An investment through the eyes of an entrepreneur – resemblance to an orthodox Muslim wedding

Day 3. October 2014 posted Stanislava Vabšek

The second day of the investment preparation training for the tender SK200 and accelerator Go:Global Slovenia has revealed two worlds of conflicting interests that a start-up has to steer through when trying to obtain an investment. According to the participants, the acquired knowledge and shared experiences of the training had been so valuable that each Slovenian start-up wanting an investment should attend.

Marko Ketler’s lecture revealed the key components of the term sheet and instructions for its preparation
Barbara S. Podlesnik supported the valuation methods with practical calculations
Participants had gotten a new view on investments – this time through the eyes of an entrepreneur.

Yesterday, the second day of the investment preparation programme took place, and was attended by 9 start-up teams who are trying to obtain an equity investment in the amount of 200,000 € through the tender SK200 of the Slovene Enterprise Fund and enter the Go:Global Slovenia accelerator. Marko Ketler, from the Law Firm Ilic, presented the basic document that regulates the relationship between an investor and the entrepreneur – the so called term sheet, which is a preliminary contract defining all general key conditions for carrying out an investment. The term sheet is the basis for preparing all other documents, such as the contract of members, an investment contract and contracts on employment of company management.

Basic “term sheet” content

As Ketler pointed out, most clauses in the term sheet aren’t binding, except for the clause on non-disclosure of information. Amongst the key contents of this document are:

  • the general context of the investment (purpose, goals, intention of using the invested resources, amount of investment, milestones, several tranches),
  • company management and the manager team (here is where voting rights, selling shares and the possibilities of founders or the management team leaving are defined),
  • company business, information, intellectual property (representations and warranties, due diligence, right to information) and
  • additional financing sources and the investor’s exit (defining pre-emptive rights, and the priority right for obtaining new shares). 

The “Texas shoot-out” clause

The lecturer also pointed out several special cases that entrepreneurs entering an investment should know: unless the contract of members states otherwise, company members have priority before other persons when buying company shares under the same conditions. In the case of a so-called deadlock situation, in which entrepreneurs give suggestions, investors are vetoing them and everything keeps going around in circles, the “Texas shoot-out” clause can be invoked. According to this clause, the entrepreneur and the investor meet up before an arbiter in order to reach an agreement about the divestment of shareholdings. The contract of members is public, which is why it’s good that the optional contract is settled with a special contract. Ketler also pointed out the liquidated damages in case of data disclosure and for protecting company secrets.

An investor wants to buy as cheaply as possible

The second lecture of yesterday’s training focused on company valuation methods and financial projections, as presented by the financial expert Barbara S. Podlesnik from Technology Park Ljubljana. “Investors will of course try to knock down the offered price for the company share, as they wish to buy it as cheaply as possible. This is why you should support your company valuation with sales contracts, client bases, connections and other soft data that the investor will also benefit from as a future co-owner of your start-up,” was the speaker’s reveal of investors’ interests. This is also one of the best ways for decreasing investor’s doubts about the investment risk and lower expected yield.

The method of the discontinued cash flow

A young company is usually evaluated with the method of discontinued cash flows – the free cash flow is discontinued to the value today, while the discount level depends on the yield demanded by the investor. “You can determine your real income by simply deleting one quarter, since you can’t do all that much in the first three months after receiving the investment. If an investor is demanding due diligence, this is usually paid for by the company. The purpose of due diligence is mostly the identification of all possible risks. It is also quite common that a company and an investor come to an agreement that a part of the sum is put on another account, in case of payments for certain risks, liquidated damages and so on,” explained the lecturer.

Entrepreneur Aleš Špetič shared quite a few views completely different to those of the investors who gave a lecture to the start-up teams yesterday.
The final pitching training of the team Modro nebo, offering an innovative programme for geodesists...
... and feedback from start-up mentors Tomaž Frelih (Hekovnik) and Branko Drobnak (Business Angels of Slovenia club).


An investment resembling an orthodox Muslim wedding

Aleš Špetič, one of the more visible Slovenian start-up entrepreneurs, introduced an entirely different world of conditions and expectations to those told by investors’ representatives yesterday. He mostly drew from his experience from obtaining an investment for companies Zemanta and Cube sensors, and according to him, it’s a process that most resembles an arranged marriage between a young bride and an experienced older groom in the orthodox Muslim world.

Without a business plan or financial projections

Špetič thinks that financial projections, budgets and business plans for start-ups are completely irrelevant, since no one can be certain about the direction that new technologies will be taking or what the market reaction to them will be. Besides, an investor is principally looking for a company that is so out-standing that no formula can define it. They should more be interested by the main risks that can block company growth. “No investor demanded sales projections for two or three years from me, neither did I write down a business plan for either of my start-up companies. An investor is giving you money for a period of 12 to 18 months – they can’t trust you for more than that. Therefore the crucial question is: what is the most you can do with this money that’s guaranteeing a year, or a year and a half, of your life,” were Špetič’s illustrative words.

good feeling and cubes in your pocket

“While the process for an investment is technically a well-settled one, it’s still a very soft science, based on someone having a good feeling about you, so that the right chemistry is created. The best advice for a pitch – tell it in such a way that the investor will know how to tell all about it to his colleagues or co-workers. If possible, have the product on you at all times – I myself am always carrying the cubes in my pocket – and show it live. And remember: the main task of the pitch is for the investor to remember you and invite you to a meeting,” emphasised the speaker.

As Aleš Špetič thinks, financial projections, budgets and business plans for start-ups are completely irrelevant,
since no one can be certain about the direction that new technologies will be taking. 


Metrics for investors: reputation, connections and experience

Expect three most important things from an investor, besides money: their reputation, network of connections and experience with work in certain industries. “Reputation of Fred Wilson, who invested into Zemanta, went a long way to helping a young company from Slovenia establish itself on the American market. The network of connections is mostly important for products from specific industries, such as mobile networks or biotechnology, and an investor can open a lot of doors that would stay closed if it weren’t for his contacts. You also wish to have someone with a lot of business experience at your side, not someone you have to teach how business is done,” were the metrics for evaluating investors as summed up by Špetič.

The problem of tranches is de-focusing

Even though transferring investment money in tranches has established itself in the world of start-ups, the tranches create pressure that defocuses start-ups from their key work, according to experience from Špetič. “If someone is “nagging” you every three or four months about why the sales goals haven’t been reached, but at the same time doesn’t understand that there are so many variables in the process and that an entrepreneur has to simultaneously lead the team, employ and innovate, maybe the appropriate question is why they won’t trust you with the whole sum of the 12 or 18 months. I understand that tranches are investor’s protection mechanism, but in the uncertain world of start-ups, where the entire market’s paradigm can change during a night, I don’t think they’re the best solution. This is why it’s that much more important that an investor is someone who trusts you to give it everything you got, and that you will know how to sit down and talk about further actions in critical moments,” Špetič summarized the guidance through the eyes of an entrepreneur.
Despite his criticism, Aleš Špetič stressed the incredible importance of the tenders of the Slovene Enterprise Fund SK50 and SK200, which entrepreneurs should take seriously, since they infuse new responsibility and an opportunity for the development of the start-up scene in Slovenia.


Final instructions for improving presentations

After the lecture from Aleš Špetič, what followed was pitching training with Tomaž Frelih from Hekovnik and Branko Drobnak from the Business Angels of Slovenia club. All nine teams got valuable feedback and final instructions for improving their presentations, which they will give in front of a start-up mentor committee at the demo day on Wednesday, October 8th 2014. Then, the programme participants will also find out how many points out of the 30 possible they obtained in this second round of the pre-selection procedure.

For additional self-confidence and motivation

The fact that the country is entering as a co-investor into companies through tenders SK50 and SK200 gives start-ups additional self-confidence and motivation for development, summarized his impressions Tomaž Izak from the team Modri planet, which is introducing a new app service for making 3D models based on air-taken photographs for the geodetic market.


Indispensable knowledge for all those searching for an investment

Simon Meglič from the team GlobalWebDJ, which is introducing an innovative business service in the field of playing music, also thinks that the investment preparation training programme for the SK200 tender is excellent and indispensable for all entrepreneurs searching for an investment. The entire investment process really has a lot of details that can be deciding and to which you have to pay attention. This is why this is a programme that all start-ups should go through, as this would very much increase their possibilities for market success and entrance of a private investor, said Meglič.


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