If there is a field in which Europe leads, then it is fintech.
If there is a field in which Europe leads, then it is fintech. At least in terms of investment volume. This is claimed by Petr Šíma, a member of the European Business Angels Network (EBAN) and at the same time the CEO of the Depo Ventures investment platform. According to him, investing in these start-ups is a great opportunity not only for investors but also for banks, which can get a lot of ideas. What does the domestic business angels scene look like? In what ways could banks learn from business angels? Where is Europe heading in this area? Petr Šíma answers these questions for the magazine Bankovnictví.
We can often hear that start-ups are easier to start abroad thanks to far greater funding opportunities, but is it so? If so, why?
Unfortunately, yes, and it's not just about money. However, there is not just "abroad". I would divide it into the USA, mainly California, Great Britain, Western Europe (Germany, France, the Benelux, and the Nordic countries), and the rest of Europe. From west to east, the situation is deteriorating. The main reason is the tradition of investing in risky assets and real and general business support. The more you go west, the less the word "entrepreneur" is almost swearing. On the contrary, US culture looks to someone who is not afraid to take risks and take matters into their own hands. That is why startups there originate completely naturally and have a lot of investors. It's hard to find a decent-earning manager over 30 who doesn't have at least some investment in startups there. And there are a large number of those who sold the startup or at least had an option program. The money goes back to startups. Besides, there is a huge ecosystem of all types of investors, advisors, and mentors.
However, in Europe, the situation is gradually changing and the volume of capital is growing. State and EU funds are very active, corporations and smaller investors are joining. In our country, less and less capital is available than in our neighbors. And it is less willing to take risks.
How do you evaluate the domestic startup scene? Does it make sense to focus only on the domestic market in an open Europe?
The beautiful thing about startups is that they are naturally transnational. So at least the type of startups that interest me. Teams made up of several nationalities are quite common from the beginning. And they know that the domestic market is not enough. I think that our small domestic market is an advantage for us, as well as for the Baltic countries. Unlike, for example, Poland, which has a large domestic market and a larger proportion of startups focused only on it. So I see no reason to focus only on the domestic market.
There is a lot of technical talent both in our country and in the whole of Central and Eastern Europe. But fewer traders who are able to sell the product. I see this as a great opportunity.
If we look at the ratio of business angels and startups, can it be said that there are a sufficient number of business angels in our country and in Europe in general?
Certainly not. The success of Silicon Valley is largely based on the quantity and quality of angel investors. 70 % of startup investments (by number, not volume) are angel investments. The role of angel investors is crucial. They invest their own money, they can afford more risk, they can make faster decisions. They invest mainly in people, the product can change. And they give smart money, so they are able and willing to help startups with advice, experience, contacts. In Europe, angel investors are mostly based in the UK, otherwise, there are still woefully few. However, even here the situation is gradually improving. The number of successful exits is growing and with it the number of investors.
We could literally see a boom in the stock markets after the pandemic. Can it be said that startups have aroused similar investor interest, or, on the contrary, does the current situation not favor the development of businesses?
It is similar to the previous crisis. There was a momentary cooling, but then everything came back. According to statistics, the decline in investment in startups in Europe was minimal. Overall, Europe is still growing, especially in seed investment. Venture funds are still investing. What would they otherwise do with the money? Angel investors have slowed down a bit. No one knew what would happen, many of them kept money to support their already invested startups. Or they expected blood to flow in the streets and it would be cheap to buy everything. Especially those who are not full-time angel investors. But it didn't happen that much, there are a lot of startups that are doing better. Overpressure of money is everywhere, but investments in startups are long-term and illiquid. They do not attract speculators, they create value.
Can you say in which segment startups are doing best? Or does the rule that more than 90 % end up apply to everyone without exception?
That rule applies, but it's a little more complicated. What's the end of a startup? Globally, 2 % of startups are successful, but that success means an IPO, for seed investors valued in the order of hundreds of times the investment. Most startups drop out in the meantime. But it very often means that they were bought by a strategist or a competitor. For investors less appreciation, but still good.
If you invest in a startup that creates something interesting but burns out and eventually someone buys it and you get twice as much, is it a success? For a fund no, an angel investor doesn't have to be angry. Of course, now all startups connected to online services are doing their best, medtech is also very popular. But overall, the old normal will never return, and as usual, every crisis affects those who are able to do things differently. An ideal time for startups and investing in them.
How successful are you with startups?
You only find out about real success when you have money in your account. And it takes a long time, even if the value of your startup is huge. There can always be something wrong. So we don't have the results turned into money, but so far it looks very good. I don't see anything where I would write off the investment straight away. On the contrary. I think you will hear about some of our investments soon.
The success of the angel network can also be evaluated according to the quality and quantity of startups that we show to investors. And we are successful there too. We choose interesting ones from hundreds of startups and there are surprisingly enough of them. Probably also because we do not focus on domestic startups, but on the whole of Europe. The online age is ideal for this.
Our readers are people from banks. Is there anything that banks could be inspired by business angels? Or, conversely, if they joined similar companies, would it be contrary to their business?
If there is a field in which Europe leads, then it is fintech. At least in terms of investment volume. Even according to our survey, most Czech angel investors invest in fintech. And banks, at least most, work with startups.
The bank is like any other corporation. It can make real innovation very difficult, in any case much worse than a startup, unaffected by history and structure. Plus, there's regulation. Banks certainly cannot replace the role of angel investors. But they can certainly, and do a lot, help angel investors, funds, and startups. Startups are those who come up with something new, and if they make it somewhere, banks will be a natural investor at a later stage. A corporation usually buys something that has worked and works.
Could there be a way for banks to set up their own fund?
Definitely yes, it is already happening in part, for example like Česká spořitelna or Komerční banka. However, it is important to realize that startups are a good product for equity investments, not debt. Banks are aware of this, for example, they can also put together their clients who would invest in a startup.
Do you think that the support of startups by banks is sufficient?
No, but the question is how it could work. Companies without history cannot be lent. But banks have the power to create investment products and can help their clients invest. There I see probably the greatest potential.
What role could the capital market play in this regard? And how do you, as an investor, view the new concept to be implemented in the coming years?
In the capital market, startups and their investors carry out exits, IPOs. In Europe, of course, it works significantly less. Investments in startups are illiquid in IPOs. But I see attempts to create a market and, of course, I support it. But it will not be easy. There is a huge space for speculation and it is impossible to provide market participants with the information they would normally need to make decisions. Firstly, it would be too bureaucratic for startups, secondly, they develop too fast and they have to keep the essential information to themselves, the competition is huge.
I don't believe that the stock exchange could work for startups that interest me. I can imagine it at a later stage of startup development. But for the startup, the future is important, not the past. Let's look at the recent case of Integromat. How could it work? A company that has negative equity but is creating something that someone would value at $100 million. However, until the transaction takes place, it is only speculation. Would an investor invest in it?
As a business angel within your Depo Ventures company, you support startups in the Czech Republic, but you are also a member of the European Business Angels Network. What role does this entity play in supporting startups at the European level and how does it work? Do you also participate in the creation of legislation within the development of the capital market?
EBAN, the European Business Angels Network, was created by private institutions and the European Commission. The European Commission is trying to support it as a representative of investors. It is a partner for the EU as well as individual governments and government institutions designed to support investment. So definitely yes, we are involved in legislation. Also, EBAN has huge opportunities for educating investors and improving the entire environment. I was recently elected to the EBAN board and I will be happy to help the Czech government to set up support at least comparable to other European countries. There are options, we just need to want to use them.
What are the current topics you are dealing with within EBAN?
We currently have several important topics. The first is a cross-border investment, ie how to help angel investors invest abroad. The second thing is cooperation and assistance with state aid. Both the EU and all the countries have their own funds to support startups, and there is a lot of money that works quite well for venture capital funds, but unfortunately not for angel investors.
Can it be said that these funds work more efficiently in Western European countries than in our country?
Definitely. I dare say that we are one of the few countries in Europe that have zero support for the angels. In every country, you can find something, whether it is co-investment funds or other benefits. Today, for example, there is the so-called European Angel Fund, which is part of the European Investment Fund. However, it only works in a few countries, and besides, its criteria are set so that only super angels pass through its network or people who have made hundreds of investments, have dozens of exits, and no longer even need money. An example in this respect is the EIF product, which originated years ago in Denmark. In the final, he supported about 15 investors from 1,500. That is one of the main topics we are dealing with now. At EBAN, we design funds to help all investors. In our country, it will be mainly about helping beginning investors.
When you mentioned the aid, what about aid in the form of tax relief?
This is definitely the best way. But it works that way in the UK and I don't believe it would work here. In a nutshell, it is not a populist topic.
To what extent will the European Commission hear the voice of EBAN?
The European Commission is interested in the opinion of EBAN. Simply because one of the representatives of the European Commission is present at all meetings. After all, EBAN's headquarters are located in the European Union. And that is one of the reasons why I dare say that investing through business angels is on the rise in Europe.
In the Czech Republic, there are several entities based on business angels – the Czech Business Angel Association, the Business Angels Club, etc. Is there an effort to unite? Or is it just about the fragmentation when an investor is looking for a suitable sponsor for his/her project?
The competition is good, here as elsewhere. DEPO Ventures does not aim to be the only player in a small market. We want to bring as many people as possible to invest, show them the way. Show what should and should not be done. That's why I joined the EBAN.
I am convinced that there is beauty in difference. There is room for many angel networks, each focusing on something different. Some people prefer local investments that are close. We are only interested in startups with global ambitions that want to establish themselves worldwide. And it doesn't have to be Czech at all. Every investor can choose their path and feel free to join several networks.
An angel investor can seldom operate alone. Where would he/she look for startups, where would they find him/her? Where would they find co-investors? Where would they learn? Networks of angel investors serve this purpose. All networks should be associated with a national association, whose main concern should be to comply with the ethical and technical parameters of the investment. EBAN stands above the individual networks and the national association.
What does the first contact between an investor and a person looking for financing look like?
It's exactly the same as with marriage. Somewhere you see at first sight that there will be no relationship. Sometimes the relationship is established only after several meetings. And after the investment, the relationship is long-term, so it's really good to approach the choice of partner carefully, from both sides.
Today, the first contact is online. It is necessary and at the same time comfortable, it can be achieved much more and the distance does not limit. Of course, it doesn't work as well as face-to-face meetings, but that's the time. So it's crucial to be able to engage in three minutes.
You say that a relationship originates as a marriage. But when someone comes to you, must they already have a working prototype, or can they have a project on paper?
The idea is not a startup. An idea is something that can become a startup. We look at startups that have a team, are working companies, and have already built something. In the idea phase, funding is provided by the FFF (Family, friends, and fools) group, which will help make the idea a startup. And then a business angel can enter.
Within the FFF, the bank could finance the client in the form of a consumer loan, right?
This is possible and sometimes done. But even so, it is a sad fact that banks today cannot even finance SMEs, let alone finance startups. For every bank, it is a lot of work for little money and it is far more advantageous for it to give a large loan with a small margin and low risk. And this creates space for players who are willing to take risks.
If we look at startups from a macro perspective, what impact could a higher volume of venture capital have on the Czech economy?
Huge. Unquantifiable. In startups, there is entrepreneurship. All positive hidden in it. Future. Startups are something new, mostly high added value. It forms the head, not the hands. If we want to stop competing with cheap labor, if we want to be an equal partner, startups are the only way. More capital means more startups. More startups mean more young people in business, a change in the education system. That's one of the things that led me to startups, even though I'm not exactly a startup generation. Here the invisible hand of the market works perfectly. I will help myself, I will invest, I will find good projects. I'll make money, maybe if I'm good and I'm lucky. But in any case, it will help the whole company tremendously.
Last question. How do you perceive bitcoin?
Like a great future. You just have to see it not as a digital currency, but as a digital investment. However, while before it was a matter for a few fools, today, when I look at the amount of liquidity that is being pushed into the bitcoin by large hedge funds and institutions, I dare say that it is starting to be a mass affair.
But bitcoin has no real use, unlike a startup or company.
See how much money is printed. If bitcoin is not based on anything, then what are the basis of the dollar, the euro, and other currencies? It is all about confidence. The advantage of bitcoin is that you have a clear algorithm for creating new bitcoins, and you know that its amount will decrease. Therefore, it will be rare. And the rarer something is, the more valuable it is. This cannot be said about the dollar or the euro. At the same time, I can imagine that if not bitcoin, then there will be other cryptocurrencies that will be possible to pay. It will be far more advantageous because the transaction costs of making the payment will be much lower than in the case of money.
More startups mean more young people in business, a change in the education system. That's one of the things that led me to startups.