowledge of how to start a business and how to go and ask for capital. “If it were ideas that won, then we would not have been using Microsoft Windows, but different, much better programmes from other companies,” Míka says laconically.
Jiří Beneš complains that there are investment barriers in people themselves. They have no direct experience with business and management; they do not have competitive products or technologies suitable for sale on foreign markets.
“I know some six or seven entrepreneurs in the country; the rest are merely self-employed people,” Poplar says.
Moreover, those who have already launched a company cannot imagine selling it. “They establish such strong relationships with their businesses that they wouldn’t know what to do if they did not have them,” Poplar says. “They are even frightened by the idea of making half a billion crowns by selling their companies.”
That is one of the reasons why the cycle common in advanced economies – where one person founds, launches, sells or buys several businesses over the course of his or her life – is not present in the Czech Republic. “In Poland, there are more investors,” says Beneš, of 3TS Capital Partners. “People there are more willing to trade in businesses, while in the Czech Republic it is rather that parents build companies for their children.”
And, until this practice changes, business angels and venture capitalists will probably continue to be perceived as rather unknown players on the market. Something like a secret society.
