Finding investment is a tough nut to crack for many startups. But it is much easier if you know how investors think and what they are looking for.
We spoke to Tatjana Zabasu Mikuž, Managing Partner at South Central Ventures, an early-stage VC fund mainly active in the Balkan region. Throughout the interview, Tatjana gave us an insight into how investors think. We also touched on the most common mistakes startups make when looking for investment.
Read this very interesting interview with Tatjana.
Where and how do you look for investment opportunities?
Active sourcing is one of our core activities. We do have a form on our website where we receive proposals, but I can say that the quality is not the best and I don’t think any of them have made it to the in-depth review stage. Other than that, a good source is recommendations from our existing portfolio companies, investors who cover the stages before us, so accelerators, business angels and so on. On the other hand, later-stage funds also refer teams to us that are not yet suitable for them. Our team is present throughout the region we cover, but we also try to build as wide a network of partners as possible, who are a valuable source of information for us and give us a good overview of what is going on. Of course, we also attend events like Podim and get to know the teams through mentoring and so on.
How long do you usually keep an eye on a startup before you decide to invest?
It varies a lot, but it’s always several months. If we know the team, or at least part of the team, for a longer period of time, the process from the first time we see a particular startup to the investment might be around 3 months, but it is almost always at least 6 months otherwise. We want to know how the team functions, how successful they are in achieving their goals, how they react to information from the market, etc. At the same time, we check on the customers, we get the opinion of experts in the field in which the company operates, and all of this takes time.
What do you look for in a startup when evaluating it for possible investment?
We look for ambitious teams with domain expertise who have a good understanding of the needs of their potential customers and can successfully meet those needs with their solutions. Of course, at the stages we invest in, many teams don’t have a fully defined market segment they’re most interested in, an optimal business model and a detailed roadmap to market entry, but they should at least have the beginnings and a plan for how they’re going to get there. To borrow from Moore’s “Crossing the Chasm”, we expect a startup to have early adopters and an idea of how to reach the ‘mainstream’ users. In addition, of course, we expect a sufficiently large market potential, a market that is growing, and something that we call an ‘unfair advantage’ or a ‘unique selling proposition’, and more. In short, something that makes a startup stand out from the crowd. Of course, as a VC investor, the differentiation aspect is also very important to us. When we invest, we need to have a rough idea of who might want to buy our stake (or even better, the whole company) in a few years. All this may sound rather clichéd, but that’s how it is.
What are the most common mistakes startups make when looking for an investment?
Many. One that we often see is a mismatch between the size of the investment and the stage of development the company is at. There may be fewer such cases at the moment, but there have been a number of cases in recent years where companies with virtually no revenues have sought multi-million dollar investments at valuations of a few tens of millions. Without some serious market validation, this is too much and too soon for us. On the other hand, there are also companies that give up too much equity at the seed stage for a small investment or raise a round that does not allow them to make enough progress in raising the next round. As an early-stage investor, you almost never think that your investment will be the last, so it is important that the company grows to a certain size/stage that allows it to approach new investors and new rounds. Very often, companies will also approach institutional investors when they are not yet ready to do so, either as an organization or in terms of their revenues and number of users or customers.
What advice can you give to startups looking for investment?
Think carefully about where you want to invest the capital you raise and where it needs to take you. I deliberately say “invest” rather than “spend”, because we investors want to see how we are going to get 2, 3, 10 euros for every euro we invest…. Think carefully about which type of investor is right for you – not all startups are necessarily VC-ready, in which case looking for investment can be a waste of time. Once you’ve identified this, make sure you have mutual contacts who can help you get in touch with potential investors, that you know your market well and that you can explain where the investment you’re looking for can take you.
How has and will the cooling of the VC industry affect your business? From a VC fund point of view and from a startup point of view.
First of all, I think it’s helpful to be more grounded. In previous years, valuations reached heights that were not justified by any economic logic, and there was too much confidence that there would be other “optimists” who would invest in the company at an even higher valuation, expecting the company to be a unicorn or a decacorn. It is true that both the number of investments and the amounts have been reduced, but there is much more focus on efficiency and the path to profitability. This is all part of the positive side of the changes. On the other hand, expectations have decreased, fund investors are more cautious and more inclined to less risky investments such as VC. As a result, it is and will be more difficult to raise new funds, i.e. there will be less capital available to invest in startups. However, I believe that even under these circumstances, good companies will be able to raise investment; there is plenty of capital for the really good ones.
What kind of startups are you looking for at Podim?
The ones that have what I mentioned earlier. While we expect to see more companies that aren’t yet ready for VC investment, it’s definitely good to meet new startups. At least some of them are definitely going to get to a stage where they are going to be an interesting partner for us to talk to. And we for them, of course.
Do you have a message for the participants of the Podim conference?
Make the most of what Podim has to offer. I think the organizers are really trying to put together an interesting program and attract speakers who have a lot to offer, both to the startups and to the other participants.