9 start-up teams passed through the first round of the pre-selection procedure. They recently had their first day of investment preparation training for the tender SK200 and the accelerator Go:Global Slovenia, and got a lot of useful advice about the mentors’ mentality and work. Priceless, as always, was also the eloquent feedback from mentor Kristjan Pečanac from Hekovnik.
  
9 start-ups are contending for 200,000 € of equity investment through the tender SK200, which also includes the condition that a personal investor with at least a 40,000 € investment has to be present. At the first day of the investment preparation training, Branko Drobnak introduced the basic dilemmas that investors as well as start-ups face when it comes to sales values and equity shares.
 

The exit is the goal. Entrepreneurs – don’t idealize!

When you approach an investor, you have to start thinking about when and to whom you will sell the company. The so called “exit” has to be the goal of every start-up. “When you are presenting the idea to a potential investor, you often get stuck, because entrepreneurs tend to idealize stuff and transfer their future products and activities into the present,” explains Branko Drobnak and adds that the process of obtaining an investment usually goes through six crucial steps:

1. how to develop a product,
2. how to arrive on the market so that it will snatch up your product,
3. how to fix the product based on market reactions,
4. how to increase sales,
5. how to obtain an investor,
6. how to make an “exit” or sell yourselves to a strategic partner.

 

Get expert help

When you and the investor reach an agreement for an investment, the first thing to do is to carefully review business operations and all key documents: the founding contract or the statute of the enterprise, ownership relations and any other documents that may be lying in a drawer but can influence ownership in the final phase. What follows is the preparation of the so called term sheet, in which all key elements are defined: company valuation, investment amount, mode and time of payment, possible options, additional rights of investors and similar.
“Even though I am fouling my own nest by saying this, I have to advise you that as a start-up, receiving an investment for the first time (compared to an investor who does it all the time), you should ensure you have professional help. Namely a good investment banker, many of whom are on the market, and a lawyer who will represent your interests,” was Drobnak’s sincere advice.
 

Higher valuation clause

If you don’t agree with the investor’s valuation of your company, you can add a clause, according to which the company’s valuation will increase in time, if all key milestones are reached. The main problem of start-ups lies in the fact that in 80 to 90 % of them, there is a deviation between the activities done versus those planned for the timeline. This is why investors are inclined towards correcting the valuation in time, if the team proves that it’s capable of promptly achieving the set goals.
 

A jump from zero to 300 thousand €

As Drobnak says, the investor usually doesn’t pay out the entire sum in one piece, as practice showed that entrepreneurs rapidly change behaviour when the state of their account jumps from “I have nothing” into having, for example, 300 thousand euros. “You are more prepared to pay for suppliers, subcontractors, you can easily buy something you don’t need. The lean approach is crucial for spending as well, and is good for avoiding spending money too fast. This is why the best approach is to gradually pay out the pre-arranged sums, for which the entrepreneur also has to report how they will spend them and in what amount of time. The investor usually monitors the progress every three months and decides whether to give green light for the pay-out of the next instalment payment.
 

If it doesn't go according to plan...

In cases where there are significant deviations between the fulfilled and set goals, the investor and entrepreneurs have a talk and try to find the facts or the reasons for the situation that has arisen. Partial or complete turns from the first development path are also possible, especially in cases when market feedback or the employments of key staff show that changes are necessary, explained Drobnak, who faced the described situation in quite a few of his investments.
 

The investors' syndicate

It often happens that five or six business angels enter one project, forming an investors’ syndicate. The latter will probably be most helpful with finances, but it is always crucial that you meet up with the investor at regular weekly meetings, where you go through all the key functions: sales and market feedback, development and financial state or cash flow. After each meeting, make a record with clear conclusions and goals – who has to do what, in what amount of time, with which budget and what has to be the result. Next week, absolutely review what had been done. “Monitor your co-workers and regularly check up on them. If you don’t, it’s the same as if you hadn’t given them any assignments in the first place,” advises Drobnak.
 

A lighthouse, charisma and your "commandment"

You have to monitor market feedback just as intensely. As a CEO and founder, you should have contact with your key customers. You can’t afford to not know exactly what’s happening in your company, with the customers and the costs. “If traction isn’t reached in 9 months, you won’t ever reach it. If key staff doesn’t start doing the assigned tasks in two or three months, don’t wait half a year before breaking off collaboration with them. At the same time, don’t give too many goals to your employees at the same time, and listen to them if they sometimes say that they can’t do something. Defining tasks, delegating and controlling the results is your everyday commandment. You are the one with the charisma and influence on co-workers, you have to be the role model for the employees and customers. If you aren’t capable of doing this, find someone who will be able to tackle it, since ownership and leadership aren’t the one and the same thing,” were the interesting words of the experienced business angel.
 

Optional shares and proposition for additional KPIs

Anticipate about a 15 to 25 % share for optional upgrading of key staff, which can either be on the account of founders’ equity holding bound to company income, advises Drobnak. And concludes his lecture with a very important piece of information: “I will suggest to the Slovene Enterprise Fund that KPIs (key performance indicators) should also include the amount of costs for obtaining clients and the margin that the company reaches by selling to these clients."
 

Investitorje motijo vsevedneži

Koristen nasvet startupom je dala tudi Tatjana Zabasu iz RSG Kapital, ki je jasno in nazorno povedala, kaj investitorjem ne usteza, ko poslušajo vašo predstavitev: 

• investitorje zmoti agresiven vsevednež, ki ni pripravljen na konstruktivno debato,
• nekostistentno in zmedeno predstavljanje podatkov in dejstev, 
• poraba investicije za (pre)visoke plače,
• 'hockey-stick' projekcije brez z argumenti podkrepljene osnove (npr. povečanje prihodkov za 500% brez realne razlage, kako boste to dosegli),
• ne dajajte vtisa, da želite graditi 'life-syle' podjetje, v katerem glavni cilj ni povečevanje vrednosti podjetja.

I'm not interested in your idea

Kristjan Pečanac’s lecture on the basics of investing for start-ups, and metrics that investors are interested in couldn’t have been done without current facts on what is separating the potentially successful candidates from the unsuccessful ones: “An entrepreneur is a person driven by problem-solving. This is why I’m not interested in your idea, but rather in your decision that you are going to do something, that you are going to be passionate and focused while doing it, that you are going to enthusiastically search for customers’ problems, and develop your products and business model based on this.”
 

7 reasons for failure 

New statistics in the world of start-ups, where approximately 9 out of 10 companies and about 95 % of all new products fail, show that from amongst approximately 1,800 companies founded in Silicon Valley, only one would have income in the amount of 10 million dollars on the B2C market. “The key problem of start-ups lies in the fact that you don’t understand the market and your customers’ problems. From amongst the seven key reasons for failure, the first four are the most critical ones. As much as 85 % of all start-ups fail because of them:

1. Premature scaling, when your company hadn’t yet reached the “product/market fit” point or its product isn’t yet attractive enough for buyers to use regularly. Especially apps and web products see devastating effects when companies invest too much into advertising and obtaining new users, who then leave soon or stop using the product.
2. The market you are entering is too small or even non-existent, if you are solving a problem that actually doesn’t exist or you are developing a product that no-one needs.
3. You are trying to take the market share from a market leader. Instead, find a market that isn’t yet a couple of hundred million dollars big, since at this size, it is probably saturated with big players and is really hard to enter. You should find a market that you can resegment and offer a significantly better solution to that of the current market leader.
4. Lack of clearly defined competitive advantages. 
5. Bad money or cash flow management.
6. Company doesn’t succeed in establishing teamwork.
7. Unsuccessful enforcement, because the company doesn’t establish a system for carrying out the agreed-upon tasks. 

Martin Blazinšek, Enolyse: “Even though Kristjan and I are in touch practically every week, it was still very valuable for me to refresh all instructions on pitching and swiftly describing the idea to the investor in nine points.”

 

What you have to know "blindingly drunk" during the night

Every start-upper has to be capable of describing their idea in nine key steps to an investor, even if you are “woken up in the middle of the night, blindingly drunk. If you can’t do that, you have a problem. And you don’t need a PowerPoint for this,” explained Kristjan Pečanac very explicitly, accompanied with a lot laughter, and invited the participants to describe their idea to him through:

1. description of the target market,
2. description of the target market segment,
3. description of the ideal customer,
4. problem they are solving for this client,
5. specific product value,
6. uniquely offered value,
7. clear product description,
8. differentiators and
9. key competitive advantages. 

Jakob Šušterič, Mesi: "I like the approach that the Slovene Enterprise Fund is choosing for allocating the public equity investment. And the training with Kristjan Pečanac was great, especially when we had to promptly present all nine key pieces of information that investors are interested in.”
 

Are you living for your idea?

The key elements that the investor is most interested in are the classical four: team, market size, key differentiator or competitive advantage, and traction (attractiveness of product for sales). In all this, the team still carries the biggest weight, whereby the investor is evaluating three crucial criteria: 

1. is the team complete and capable of quickly fulfilling the set goals,
2. is the team 100 % pledged to the project’s realization,
3. is the team passionate about what it does, and does it live for its idea. 

Two entrepreneurs living for their idea and enriching the Slovenian start-up community – Jakob Šušterič, Mesi, and Martin Blazinšek, Enolyse.
 

Focus is about saying NO!

After listening to all nine presentations and deliberately asking provocative questions, Kristijan summarized his impressions of today’s work with teams: “Their current key problem is focus! Because they come from Slovenia and want to do “bootstrapping”, they reach too widely and forget that they have to focus in order to break through to the global market. And focus also means simply saying NO to customers who aren’t a part of your target market segment. Or, as Steve Jobs used to say – focus is about saying NO!”
 

The investment preparation programme for companies was enabled by...

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Stanislava Vabšek

Communications and PR Start:up Slovenija

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