Lukáš Foral: Analyze any feedback from the investor and, if it makes sense, use it
How should a startup proceed once it gets money from, as they say, family, friends and fools?
I definitely recommend going through an acceleration program, educating yourself and using money to find your first customers, get early feedback and map the competition. It is good to go to an investor with something tangible.
What should a startup founder consider before meeting an investor?
He or she should certainly have a clear idea of the amount that they want to ask for and know what they are going to use it for. He or she should also be realistic about the valuation of the company, or of the idea. Exaggerated valuation is often a show stopper for negotiations. An acceleration program, a mentor or a startup that has gone through an investment round can help new startups decide when exactly to go for the investment and with what requirements.
Let's say that the founder has decided to ask for an investment. How should he or she negotiate with an investor?
In the first meeting, it is important to explain the problem and the target market, to present the company as unique, show the team’s enthusiasm and listen to feedback. A lot of startups close up shop when they get a few rounds of negative feedback in a row. Negative reactions, however, hide an important message – what to change in order to have a chance to succeed next time.
How should one work with negative feedback?
It often happens that a startup meets a late-stage investor. In their feedback, the investor mentions that the idea is interesting but needs to reach certain metrics for them to consider investing in it. In such a case, the startup can go to an early-stage investor and tell them they need to get to a certain stage. Knowing the requirements is beneficial for the early-stage investor because they can estimate whether their means to achieve the goals are sufficient. In short, the startup did not get the investment, but learned what metrics it should reach for the investor to be interested in it.
What is important to talk about during the first meeting?
Essential things like innovation, global potential, scalability, the team involved and the potential of profit for the investor. Investors always appreciate startups that are empathic, in the sense that they can explain how they think about valuation, strategic exit partners and future investors. Only a few startups can think of venture strategies as an investor, so whenever such a startup appears, it’s a good signal for us.
Do you want to hear that the startup will change the world? Is it not a cliche?
It probably is cliche, but it's definitely important for us to hear it. In the future, we would like to focus on impact investing – investing in startups whose products or services visibly help to improve the world around us, have a sustainable business model and have the potential to bring venture investors a return. Currently, such funding is being used by Inventures or Google Ventures.
Can you describe the process of getting an investment?
If the startup falls into our focus (CEE region, IT solution, investment up to €1 million), we begin to evaluate our core criteria, including innovation and uniqueness of the solution, potential to succeed in large markets, competence of the team and of course the possibility to multiply our future investment. If a startup meets all of these criteria, we run an in-depth evaluation, which lasts for a number of weeks. We evaluate technology, get industry-specific information, talk to prospective customers and so on. Only after such a detailed assessment are we be able to decide whether to offer an investment. If so, we begin negotiating basic terms and conditions of the investment and create a so-called Term Sheet. Then we start talking about the investment contract. The entire process takes a number of weeks or, often, months.
Can founders negotiate the contract themselves or should they hire lawyers?
First, a business agreement between the investor and the startup should arise. We try to set the most standard terms, but it is legitimate for the other party to consult with their lawyer on such important matters as the investment contract. What does not work well, however, is interference by lawyers in negotiating investment conditions from the outset. It often creates a lot of complications and a bad atmosphere.
When should startups consider looking for another seed investment?
It is wrong to look for an investment when the money is running out. Startups should begin communicating with potential investors very early on -- ideally after forming an idea and verifying basic preconditions for its implementation. There is nothing better than having a network of investors around you who know who you are and how your startup is developing. These investors will already have confidence in your startup and will give you money without needing to check up on you because they know you well.
Should startups look for the second round of investment from the moment they receive the first round?
Certainly. One of the most common mistakes we notice is that startups neglect investor relations. They should focus more on investor marketing. When you are looking for a seed investment, 99% of investors will tell you that they like the idea, but you should call them when you have returns, customers or a certain number of users. While trying to reach these goals with a seed investor, you should maintain contacts with venture funds at the same time.
“Lukáš Foral is a co-founder and partner of VC Opifer. He has a wide range of competencies ranging from startup portfolio development to strategic partnerships and investor relationship management. His passion for startup development and discovering new talents is a lifestyle that brings a wide variety of new challenges that always require luck and courage. He keeps tabs on innovations in many fields, including their implementation and applications, which address the real needs of businesses and people and help improve quality of life.”