Have you ever dreamed of taking your first rounds of investments in order to make your company a success? Well, think again because in reality not all the investments that have been made or will be made in the future will be successful. There are gonna be ups and downs throughout the negotiation phase, how you interact with your investor, and how you move forward with your startup.
That’s why we invited professionals in the investments industry that have been on both sides at the table to shed a light on best practices, what to do and not do when you are seeking funding for the first time
- Mihai Rotaru, CEO of Urban Air, serial entrepreneur, founded 4 companies one of them being Clever Taxi, investor and part of Tech Angels,
- Carmen Sebe, founder and CEO of Seedblink, built software companies from scratch like Rav Antivirus E payment, Avantgate with 3 exits in the past 25 years, now a VC and
- Ciprian Borodescu, ex CEO of MorphL that got acquired by Algolia, now being the head of Algolia Romania
Recognizing a bad investor
How can an investor be bad if he gives you money? Without money, it’s more difficult to achieve what you want. In Carmen Sebe’s view, it only depends on expectations.
“If you expect your investor to give you knowledge and he’s giving you only money then you are unhappy.”Carmen Sebe
Mihai Rotaru is of another perspective when it comes to receiving money as he knows from his experience, that in the early stage of a startup it’s easy to spend the money cluelessly. So it’s fundamental that there is chemistry between the founder and the angel investor because actual life & business experience and spot-on advice can go such a long way together with the funding.
In Ciprian’s view, the framework of defining what is a good and a bad investor is really important.
“Honestly, as an entrepreneur, I fell into the trap of judging investors as good or bad, zero or one, black or white. But my framework of analyzing an investor was questionable because it was subjective.”Ciprian Borodescu
“An investor might not answer your phone for days, weeks, and months in a row and might be hesitant in saying a clear no to a startup because they are afraid of not losing a good investment later on. Does that make him a bad investor? Maybe. Bad for the entrepreneur? For sure. Bad for the long-term strategy of the fund or vc? Only numbers can tell. It’s all relative.”Ciprian Borodescu
An investor can be bad for one startup, excellent for another startup and vice versa but usually a good investor is in a position to help not only with money but also with connections and expertise.
The difference between an angel investor, a seed VC, a growth VC & a corporate VC and where they come in the life of a startup
In the investment environment, rigid structure doesn’t work, but when you look at KPIs, startups have different stages of development while investors and VCs just try to capture the whole spectrum of development stages.
An angel investor comes in the early stage of a business when many times the product isn’t done yet but they like the idea and they can invest between 10k to 100k up to half a million. Their thesis is based on trusting the team that they can make the company grow and this is why they are called “angels”, it’s a more personal approach.
“It all comes down to psychology and chemistry and taking a leap of faith”Mihai Rotaru
“Each VC has a thesis and it’s important for a startup to know where to go for money because not all the VCs are suitable for all types of startups”.Carmen Sebe
The Seed VCs come also in the first stage of the startup life and their thesis is to invest in seed rounds – tickets up to 5 millions to 200 millions for a particular sector or in a specific geographical area. “Seed VCs are looking for a stable product, some small revenues and projections. Because companies are very risky at this stage, they prefer to invest in more companies in order to have a better spread of the risk.” says Carmen Sebe.
Growth VCs may invest from 3 millions to 20 millions and have their thesis organized in sectors or geographically. Each VC looks at the company stage in terms of growth, so it’s important for a company to show that revenue or the volume it’s getting bigger and growing steadily. They are taking only the companies that have a certain amount of revenue per month and a certain growth: e.g. a company needs to make 100k euros / month recurring revenue.
The Corporate VC is a VC made by a company like Intel. They are interested in technologies they can use but not necessarily interested in revenue or other financials. They can help the founders with clients but they will be somehow tied to the company.
“Besides the roles of VCs, angels and corporate, investors usually look at risk, structure of deals, the value of the founder and general involvement of investors in the company. As a company grows, the value of the founder decreases a lot as well as the involvement of the company and proper numbers are much more relevant.“Mihai Rotaru
The good and the bad terms in an investment contract you need to be aware of as a founder
When negotiating, it may be easier getting the money for a percentage, then negotiating all the terms of the deal. Having the company objective in mind, whether it be making money, making an impact or changing an industry, it will make the difference in the long term, because concessions will be made that can increase the chances to achieve your goal or lead to unpleasant situations.
“Because we don’t have such a long history of investments in Romania, founders need to educate themselves in what the terms mean and what intentions are on both sides, be it by having an advisor or talking to many founders.”Mihai Rotaru
There are 2 categories of terms in a term sheet – the economical one and the control one. In the US and Eastern Europe, these terms are pretty standard. Instead of being obsessed with the economical terms like percentage, how much of the percentage is given away or what’s the valuation, founders need to pay attention to the economical & control terms like: preferred stock, liquidation preferences, anti dilution, drag along, tag along.
“I’ve been involved in receiving term sheets that had red flags all over them when an investor brought a term sheet with a lot of non standard terms. I learned something very valuable: never sign a term sheet unless you have a lawyer to assist you.”Ciprian Borodescu
Signing bad terms at seed stage may not impact you in the short term but it will do in the long term. It can reduce your chances of actually taking professional money at series A because investors don’t want to come onboard if founders don’t go back to the seed investors to renegotiate the shareholders agreement. This is why you need to think long-term together with the investor on the seed stage and they should not prevent you from raising a subsequently healthy round.
“A bad investment is an investment that doesn’t take you to a desired outcome”.Mihai Rotaru
Approaching the terms process negotiations, when wanting to have ownership of the company but still needing to give out some control
In the first rounds, founders may strive to have the majority of shares but there are some voting rights that have to be given to investors that can either be negotiated or are standard. Unless you have a great startup where everybody is fighting to invest in and you can impose any terms you want, the leverage moves towards the investors and you need to be prepared to make concessions.
Carmen Sebe mentioned that “At Seedblink we have a rule to have a third party involved as well, like a VC or a business angel. It’s a complex discussion between founders, investors and VCs, usually the VC providing a term sheet and shareholder agreement. There are still cases when founders have to go back and renegotiate with the first investors because the cap table is not in order and things cannot move forward.”
When looking to take on board members, have in mind 2 aspects: as a CEO it’s important to be accountable to someone, and board members have to be put to work in order to help you drive the company forward and not be a bottleneck.
“Even if it seems like you are losing control and can’t do whatever you want at your own company, always having to ask for permission, it actually helps, speaking both from a board member and CEO perspective.“ Carmen Sebe says. She is proud to say that at Seedblink they have a board that is helping the company a lot and are working alongside them, but otherwise it would be a waste of time.
Can a founder ask for too much money?
When going into investment rounds to fund your startup it’s important to have in mind that you need to have a plan for the next 3-5 years. If you are giving too much in the pre-seed or seed round, you will have nothing left for the next stages. Have in mind that you need to get the right amount of money for the right amount of conditions.
“It’s never too much money, it’s the ratio between money and how much of the company you are giving for that money.”Carmen Sebe
Getting money from investors isn’t the goal, it’s just a stepping stone, not to mention raising too much, a statement Mihai and Ciprian agreed upon. When getting funding, you are always gonna give something back for the money, be it equity or voting rights so always have in mind the cost of the money you are receiving.
In fact, the “best investors you can have are the customers”, says Mihai. The right way to get an investment is only if you need money to improve the KPI of getting more money from customers.
Even if you get the money from investors this may not guarantee your success. Ciprian has been opening up about his experience: “We managed to raise 100k euros, back in 2014, which were a lot of money. We were so happy, but 6 months later we actually failed event with the 100k investment. Not in the sense that we spent it all but in the sense that we failed as a company, as a startup and as a team. You can raise money and still fail”.
All in all, in order to avoid a bad investment you need to focus on developing a good long term working relationship with the investor or VC firm. Think about it as a partnership more than a pure financial investment because otherwise a bank would probably be a better option.