Michal Rostock: Catch them, while they’re young

Michal RostockHe studied Corporate Finance Law at Hughes Hall University of Cambridge and St. Anthony´s College. Now he is the manager of the Investment Banking Department of Venture Investors, specialising in information technology. For being a member of the investor community he is unusually open, informal and controversial. His written and spoken comments often criticise the low productivity and mobility of the Czech labour force.

Isn’t it just an act, how to attract interest and to be different?

It is up to our clients and partner companies to judge that. We tell things as they really are and this is something rare amongst consulting companies in this country. We appreciate when our clients respond with the same frankness. I believe, that frankness, simplicity and transparency are and for some time still will be a commodity which is in shortage in our part of the world.

What do you find is the biggest difference between the style of doing business in Eastern and Western Europe?

Not long ago I was at a discussion with Šimon Pánek, one of the people I have admired since the time around the years 1989-90, and I posed the same question to him. He replied that one of the biggest differences is still ongoing trust in the non-standard solution to problems. Although ten ways exist how to solve the problem in a standard way, we still look for shortcuts and new ideas, which of course can never work.

One of the specifics of this region is that only in the last ten years a new class of entrepreneurs has come about. Therefore there are very few successful people above 40 years of age. We lack the tradition of success and learning from mistakes of elders, who “have already been there“.

Another difference is that in this country people generally prefer cushy employment in a foreign company with (for Czech standards) solid salary over a more risky carrier having their own company and responsibilities for its development. I see this especially with the people of the upcoming generation, who now leave schools. Very few of them see themselves as a person, who wants to reach something on his own and build something. But that is also changing slowly.

Should we want to be competitive in the developed world, we have to be ten times better than the local competition. If say, we are only five times better, there is no reason why our potential German or American customer should change his current supplier. We can grab his attention only if our product is simply the absolute top. It is not enough to have a product only marginally better.

Probably the biggest difference is that nobody taught us how to appreciate intellectual work. The fact that my doctor, who studied for ten years to do his job, means, that I have to pay him better than a waiter in a restaurant or a boiler repairman. Similarly it applies also for the software development, consulting and similar activities based on brainwork.

The final difference is corruption.

What do you see as the most common mistakes in our company start-ups?

Everything begins in the ability to sell your products, services and yourself. If the start-up doesn’t have an order, the expected business cycle is longer, than is healthy for the company’s finance. Further the new companies have gaps in their team make-up, usually they lack sales abilities, knowledge of financial management and international dimensions of their business. Only a few managers are capable of using what I call professional toughness. In practice this means leading people to respect their own work, values they create, and customers they need. If they are not capable of that it is a part of professional toughness that such people are asked to leave and look for their occupation elsewhere.

Real businessmen are special people. They are too ingenious to be able to fit in to existing structures. They prefer to create their own structures and those that already exist they more or less successfully beat. They also have a highly developed instinct and they are correctly impatient towards people who just don’t get it. At the same time their employees like them, because they know, that they participate on something new and unique, on something, that doesn’t happen in a large corporation.

I have the impression that there are still very few of our entrepreneurs, who want to build something more than just a local company. Those, who today study at secondary technical schools will within ten years find their way into business and show the others the right way to go.

How to help the most talented? Is it actually possible to learn it at school?

At this stage it would be sufficient if schools would support personal initiative, creativity and natural competitiveness of their students. I don’t really believe that it is possible to learn business at school. Those, who today study at schools, often do not have a clue, what it means to manage a company. In the USA it is solved in the way that quality entrepreneurs give lectures at schools and co-operate with teachers on their lectures.

The biggest problem I see is on the academic side. I have the impression that profit for many people at universities is a rude word. A lot of people at schools are afraid of applied research in contrast to the basic one, where no methods exist how to prove its benefits. Success is something, which is not forgiven in our schools, and this is truly sad.

Incubators are a great thing. Once again the point is to find the right kind of people, that is natural businessmen or those, who at least have the inclination for it. And if the incubators will serve as a bridge connecting the secluded academic world and the enterprise sphere, and if the academic world supported such initiative, all the better. Of course it is necessary to measure the whole thing, it means the teams in the incubator should be profitable within 12 months from starting incubation, the loans returnable with interest, the incubator operators should invest their own money into it, etc. In my opinion the real changes will occur only when the higher education institutes stop being afraid of their own success.

The only way how to learn to do business is to have your examples, from which you can learn and enough will to prove to the world, that success is not a matter of chance or good contacts of your parents. A man is more born as an entrepreneur than being brought up to become one. Many businessmen, that I know, started as children selling lemonade or stamps, invested their pocket money with a monthly triple return, picked apples, then they started to sell computers and so on. Business is not a rocket science, although a PhD in maths can be a great help.

Lets get on with the investments into our IT sector. Where is the biggest difference between company and investor expectations during initial negotiations? In which cases can venture capital help and when not?

The prime question in our business is whether those who want money have ever made it for anyone else than themselves. The concept that the one who gives money to the company should get it back together with interest is still unusual in this region. Very few are able to lay down references, show that they treat their minor investors well, and have a realistic growth business plan.

On the investor side we still lack smart money in this country. A thumping majority of investors in this country don’t understand the business, into which they want to invest. What’s more, they are actually not interested. Then of course they are not able to understand what’s going on, when problems occur, and everybody loses – the company, investors, customers and employees. Marriage with an investor is interesting as long as both parties understand each other and know what they can expect from each other.

What criteria do you look for when selecting a company for investment?

There are at least five levels, on the basis of which I assess projects. The first one is – is it someone I will get along with? Can I go out or for a drink with him after work? What has he done so far? Is he sufficiently determined to start business and to follow things through to the end? Is he able to lead people?

The second one is team. Is it complete, qualified and capable of working together? Does it know its market and customers? What is the team vision – family company with 100 employees or regional, professionally managed company, which wants to have 3,000 people in ten countries in Europe and keep growing?

The third one is market. How big is it? The Czech one is always small. How does the company want to sell its products and to who? Is the company capable of defeating its German, Polish or Russian competitors? The fourth is a question of trust – can I entrust investors’ money to them? The fifth and final one is a question of finance. How much money does the project need, is it returnable? Does the project already generate profit or is it in loss? What are the margins, what is the general price politics and what prices does the competition have?

It is logical, that every investor emphasises growth, to receive higher returns on his investments. You personally have in your e-mail signature written „Ten Times Growth“. But when you look at the growth from the entrepreneur’s point of view, isn’t it sometimes just an enticing magic spell, that many companies have been tricked by, when they started to expand uncontrollably?

It mustn’t be uncontrolled, but professionally handled, targeted and effective expansion, as for example what Nokia achieved 10 years ago – at that time a manufacturer of commodity TV’s and rubber boots. Stagnation often means the beginning of the end. What’s more, in our conditions only very few companies managed to cross the border of this country.

I like small companies. For instance a company providing database consulting with 1,500 consultants is for me a small business. It is focused, profitable and still “small” for the German or French market. So far I haven’t met a successful businessman who would do business in order to have a stable full of cars and a palace by the Orlík dam. That was the problem of those who started business just after the revolution – as Soudeks, Junks, etc.

The size is relative, let’s try it a different way. How to recognise the border of healthy growth? Can you think about criteria according to which it would be possible to predict, when the further growth could be already dangerous and counterproductive for the company?

One measure could be what was already accomplished. So it was proved, that it works and makes sense. Before the business reaches the size of Citibank, GE, Ericsson, Nokia or Siemens, it still has something to catch up with. The second measure is practical. If I have good margins, solid external financing, team, for which it is fun to work, and market demand, then why not to grow? Negative or counterproductive growth is when I don’t have healthy margins, I get into price wars, the company is not able to handle the growth from either the human or management side, I get pulled down by debts etc. There are many examples around us, but I have heard that in these cases you are not supposed to drop names.

I have to ask about your comments about the transformation of investments into Internet services. Was it really, as it is said today, the stupidity of investors, who weren’t able to recognise a quality project and were giving money out “while you wait” just by the number of key words on the projected slides? Was it a natural stage of development or was it, in your opinion, possible to avoid it?

I have several points of view on Internet fever. I always have to laugh, when some foreign expert claims that he “knows better” and gets burned brutally. In this country we still have an idea, and let me to cite one director of a large IT company, that “an expert is the one, who comes from abroad”. Perhaps from these cases some entrepreneurs have learnt that a correct accent and an angular jaw don’t make an expert.

The fact that there was an investment fever in the USA doesn’t mean that “smart money” didn’t exist in time together with profit. For sure somebody made money on dot.com fever, he just doesn’t want to talk about it today. I wonder what for example the founders of Hotmail, ICQ, Checkpoint and so on, are doing today. The Internet Start-up fever in the Czech Republic had one great benefit. The first generation of young people for the first time found the courage to start to work on their own and for themselves, to take the responsibility not only for themselves but also for their people, clients and investors. Even though many of them didn’t make it on the first trial, their scars and experience will help them to start another business. Even Tomáš Baťa succeeded only on the third trial.

What is the current investment climate regarding Internet or generally ICT? Did the investment pessimism reach its bottom?

I don’t know if we’ve already reached the bottom, however for a long time I haven’t seen a group of guys in shorts with a miserable business plan, who want a few million dollars to expand abroad. My impression is that investment scepticism on the market of financial investors still remains, on the market of strategic investors we start to see light at the end of the journey. An interesting situation is with the VC funds, out of which practically none finished yet. I have the feeling that they prefer to sleep in their losses than to look into the eyes of the truth. There was never any reason for scepticism for companies with a good business plan and management.

In your sci-fi about one day of a Czech manager you make fun of fusion. Is that really the way you see the future of globalised economics? Where is the capital concentration going to stop? For how many companies will there be place for in the individual fields?

I personally don’t believe in globalisation and capital concentration. The charm of capitalism is that it is the space where people having money meet and pay those, who make the values. It is not a battle between rich and poor. It is a battle between those who have ideas and the ones who want to buy them. Everybody can start business and prove to the others, that his idea created a value someone else wants to buy. Bake a new kind of cake, think of a new design of glasses, write a software utility. The space has no limits and is wide open, good luck is on the side of the ready and experienced ones.

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