Exclusive interview with Elek Straub, DayOne Venture Capital Fund, on startups

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Elek Straub, Managing Partner and Chairman of the Board of Day One Capital gave us an interview.

 

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Elek Straub, Managing Partner and Chairman of the Board of Day One Capital

How would you characterize yourself, as a business angel or a venture capitalist?

The original idea was to set up a business angel community as we know it from other countries like the US, Germany, and the UK. For practical and legal reasons we decided to create a venture capital management company according to all the Hungarian laws and regulations. This way it is easier for us to collect and raise capital for our funds in Hungary.  All in all, we consider ourselves as business angels, that is a nice and colourful expression, but we are acting as a venture capital management company. We focus on the first phase of the life cycle of a company. We are investing seed capital in startup companies.

What do you think of the current startup landscape in Hungary? Are there enough capital and good ideas on the market?

The landscape, the eco-system is very vivid and dynamic. Every day we hear news about successes and new ideas in the press, in conferences and competitions. The whole startup environment is growing, but naturally it shows all the signs of a relatively newly established environment. We see the strengths as well as signs of weaknesses.

What does your investment portfolio focus on at DayONE? Have you had a successful exit thus far?

Mainly, due to the inflow of the European Union capital in the form of the Jeremie funds distributed in three stages during the last couple of years, I think that there is enough capital on the market and there are enough players distributing and investing venture capital. On the other hand, we see a lack or at least a bottleneck in new ideas and new startups. The number of potential projects is lower than we would like. One reason is that the idea for a young person to start his/her career with establishing a venture is relatively new. The weak labour market however is helping us. Options for a young person leaving the university to find a good job in a company with a good job career prospect are very limited. There is of course the option to leave the country and unfortunately many do that. The third option is clearly to be more innovative than the average and think about starting a venture. We invite these young men and women, those who have an idea they believe in with at least a half-way designed project or product that they would like to market. We have to cover the whole spectrum of the market in order to get enough input. We cannot limit the scope of our investments in IT, in design type of ventures, or tourism-related ideas, etc. The market is not big enough for such a specialization. However, there are certain very clear criteria along which we are selecting our projects and that means indeed a kind of specialization. The main criteria are the following: first, we are looking for at least a couple of talented and committedyoung people. It is not enough to have only one person, we do not believe that one person alone can run a successful project. Secondly, the money we are investing in the companies is relatively limited. We cannot deal with projects requiring very high upfront investment. Projects which would be started by building a hotel or a factory are out of our range. Next, we are focusing on innovation and labour-intensive projects. Finally, we focus on the potential growth of the business. The high risk in venture capital investments is justified only by the very few successful and fast growing projects in the portfolio, creating high value. We are calculating on the basis of international standards. From ten projects one or two successful ones are covering all the money that was going into the other eight, which are loss-making or are recovering our money at best. Let me give you a mathematical example: we are investing 50 million HUF into a project and with that we are acquiring for that 50 % of the company. So the company is valued at 100 million HUF at the very beginning. This company will grow quickly in the coming 5 years and will have a revenue and profit five to seven times higher than at the time of our investment. This company may have a value of 500 million HUF or even more. So the value of our 50% has grown to 250 million HUF. This is a good return of our original investment. Some other projects in our portfolio may not even survive 5 years and there can be some others that are just operational but not growing and so they do not create additional value. From the returns of the one or two successful investments we have to cover our losses on the others and create returns for our investors. This example clearly shows that the expectations of a venture capitalist on the return of a project are fairly high, which makes most of the younger entrepreneurs rather nervous. It is a pressure on them. We remind them that they may start their venture with other financing. It is typical that family and friends finance the venture at the beginning. In some situations it is also possible to raise money from the banks or get government or EU funding which don’t expect a very high return. To sum it up, we are focusing on projects which have a potential to grow quickly and are based on creativity rather than physical assets. These are design, IT services, or biotechnology, where innovation and ideas dominate and not the material investment.  We are managing two funds. The first was started three years ago and we have 5 companies in the portfolio. We are managing these investments and coaching the management, and in some cases we are actively involved in the day-to-day management together with the founders. The second fund was initiated and set up jointly with Portfolio Kockázati-tőke Alapkezelő and is called OTP-Day One Seed Capital Venture Fund. We opened the whole process a year ago and now we have already four companies in the portfolio. That is all together 9 companies in the investment portfolio. This number will grow as in the second fund we still have money to invest. The 9 companies are all in the first phase of their life cycle. So we cannot yet speak about significant revenues or significant sales results. But we see the potential, and we are getting good feedbacks from the markets. For me personally, and I think my colleagues would agree with me, the most interesting company in the portfolio at present is OPTOFORCE. It was founded by two young persons working on their PhD theses. It is a development of a pressure sensor with a very unique technology which can be used in many fields of life, eg built into vehicles or household equipment. The most interesting application today is in robots, in robot arms and legs. They are getting very good feedback from universities, research labs and companies developing robots on the innovation and on the sensors sold all over the world. I would like to highlight another one as well. It is a software application, a kind of gaming platform on the internet. The company developed a gaming environment where you can set up your own football team and play. There is a game already going on at the site of the MLSZ (Hungarian Football Association), where more than 10 000 people are participating in it. It is very promising, and we hope that the real financial success will come in a few years.

Are there any significant startup and angel events in Hungary and in CEE that you follow?

Almost every week we have some event. There are smaller ones where young entrepreneurs are coming together and drinking a beer, talking to each other about ideas, and networking. There are real established conferences. All are important sources for us. We are attending these events regularly in order to have access to the latest projects we may consider and evaluate as potential investments. These events are organized by the National Innovation Office, as well as by public institutions like the Design Terminal or by venture capital management companies or incubators. They all have one mission: to help the startups grow and the eco-system flourish. It is a dynamic environment and is not limited to Hungary. We visit similar events in the region, Vienna, Croatia, Slovenia, Prague or in other countries of the region.

What skills/talents do you think young entrepreneurs need for becoming successful? In this respect, what do you think about higher education in Hungary?

The answer is fairly simple. The main focus of our evaluation is the team’s potential capabilities which are related to business. We see a lot of persons who are very talented in technology and in IT who have excellent technology-related ideas. Unfortunately, in most cases we see the lack of understanding of how to build a business, how to sell the product, how to run a fast growing small company, and how to get real value out of the venture at the end of the day. These are, among others, more tangible skills of accounting, administration, management or some legal activities, or the less tangible things, like leadership, commitment to success, knowing that only hard work is leading somewhere. In these two fields we have difficulties. Hungarian higher education is not really efficient in these fields. Students of the University of Technology in Budapest for example are very strong in technology knowledge, but when it comes to everyday problems in the life of a business they are lost in most cases. We are meeting from time to time with young doctors who are setting up health-related businesses. They do understand every aspect of health technology or health issues. On the other hand it is very hard for them to understand even the basic principles of business like, for instance, that in order to be able to spend money you have to have revenue first or if you have an investor, this investor wants the money back with some return within some years, etc. I think IBS has an advantage in this respect, as it is focusing on business. It is a huge advantage that we are working mainly with bright young persons but we have to work on compensating for the missing work experiences and routine.

When do you think the current Hungarian startup scene will see its first exit or IPO on a major stock exchange?

Very soon we will have IPOs as some of the early Hungarian startups become internationally successful. This is a very long road. Even for Facebook, an outstanding example in the US, it took more than ten years. Financing may come from other sources as well. In many cases the solution for a successful company is to be acquired by a strategic investor. This direction is also developing very fast. Google, Microsoft, Facebook and other leading companies internationally and in Hungary are buying up the startups. Such an exit signals the end of the investment story. All those who invested earlier or who worked on the project are getting a compensation for their efforts. So going to the stock exchange can be one end-point of the story and another end-point can be to be acquired by a strategic investor which then includes the services and technology in its own portfolio.