5 years on Europe still wrestles with the euro crisis. It struggles to recover from a deep economic slump. Yesterday it reached yet another bleak milestone: a record-breaking 12 % unemployment rate.
Everybody agrees on one thing: the key to Europe’s economic future growth and way out of the crisis is innovation. Propelled by startups that at the same time spur employment.
Startup founders in the Netherlands are however restless and sometimes even angry. The complain is that the state of startup funding is in dire straits. Especially if you compare it with seed and A/B/C funding rounds taking place across the Atlantic.
Investors complain however, that there is a lack of good ideas, not investment capital. So what’s the real problem? To understand the intricacies that underpin this apparent mismatch Startup Juncture talked to Peter van Meersbergen, managing partner at Investormatch. Investormatch is the largest investment network platform of the Netherlands. It matches investors with entrepreneurs seeking capital.
Startup Juncture: How many investors does your platform count?
Peter van Meersbergen: the total number of investors that are a member of our platform is 1300. 900 are business angles and 400 are large investment funds.
How does your investment portfolio look like?
It’s quite elaborate. Our members invest in ICT, life sciences, real estate, restructuring and refinancing of retail outlets and in electrical vehicles. Actually investment are made in almost all sectors as long as the business idea is backed by a sound business model. Except the obvious exceptions, like the weapon and sex industries, of course.
How large is the investment capital that Investormatch garners?
The large funds sum up to €900 million. Individual business angles checkbooks are on average €200.000. So in total it’s close to one billion euros.
What are the current investment trends in the Netherlands?
In our network private equity firms tend to look for growth companies that have an annual turnover of at least €500.000. In the Netherlands in general seed capital is getting more and more difficult. Nowadays startup means: ready to start selling.
Startups and growth companies alike complain about a lack of funding capital in the Netherlands. Do you agree that it’s more difficult to get funding in the Netherlands compared to Silicon Valley?
I don’t think that’s entirely true. There is no doubt that Dutch investors are more conservative than their counterparts in USA. It also goes without saying that in the USA there is a larger pool of richer business angles. But it’s also true that good ideas always get funded. Also in the Netherlands. I also think that many startup founders complain because they think that they have build the next big thing. Often that’s not the case and they get frustrated because of the wrong reasons. Another reason is that startup founders start to attract funding to fast. Don’t.
A couple of years ago the founders of the Dutch startup Cloud9 IDE tried very hard to get funding in The Netherlands. They didn’t succeed. In 2011 they raised $5.5 million in a series A funding in Silicon Valley.
I know a Swedish entrepreneur in the agriculture business who couldn’t get funding in the US, but got funded here. So I think it goes both ways. For companies in need of funding it’s also important to consider the field they are operating in. If you’re an ICT startup you may indeed have a bigger chance of getting funded in Silicon Valley. If you’re in transport, design or agriculture the Netherlands might be a better option. If there is a agglomeration of the best knowledge institutes and brains and large and dense networks than the money will follow. So seek the best place from a much broader perspective to jumpstart your startup.
Your platform gives a good glimpse of the amount of investment capital available in the Netherlands. On the other hand the startup scene in the Netherlands is flourishing, specially compared to a decade ago. So why is there still a mismatch? Where does it go wrong?
The first two requirements for a deal are a match between the personas and the investor’s sacred belief in the business idea. Our observation is that deals are often not closed, because the parties cannot agree on the deal terms. There is an endless discussion about the value of a startup, for instance. No good shareholders agreements are made, if made at all. Etc.
So how should they go about in determining the value of the startup?
They shouldn’t. Skip the value discussion. In it’s early days a startup is worth nothing. Agree on milestones. A deal could for instance be that at the outset the investor gets a small stake in the startup. He is however allowed to get a larger piece of the cake after the startup has reached a particular milestone.
But you can also apply for the reverse option: the investor gets a large part of the equity at beginning while the entrepreneur is allowed to buy a piece back at reaching the agreed upon milestone.
You said that shareholders agreements are not made. I am surprised.
Yes. I know about an investor who wanted to cash-in. He couldn’t, because the entrepreneur wanted to use the company’s profit to finance its growth. Prima facie you might think the entrepreneur is making the right decision. However, the size of his car increased as the company’s revenue grew while the investor didn’t get any ROI. No agreements were made upfront.
Remember that for an investor the fun-element of investing is very important. They don’t have to do it necessarily.
So make a term sheet in which you discusses issues like what’s the role of the investor going to be. When is he allowed to intervene? What happens if you fundamentally disagree on the strategic course the company should take after its startup period? And hire a very good lawyer, it’s worth every penny.
Why should entrepreneurs try to getting funding from a platform like Investormatch?
I don’t know about other platforms. But a good reason to consider Investormatch might be that by simply uploading your 8-page business plan you’re presenting your startup or business idea to 1300 investors.
What would your takeaway be for startups that are looking for seed capital?
Try to get the first €20.000 to €30.000 from your own network. This will give you the leverage you need to make the first steps. It will also allow you to learn a lot about your business and about attracting capital. This will enable you to demonstrate that you’re committed. But most importantly, you will as a result have a much better offer to make for the investor.