12/11/2021 – Tokeportal’s own content

In the previous episode of our mini-interview series, Dr Peter Szabo was introduced, and this time Laszlo Csiki answered our questions. Laszlo, a data-driven growth consultant, has spent the last 10 years financing and bringing to market early-stage innovations. He has had several businesses of his own, including a technology-focused startup. 2 years ago he started using his experience to provide data-driven growth consulting, which can be applied to a wide range of processes regardless of the profile of the business: efficiency improvement, automation, raising domestic and international capital, decision support. Specialisms include market entry strategy, business planning and e-commerce. In addition to relevant experience, he is also pursuing PhD studies in this field, focusing specifically on startups at Budapest University of Technology. (BME GTK).

I have been involved in financing typically R&D-based innovations for more than 10 years. It’s a diverse field, because on the one hand innovation is a very broad concept, and on the other hand there are quite a lot of players on the funding side. To give you some practical examples, I have been involved in very early-stage state-funded university projects, in multi-billion turnover domestic companies, where the funding was typically mainly from own resources, and also in start-ups with a venture capital fund manager.

I have also been on the other side of the horse and continue to do so, having founded several businesses of my own, both family businesses and start-ups.

So for 10 years I’ve been looking at how and what resources a business has to develop or further develop a product and then launch it in the market.

In line with the Tokeportal profile for this interview, I would focus my answer on early-stage companies, leaving out the internal innovation processes and talking about financing products or services that companies want to bring to market, as this is typically the question that comes up most often.

I think the biggest challenge today in terms of promising innovation is not finding the funding for it, but finding the funding that fits the company and its vision. There are countless examples of this in this context here at home.

A start-up that envisages an innovative product or service wants to finance its development at an early stage. How can you do this?

 

Through calls for proposals: this is not a viable option for a start-up, as calls for proposals are already addressed to companies that already have a closed business year. Moreover, and perhaps even more problematic, R&D&I tenders do not favour R&D-intensive product development, as they all include a commercialisation commitment among the mandatory commitments, typically expecting the product developed to be on the market and generate revenue within 1-2 years.

However, the R&D process is uncertain: it may well turn out that the technology cannot be developed or that the technology developed will not be an economically viable product. In addition, developing a product with a high R&D requirement is a time-consuming process, taking up to 5-10 years or more, depending on the stage of the technology and the industry, to get a product ready for the market.

The reason for this expectation of market exploitation is understandable from a funding point of view and may be due to the so-called European paradox, which, based on past experience, is something that Europe would have liked to have done something about here in Europe.

But the current tenders are often very inflexible funding options anyway, with little scope for change of direction. This would be important if, for example, a company hits an unforeseen dead end in the development process and has to make significant changes.

 

Through risk capital: institutional financing has been available in this country for a few years, from a very early stage. However, an investor invests over a given time horizon, with a given expected return, and has a number of other rights, which are provided for in various contracts, but I will not go into this in detail. This means that if you are not practically at the market entry stage for a product or service you could invest in it for nothing, it is not worth it. After all, being a startup with an investor behind you is basically a race against time. In this country, the longer you take to develop and the later you enter the market, the further you fall behind the investor’s expectation of a 30-40% annual return. It is also possible that, for example, in 4-5 years, by the time the product is launched, the investor will have to exit the company because of his own investment time horizon, i.e. he will want to sell his stake at any price. Since a financial investor rarely invests in a non-revenue generating company after 4-5 years, the technology remains. If it’s really great, a professional investor/buyer may even buy it up, but in such cases they typically seek to buy a majority stake. So the company is finished before it goes to the market.

In addition, of course, in addition to equity or family/acquaintance capital, business angels also invest in early stage, most often before institutional investors enter, but typically on tougher terms than institutional financiers. I am not referring here of course to stronger controls and longer administration, which angels typically do not have, but to the fact that they are putting 100% of their own money at risk, so they really only invest in businesses and teams that are relatively fast and high return, already validated in the market, generating revenue, and at relatively low valuations because of the early stage. However, a well-chosen angel investor is worth its weight in gold in the future.

So my answer is that most companies developing a product or service with higher R&D needs can’t find funding, and if they do, it’s very likely that this funding is not a good fit for the company, and that will be out in a few years.

It is therefore very important that everyone looks for and finds funding that fits their profile.

I think that this is where the Tokeportal could also play an important role, although it is obviously evident here, and understandable, that people are much more willing to invest in promising businesses that are already generating revenue, because the uncertainty factor is somewhat lower and the payback period is shorter.

The solution might be to make the tendering system in this country more favourable to start-ups that want to develop high value-added, R&D-intensive innovations. Other forms of financing could also be involved following successful product development.

There are many, and most of them are internal to the business. I think the two most common reasons why early-stage companies tend to run into the ground quickly are inadequate assessment of market needs and the composition of the implementation team. But even if these are all right and the product is good, there is market demand for it and even the team is good, it is still difficult to achieve success.

In my screening of more than 500 ideas and companies, I have found that most executives – from early stage companies to companies with revenues of several 10 billion HUF (~2543142156 €) – make strategic decisions that have a huge impact on the future of the company and on the development of revenues almost exclusively through their own lens and in an intuitive way.

They do not analyse or measure the effectiveness of the relevant processes of the company. In many cases, they simply do not know what data they are sitting on or what data would be worth collecting at all. I founded bizdev.hu 2 years ago as a response to these problems, where, nowadays, we are more or less myself, data-driven growth consultancy.

In the case studies on the site I have included a short summary of some interesting cases that I encourage everyone to read. It shows how our services are useful for a wide range of companies. Our clients are mainly companies that need to grow quickly and operate more efficiently. One group of companies is those that have managed to reach a certain level of turnover – even billions of forints – through intuitive management decisions, but then growth has suddenly stopped because the strategy they have been pursuing has not been able to achieve their annual growth targets. And they either recognised this themselves or in discussions with us.

The other group are start-ups with a few years of experience, who are in a race against time and where uninterrupted growth and rapid results are practically a necessity, as this determines their funding opportunities and their ability to realise their potential until an EXIT event. For them, it is a very good value proposition to be able to move up a level, which will make it much easier to make a next round investment.

If you would like to know more about László, check his mentor profile.