Business Review has teamed up with Schoenherr to offer start-up and scale-up communities legal and funding advice, as well as success stories from local entrepreneurs, so that they can reach their business goals. Speakers from across the industry talked about problems and solutions that both companies and investors can face at our Start-ups vs. Scale-ups Roundtable, which brought international know-how and good practices to Romanian start-ups and scale-ups, from legal experts, investment funds and successful start-uppers and scale-uppers.
Or, as Alex Glod, senior trainer and online instructor who moderated the discussions said, “when people hear about investors they think only about profit, but the picture is a lot bigger. So we are here to talk about more important issues.”
Cosmin Mihai Marinescu, managing partner and business strategy and development, Lummetry.AI
“Today, we are an Artificial Intelligence company with our own R&D department using Deep Learning technology to build AI solutions that are ready to solve real business problems. Our history goes back to early 2000’s, when our company, led by Andrei Damian (actual main partner and Chief Research Officer at Lummetry.AI), had been doing classical software development. Since 2015 we switched the focus completely and exclusively to data science. In the past few years we’ve been building our own AI solutions and in 2018 we’ve re-branded our company to Lummetry.AI. So we are not acting like a typical start-up who was founded just a while ago.
In terms of funding, we’ve invested our own money, we have operational income, EU grants and also attracted a business angel investor last year.
Luckily, we are in an effervescent domain. When you say you are doing AI everybody is eager to find out more and this opens doors. We had the chance to get on board a business angel who felt more like a partner rather than investor. It is more important to have someone like that on your side, and not an investor who just wants control of the company, detailed reports and impose his vision. The successful way to do it is founders executing their vision with the support of the angel’s networking and expertise.
We already have local and global customers for our AI solutions and we are now focusing on our scaling business model which means building a network of implementation partners to scale locally and globally.”
Madalina Neagu, partner, Schoenherr Romania
“When you try to attract investors you must have the company ready for due diligence. Start-ups may not put an emphasis on having signed contracts in the early stages, they often carry out their business based on a handshake, but this should change when seeking to attract investors. The corporate governance will likely witness changes once an investor joins the business. Some investors prefer to take a seat in the board of directors, others favour the structure of the board of advisors, and founders should expect a certain level of control along with the investment.
It is not easy for the founder to adjust to all these changes. Attracting an angel investor is just the first phase, and the following rounds of financing will likely trigger additional operational changes. Ideally, owners should be prepared to decrease their stake in their company, which is inherent to the upside of additional funding.
There is a need to build protection in the contract for the minority shareholder and the exit scenario needs to be aligned with both the founder’s interest and the investors’ interests. The exit routes should be well anticipated in the transaction documents. Among the exit choices, an IPO may also be a feasible scenario, in which case careful consideration should be given to the regulatory requirements.
Looking at the market developments, we witness an increase in the number of business angels and venture capital funds looking to provide early stage funding, which should allow entrepreneurs more choices in attracting the right investment partner.”
Thomas Kulnigg, partner and head of technology and digitalization, Schoenherr Attorneys at Law
“It is important to discuss the overall growth and exit strategy with investors, to set the long-term plans and to identify potential conflict areas. Venture Capitalists will typically seek an exit via M&A or IPO, whereas strategic investors may not be interested in an Exit at all. Also, founders should disclose known issues and risk, like legal, HR, tax to avoid liability risks for them.
Founders are typically afraid to lose control over their company. While this is a legitimate interest to retain control, founders should also ask themselves: do you want to be king or do you want to be rich – because an investor, in particular a financial/professional investor that invests other people’s money, will require a certain level of control over the company. You thus have to give away some control of the company, if you want to raise funds.
Founders have to understand that funding comes at a certain cost – also in relation to their advisors. Saving advisor fees can turn out to be very expensive for the founder or the start-up.”
Laurentiu Ciocirlan, managing partner, Equiliant Capital
“We don’t invest in startups, we invest in scaleups. So we look for companies that are still small in absolute terms, but big in their business. There are niches in the market where with EUR 20-30 million you are the market leader, even though in scale you are not a big company.
This is why we only take minority stakes. Becoming the majority shareholder would only happen if the numbers didn’t add up, and it would still take 2 or 3 funding rounds.
We are always asking founders what they want to do, where they want to take the business. It is important for the founder to do their homework and make the investors excited about their business.
A suggestion for those looking for funding is to look at similar companies. When I was in the capital market, we looked at Poland to see how our market would develop in the following years. It is also good to tell the investor about the transactions that have been made with similar businesses – this way, the investor has a pretty good idea on the market context and the scale. If you can give similar examples from the region, in Poland or Hungary, it would be a lot easier for the investor to understand what they can achieve.
The more specialized a company is, the better it is for an investor. We want to come together with entrepreneurs, but it is best when they are prepared at the same time. If you want to grow slowly, the bank is your best partner, but if you want to develop quicker, we are there to support this acceleration moment in the life of the company.
There is no real recipe to how to find an investor. You must be honest and open and not go for the easy guys; you should keep in mind that the investor’s return is your return. There is a saying: when you build a house, don’t go cheap on the architect. It is the same for an investment fund; the company should have a good advisor or consultant in order to be successful. The consultant is the one with the experience who can tell the owners of the company what they can and cannot do.
For a fund manager, it is important not to put all of your eggs in a single basket.”
Cristian Logofatu, co-founder and CFO, Bittnet
“If you are in the tech business, you have the advantage that investors are chasing for “unicorns”. It is important to explain why your company is able to deliver that status, even though the probability is 0.0001 percent or something.
In the first years, when you don’t have to show turnover or profit, it is very easy to present yourself. But after that you must have the numbers when you try to find investors. Usually, the revenues grow constantly, but expenses grow in steps or leaps. And there is a gap that must be covered by outside financing.
In some areas, tech not included, Romania is 20 years behind the developed countries, which is a good thing because you have a printed roadmap for your business for the coming years.
We chose the stock exchange because we needed new funding. We thought in 2014 that the economy would continue growing so we want to accelerate the company’s growth.
On AeRO at BVB you can float a small company, we had a few million RON in revenues and profit. We thought that the stock market would give us continuous access to patient capital, which we got in small steps.
What we didn’t imagine was that we would become a destination for the employees, this was a very surprising effect of the listing and the transparency of the company. There are many people who wanted to come and work with us. We have a compensation scheme that includes shares. Now around 30 percent of employees own shares and these shares were bought, not given to them for free.