Kanapé Pitch Vol.48 | Kanapé Pitch with Petya Balogh from Sharks | Express Innovation Agency
Sharks in sharks ( called Cápák között in Hungarian) is a Hungarian investment show series in the television.
Sharks are those people who invest in the idea and the team.
This mini-course introduced the basics of Petya’s 2-day course for prospective angel investors, which Petya recommends as follows. What you will definitely benefit from is an understanding of the logic and world of startup investing, the motivations and habits of the players and how to navigate this world and prevail on the best possible terms. What I bring to the table: 20+ years of startup building experience, lessons learned from building and exiting a world-successful mobile gaming company and a world-successful navigation company (NNG). Over 30 angel investments, thousands of hours of startup executive mentoring experience. Joint investments with more than a dozen VCs.
The event was open to direct participation on Zoom – where questions were mainly from users with Angel Investors and mentor profiles on the Tokeortal, but many questions also came in on Facebook, LinkedIn, Petya’s Instagram and Tiktokya.
Below are the questions asked, in a somewhat edited version, with comments from the Tokeportal, which has added answers here and there on community financing.
1. What are the important characteristics of a business for you?
The most important aspect is that it should be able to grow and have a positive impact on society, i.e. be useful. For example, I don’t put my name to anything illegal or gambling, my goal is to keep my customers happy. What is also essential is that the business owner himself can learn, grow and build a business.
2. Do you also support start-up entrepreneurs who come to you with just an idea?
As an angel investor, it is difficult to get involved only in the idea phase. It is possible that there are angels who get involved at this stage, but my experience is that so far such ventures have failed. By the way, the fact that if you have no turnover, you are more likely to fail is borne out by the statistics. And if you do not have a team or an established client base, then it is not possible to invest. At the idea stage, 3F is typically more effective, i.e. even capital from relatives and friends, and free labour put in by the entrepreneur. Angels in the idea phase tend to be mentors, professional opinion formers, validators. The idea itself is not enough to succeed: it is the implementation that counts, and once that is underway, it is a project or a pre-seed venture in which investment can be made.
Tokeportal: in the idea or prototype phase, reward-based campaigns used to be successful, but today the market is so big, the competition for backers is so fierce, that it is not even possible to ask for funding with an idea alone. A good team, a proven (validated) concept must be able to be presented at the very beginning of the investment search. Several early-stage companies have been successful in obtaining capital through the Tokeportal.
3. Is it possible to contact you with a fully completed project?
Once a project is complete, or the business is on the growth path that the founder envisaged, the company should be sold. I do not buy, only invest. But if the project is up and running, then it is worth looking for angels. I have more than 40 investments, and I invested in the current season of Sharks, so I am completely “full”.
4. Can you describe a specific case from meeting a business to exit or failure?
On the internet, I don’t have the opportunity to do that publicly. However, in the two-day angel training, we go through specific case studies and details of investments with participants, but I also present exit stories. For this, participants sign a confidentiality agreement, so we can talk more openly about more specific information.
5. Have you ever had an example where you let the founder or management go and the business became successful?
I have never had an example of this because my basic thesis is that I cannot force someone to succeed if they don’t want to. The founder has to want it more, I cannot run the business for them. Of course, I acquire all the rights in the company, but I always manage to build trust with the members, which is why I have never once had to vote against the founders. I do not think it is a good strategy or right for me to expel others. What happens is that a leader recognises that he or she is not fit to lead, so they and their mentor look for a good leader. It is my job as an investor to support them in this process.
6. What are the typical red flags for start-up teams? Is it worth investing in a niche market business?
For me, personal red flags are more of a personality trait. So for me, chemistry is much more important when we start working together, but every angel is different, everyone has their own recipe for this. I know angels who only have a face-to-face meeting if they receive regular numbers from the company for months beforehand and they point in the right direction. So he looks at the numbers first and only then gets to know the team. I do it the other way round, I start with the founders and only then the numbers. Which is a definite red flag for me, if I can’t trust someone 100% because they are sneaky, not telling the truth or bluffing. It’s also a bad sign for me if someone has a bigger mouth than their ears, so if they have an answer for everything but no questions for the founder, they don’t want to hear anything. Those who constantly dare to question their own thoughts and actions are much easier to help and learn more. This is important because there is a lot to learn on the entrepreneurial journey until the company is successful.
7. What are the transaction costs and what is the typical time required for due diligence?
I already have standard contracts in place. I work with Dr. Bohner Lacy, who is one of the largest practicing startup lawyers in Hungary with about 1000 transactions under his belt. Lacy and I understand each other very well and we can easily work together, so the average legal cost with him is between 400-500 thousand HUF(160 million-200 million EUR), which includes due diligence, clean-up and investment. That’s why it can be important to invest 3-5 million HUF (1,2 millard -2 milliard EUR) , because then this amount will outweigh the legal costs and the couple of 10 hours of work.
Our fastest transaction took only 1 month, while our slowest took up to 9 months. On average, I would say that this process usually takes 3-6 months. This cannot be shortened, as it is a long way from the first conversation to the decision, and this cannot be rushed. Also, things may come up in the meantime that need to be addressed. For example, if you are a self-employed person with, for example, stock, you need to become a limited company to invest, and that takes time.
8. With an investment of between HUF 700,000 and 1 million (280 million-400 million EUR), but currently only in the idea phase, and a massively experienced team, where should you go for capital?
If it’s more than just an idea, you might want to try Impact Ventures, who invest in domestic impact ventures. I have projects with them, I really like working with them. However, it’s the need for capital and the nature of the idea itself that are at odds. There is a logical progression of funding start-ups.
9. Many investors shy away from the healthtech sector because it is too risky and complicated to get licensed, it is easier to invest in a traditional B2B company. What advice would you give to startups in this area when fundraising, what would make the project attractive?
A healthtech startup needs more money already at the start-up stage, and it is slower to get to the first proof point. For them, an important feature is the experts and publications they have behind them. There are incubator programmes specifically for them. One example is the Creative accelerator in Szeged, who also fund projects of this kind at an early stage. The reason for this is that they have managers who are very active in this sector, who have taken such companies to exit, and who fit this area because they understand what they are doing. If the investor understands the market and its characteristics, they can give a higher value, they can give a higher amount because they are more familiar with the risks and the solutions.
10. I would need an investment of €1.2 million to start my business, but my own experience is that Hungarian venture capital funds do not provide the right environment. Is it better to take Hungarian innovations abroad?
I think it is only worth bringing in capital from abroad if it is a proven story with a strong management team. But you can’t bring in that much from abroad for an idea, because you need to have some sales or a significant user base to get that kind of money, which is growing at a good pace.
11. On average, how long does it take a startup to exit?
On average, it takes startups in the US 3.5 years to go from startup to acquisition. The UK average is 4 years, the European average is 7 years and the Hungarian average is between 10 and 15 years. NNG also took 11 years to exit.
12. How much has the emergence of accelerator networks reduced the chances of failure?
There are not really strong accelerators in Hungary yet, and I see that there are only a few international accelerators, which could change this. The more professional help a startup gets, the less chance it has to fail, so the role of incubators and smart money is important, where we invest not only money but also knowledge.
13. When can you say that a business has failed?
A business can be said to have run aground when the founder has given up, let go and decided it is over. I’ve seen founders who, while trying to solve a problem, ran out of money but didn’t give half of it away and looked for a new market to revive their start-up. But if the founder gives up, the investor has nothing to do. It is important to clarify that it happens regularly that success will not happen in the way the founder originally envisioned, as there are always turning points, or pivots, that need to be resolved in order to achieve the ultimate goal.
14. How do you feel about the startup taking a salary from the startupper?
Investors are quite divided on this topic. Obviously a startup has to make a living. But if an investor comes in for, say, $100-200 million, when the company may not be worth that much, he has to prove himself and build. That is precisely why I expect him not to take a market rate salary, because in such cases I give two-thirds of my money to the state and one-third to the founder, which is no guarantee of success.
I find that most founders do not even want a high salary, because they do not want to grow in the short term, but in the long term, so we can always agree on a realistic price. Sometimes I even push them to raise their salaries.
However, it can be a warning sign if the founder shows nothing but takes too high a salary. In such cases, he is probably focused on the short term. And the remuneration of the managing director is a matter for each individual member’s assembly to decide, and I should be consulted on this.
15. What is your opinion on state capital? Is it useful in the venture capital market or not? How much does it distort the market?
From one point of view, if we didn’t have public capital, we wouldn’t have it anywhere in the whole ecosystem, so it’s definitely useful and it definitely has a positive effect, but it also distorts the market. The logic of public investment inevitably follows a bureaucratic and more administrative approach rather than an innovation-supportive, bold or professional one, because the state has to manage public or EU money and put it into risky assets. That is why they need to secure themselves legally, which makes them inflexible and a bit harder to work with.
I also have more work with Hiventures and we can work together effectively, but I still think there should be more private capital in the market, as it is more practical for early stage companies. Angel investors can provide professional help alongside the money, which is much harder to expect from public investors.
It may be interesting to know that in Eastern Europe 80% of venture capital or start-up funding comes from public money, in Hungary the percentage is probably even higher, so if there were no public funding, this market would not really exist. The other interesting thing is that the entire VC market in Europe is still loss-making, with less money coming back from exits than all the money put in. This is due to the fact that the whole ecosystem is still maturing, but of course there are also bad investments. The average may already be positive, but the median is still negative. Overall, therefore, the role of the state in investing in startups is important, as it also helps to finance innovation, which through acquisitions also helps the country’s competitiveness as a large company. So you can say that where there is a strong startup ecosystem, there are also stronger medium and large companies, so there is a place for public money in financing competitiveness.
16. In essence, VCs, also known as venture capitalists, are like investors in insurance companies?
That’s right, VCs are more like asset managers, as they don’t necessarily root for startups, but manage the money entrusted to them, so it’s more akin to banking.
17. What are your experiences with VCs and angel partnerships in terms of investments?
It’s not always easy to enter as an angel after a VC, because VCs are managing someone else’s money, so they bring a very complex, more complex investment contract into the company. That’s why you can’t get a very good deal as an angel after that. Typically angel investments happen first and only then VCs follow with bigger money.
18. Can you recommend a reliable angel investor like yourself? Where can they be easily found?
If you are looking for an angel investor, the Tokeportal can be a good solution, but there is also HUNBAN, which is a great platform for finding angel investors in Hungary. They also regularly organise pitch nights, which can be a great opportunity to meet people. But I know that there are also various angel circles, and there is also an angel site called VC MONITOR, which is constantly mapping out where to find funding for our startup. They also have an up-to-date list of who has invested in whom and what topics to look for in a particular investor.
19. How much money can you start an angel investing career with to have enough to build a portfolio? What is below which it makes no sense or no lower limit is defined? Overall, is an angel investor more of a financial or professional investor?
In general, angels are more professional investors than financial ones, as they usually put in some work in addition to their money. It seems that if they can put in a bit of work and expertise alongside their money, startups can do better. But if they want to put in too much work on top of their money, startups do a bit worse. So there is a limit to how much you should spend on startups. Based on international data, this is a relatively wide range, no more than 1 day per week, but at least 1 hour per week. Overall, it is worth putting in all the work, but not too much, as this is when the investor starts working instead of the management, which is not a good situation.
20. How much work does an angel investor put into the company they invest in?
Typically, when I invest, I mentor the team for 2-3 years, which for me means on average 2 hours a week, so 50 hours a year on a project. Some angels do more than that. Statistically, however, more than 1 day a week is not healthy if the investor is dealing with the company’s affairs, as it can go to their head, which can lead to conflicts.
21. How long do you work a week? You've mentioned how much it's healthy to put in for a startup, but are you wondering if you get a good night's sleep?
Basically, I try to manage my time well. I usually have a period between 10am and 4pm when I run errands and have meetings. Right now I’m taking time out of that period, but overall I try to stick to it. I don’t think I work very much, sometimes I work a bit in the evenings and on weekends, but that’s not the norm. One of my tricks is not to exercise strong control over startups just because they are in my portfolio. If I’m not mentoring them, I don’t have much to do with them. I usually mentor 10-15 companies at a time, which means 2 hours every two weeks, so out of the 60 hours in two weeks, 30 are taken up by mentoring, and the rest of the time I handle the next round of investments and can deal with the Sharks and social media presence.
22. Where do you think the Hungarian angel market is?
My understanding is that private equity is very minimal in startup funding in Hungary. There are several reasons for this. One example could be Estonia, where Skype became such a success story that private investors realised that they could make a lot of money by investing in it, so private capital has become highly valued as a result of this process. It is a similar story in the Czech Republic, for example, where there are so many success stories that private wallets have started to open up. This is not yet the case in Hungary, where the first start-up stories are just starting to come to fruition. There are no very big success stories yet, but the stories are becoming more spectacular. The country is also lagging behind in regional comparison, so this needs to change.
23. Have you met people who wanted to invest in angels?
Yes, I have. In the course, I will also discuss ways to enable angel investors to finance their activities from outside, i.e. not only with their own money. There are also public tenders specifically to enable angels to start incubator programmes.
24. We have talked about money invested and work done, but sometimes networking is more than that. How typical is this kind of help for an angel investor?
It is absolutely typical, usually an angel can give a little professional insight in addition to the money, but can also help with their network of contacts. However, more than that, it’s the management experience that counts, as sometimes the basics are not well understood in start-ups. Usually, a startup does almost everything wrong, and there are only a few things it does right. In my opinion, a startup has a lot to learn from anyone who already has a routine in the entrepreneurial world.
25. The main goal of an angel is to get a return on investment, but what if an angel is approached with a social return on investment project? Do you accept?
I have a lot of investments that are useful in some way, because for me the main thing is that the startup is something that I can take ownership of, that I am happy to put my name to or see it have a positive impact on society. Of course, apart from that, you also need the companies to be profitable and worth a lot over time. It’s important to note that just because something is useful doesn’t mean it has to be unprofitable. In fact, if the company is a foundation or non-profit, it should not be invested in. So, for me, two elements are important: the company must be viable, but the activity must also be useful to the world.
26. Can a person aged 50+ find himself/herself an angel?
I have two investments where the founders are between 50-60 years old. If you can find a 50-60 year old founder who you believe can make something successful and can justify it with their track record and world view, then a successful investment can be developed from that. Success is not determined by age, but rather by the person of the founder. Obviously, a young founder has different strengths from an older founder, and it makes a big difference when an older founder is joined by younger team members who are more in tune with current cultural and technological trends. And older entrepreneurs have the advantage of having more networking capital, a broader view of the world and market knowledge.
27. What are the constraints on how the invested forints can be used?
I don’t impose any restrictions, the company gets the money and can manage it as its own. This is important because whatever business plan a start-up writes down, it will certainly not be implemented. For this reason, you should not be told what to spend the invested capital on in any case, because the conditions are constantly changing. Manage your money as you would your own, think carefully about what is worth spending it on, and if you think something is not worth spending it on, don’t spend it just because it was agreed earlier.
As an investor I don’t want to have a big impact on them, but as a mentor I help them. In the world of VCs, that can’t work because of the nature of VCs, where you have a clear plan of what to spend. This means that the money cannot be used as effectively, because the solutions that are in the business plan may not be the most effective in the situation.
If, for example, the founder wants to go to an international trade fair, I don’t say no, but if he wants to spend too much, I mentor him on what to look out for and what to expect. In all cases I help make the decision, but I never override the decision.
28. Do you have your own role model among angels?
There are a few from England and Austria who share a lot of knowledge and experience. One of them is Peter Coll, a British angel investor. However, I find that the best angels have the same approach to investing, the same core philosophy and similarities to mine. The people I work with like working with me, so I hope I’m going in the right direction with this. But there was also talk of the Sharks.
29. What kind of courses do you organise and what are the conditions for applying?
The next angel training is scheduled for 7-8 February, which are Mondays and Tuesdays, but if you want you can come on Sunday evening. During the training there will be the opportunity to have dinner together, and to enjoy a spa and wine while you work. So you can choose between 2 days and 2 or 3 nights of training. In my opinion, if you do not want to be an angel investor, you will be paying a lot of money, but if you are serious about becoming one, it is well worth the price before you spend a few 10 million forints on investments. For me, my first three angel investments did not work out and I lost a total of about 75 million forints. That is why it is worth learning from such a course. The course covers nearly 250 slides over 17 hours, full of real-life experiences, but all in an informal discussion format. Those who are seriously interested can register for the workshop at baloghpetya.com. In terms of curriculum, you should imagine about ten times as much as this mini-course, but because it’s personal, relationships can develop more easily. The next training after February is not expected to be until the autumn or next year. I hold these training sessions relatively infrequently because they take a long time to organise and it is difficult to get so many people together. I would encourage everyone to come now because we have a pair of founders who have sold their start-up for a lot of money, so you can learn from them now.
30. What other courses or qualifications can you recommend if you want to become a business angel or a legal entrepreneur?
Milán Mándó’s team, minner.hu, is building a very good community of entrepreneurs where members are very active in helping each other. For example, you can get very cheap access to basic courses. As I mentioned, I also run courses, and now I have 4 courses planned, but they are more expensive. However, some 100 people have already done it and they have a lot of experience in startup management, raising capital and angel investing. In addition, I think the HSUP program is an excellent opportunity for students to learn about startup thinking, get university credits and scholarships.
31. Will there be an advertisement for young people in Sharks?
For me personally, I have a big dream to have young kids march in front of Sharks and have them put together a program for us, and to have teachers and students across the country getting ready. A lot of parents contact me about the fact that they have to play sharks with their kids a lot at home. This is important because future generations are learning the rules of money and investing, so it feels good to be able to influence them. We don’t yet know how to do this, as commercial TV might not be a good platform for it, and these episodes might not be as exciting and dramatic, so they might not be a great experience for the viewers. But we are working on it!
32. You mentioned that Tokeportal is also running its own crowdfunding campaign. Are you planning to get involved with Tokeportal?
I’m thinking about investing, yes, and I’m talking to the team about it as it’s a very exciting opportunity that they’re doing. Although Tokeportal is still in its very early stages, we’ve already seen some success stories emerge, which is a good sign. However, the UK’s Seedrs, for example, is ahead of them by an order of magnitude with billions of forints invested. Although the Tokeportal is still at a very early stage, success stories have already been published, which is a good sign. However, the UK’s Seedrs, for example, is ahead of them by an order of magnitude, with billions of forints invested. The Tokeportal, on the other hand, could be a new channel for domestic private investors and angels, and could grow into a powerful one over time.
33. Wouldn't you like to write a book about your life's journey and your investments?
I’ve already started several, I have several manuscripts started, I’ll eventually put them together into a full book. It’s in my head, but I haven’t got to it yet. But, what goes around comes around.