How do I invest in Mattermark


When a business needs capital to grow, there are two ways to get it: debt and equity. External financing allows the entrepreneur to remain the owner of the company by repaying the capital at some point plus interest. With equity financing, on the other hand, investors invest money in the company and receive company shares in return. In the latter case, the capital is paid back as a share of the profit (dividend) or - what is more common - after the company shares have been sold.

In rare cases, companies don't need capital as they generate the income they need to grow from day one. These are known as the bootstrap companies. Translated, my first start-up, falls into this category. In the world of tech, bootstrap companies are so rare that there is no point explaining them here.

The old economy was based on debt, while the new digital economy was based on equity. Most of the success stories of the past 30 years have been through: Apple, Microsoft, Oracle, eBay, Google, PayPal, YouTube, Facebook Equityfinancing instead of outside financing. More precisely, they were created through a special form of equity, so-called risk capital. In contrast to OTC company investments (to name an example), venture capital is more for bold and innovative companies.

The reason for this is simple: technology and innovation are changing the world faster and faster. The window of opportunity in which a new product can be released is getting smaller and smaller. In order to be successful, it has therefore become necessary to use the riskto increase the factor and to rely on initiatives that have not yet been validated by the market.

In this high-risk environment, borrowing is out of the question: banks would have to set prohibitively high interest rates and entrepreneurs would be forced to take less risks due to pressures to repay the capital. With venture capital, on the other hand, the investor accepts the possibility of losing everything and has the relatively small chance that the company will be a huge success. In a typical example, nine out of ten times an investor loses their money, while with the tenth company they get back 30 times their original investment. With an investor willing to lose all of their investment, the entrepreneur has the freedom to take those risks that can add significant value to a company.

Venture capital is not suitable for every entrepreneur. Over the years I've developed a very simple test to help you understand when to use it:

Would you rather own 100 percent of a $ 100 million company or 10 percent of a $ 1 billion company? Take a moment and think about it.

If the answer is 100 percent, then outside financing will make you happier. If you choose the 10 percent, venture capital is the right solution for your company.

The investment rounds are called Pre-Seed, Seed, Series A, Series B, Series C and so on until the company is listed on the stock exchange. The final phase, known as an initial public offering or IPO, is nothing more than a round of investments in a regulated market that is accessible to retail investors. ICO is a public offering based on cryptocurrency in a currently unregulated market.

Even if the companies and markets involved can be very different, the structure of the rounds is relatively standardized. In the pre-seed round, 10 percent of the company is sold for around 50,000 euros. In the seed round you collect 500,000 euros for 20 percent. In the Series A round, you raise $ 2 million for 20 percent, then $ 10 million for another 20 percent, and so on. In some places, such as California, the amounts and ratings received can be up to three times higher, while in other countries they can be up to half. However, according to the Crunchbase numbers for 2017, that is the general order of magnitude in Europe.

Drew Houston, the founder of Dropbox, owned 13 percent of the company in 2017 after raising $ 1 billion in 10 years. In 2017, Dropbox was valued at around 10 billion. Dropbox raised $ 15,000 in the pre-seed round at a valuation of about $ 300,000, then $ 1.2 million at about $ 10 million, then $ 6 million at about $ 28 Millions of dollars and so on to the billion ... The numbers are very similar for Airbnb, Facebook, and others.

If a lot of money is raised with a rating that is far too low, governance and motivation tend not to be secured in the long term. A founder who knows that at some point he will only own 2 percent of the company immediately thinks like a manager and not like an entrepreneur. The investor is not an entrepreneur, and without an entrepreneur the probability of success drops dramatically. Raising money with an excessively high valuation, on the other hand, increases expectations for the next round: it is difficult to persuade investors to accept a step backwards in valuation, and so you risk not raising any capital at all.

How do you decide how much a start-up value is?

The best companies in the world have received funding with similar ratings in comparable phases. Almost all startups turn to the market for funding with similar ratings (the typical rating for that round), but only the best succeed. The choice is more about who gets the money and who doesn't; and not about the rating itself. The most successful start-ups stand out because they master many rounds with increasing ratings - but not because their rating in each round was much higher than that of their competitors.

Many entrepreneurs make the mistake of measuring their success by the valuation or the capital they raise. They do this because these numbers are often the only ones available to the public. Raising capital is nothing but a necessary sacrifice designed to increase the likelihood of success. It is not a measure of success. In addition, the quality of a round should be measured against the investment conditions, but these are almost never published.

Why would someone put 100,000 in the pre-seed round and rate your idea at 1 million if you don't have a profitable business yet?

That won't happen either. Your idea will not even be rated with 1 million. A prospective score will be set based on how committed you are to advancing the project, and investors will ask you for one warranty ask that they will be the first to recover their investment. They will be convinced that your dedication is the key element to creating a valuable business, and they know that the guarantee will partially protect them in case something should go wrong.

Good investors tend to ask for a small number of shares in a start-up. You are aware that founders gradually lose motivation and control over the next few rounds. You therefore secure a small share and, on the contrary, ask for coverage.

Shareholder agreements are one way to balance this equation. They allow for low dilution and the necessary capital injection. The main clauses of such an agreement include liquidation preference, joint sale rights and bad leaver arrangements. The liquidation preference serves as a guarantee that the investor will get his capital back before the founders. In the example above, the investor would still get their capital (100,000) back even if the company were sold for less than 1 million. In the extreme - if the company is worthless - they lose everything. If the score is higher than the score for that round, everyone benefits in proportion to their share. A co-sale clause states that if the founder's shares are sold to a buyer, the investors are also entitled to sell proportionally and at the same price to the same buyer. For example, if you find a buyer who is interested in your 51 percent, you can't just sell and leave the investor by the wayside. The third clause, the so-called bad leaver rule, is an obligation of the founders. If the founder leaves the start-up within three years, he transfers the majority of his shares proportionally to the other shareholders.

No investor is like the other; therefore, it is a good idea to choose only the best of the best for an adventure that can last for many years or even decades. I therefore recommend that you see the investor as a wealthy co-founder and not as a bank. Here I present a simple test to identify a good investor: If he asks about several additional clauses to the ones I mentioned above, he is probably a bad investor. The reason for this is simple: when the investor needs more protection, they are aware of the fact that they tend not to make good investments. He therefore focuses on getting as much out of mediocre results as possible rather than focusing on success stories. There are also instances where an investor is so successful and sought after that the founders accept all sorts of terms in order to get them on board. Still, I don't know of any successful investors who aggressively enforce their terms - the opposite is more often the case. Success comes when you select and support the best entrepreneurs. I don't think it is possible for one investor to limit the success of others.

Other conditions such as veto rights, co-selling obligations, control of governing bodies, etc. are warning signs to look out for before accepting an investment.

Nevertheless, it is advisable (even if it would be otherwise possible) to include the three standard clauses, as otherwise unnecessary tension may arise during and after the investment. When I raised capital for Memopal, I negotiated an agreement with no liquidation preference and received capital with relatively high valuations. When it came to the sale, my co-founder and I were among the few people who made money with it. It has not been a pleasant experience to see some of the investors losing money to us, and it certainly does not benefit me if I want to raise money from the same investors in the future. I was able to compensate some people with my winnings, but in retrospect, in the midst of taxes and complicated balances that evolve over time, it was not easy to do things exactly the way you wanted them to.

In view of the average success rate of start-ups, a founder who receives a capital of 2 million with a valuation of 10 million, a 4-fold liquidation preference, veto rights and co-sale obligations does on average worse than a founder who receives capital with a valuation of 1 -5 million, a 1-fold liquidation preference and without veto rights and co-sales obligations. Only the best founders understand this and focus on the conditions.

To make raising capital quicker and easier, the SAFE (Simple Agreement for Future Equity) is widely used in California and elsewhere. This is debt that is converted into shares in the next round with certain discounts and a certain maximum rating. The SAFE also represents a standardized contract for investors and entrepreneurs, so that the use of lawyers is superfluous. The biggest advantage of SAFE is that it is asynchronous and high resolution; that is, you can negotiate and sign agreements directly with investors without having to write a contract that everyone has to sign, as is necessary in many countries, for example. SAFE works well when investor demand exceeds supply from start-ups. In these cases, investors want to secure a stake in the company as soon as possible - often at the expense of better conditions. The Y Combinator’s Demo Day has an example of this. The typical discount there is 20 percent with an upper valuation limit of 15 million. When you consider that 50 percent of startups won't do a Series A Round in the next two years, and their Series A round ratings are around 30 million, the 20 percent discount and rating cap doesn't compensate for the risk an early investment. In less competitive markets, the SAFE is therefore not always accepted by investors, as no major discounts, which would make it comparable to equity, are possible. I myself also wonder if it wouldn't be better to spend a few days looking for the ideal investor instead of using the SAFE to get the deal done quickly. The SAFE is very useful, but I would always make sure that it is acceptable to major investors before using it. I personally like to use it when I want to secure part of the capital and when all other investors prefer it. I avoid it when I have more time to talk to the founder.

Another important issue when raising capital is how much money to raise at each stage. As already mentioned, the process is not infinite and the market is quite structured. Two elements have to be balanced: on the one hand, raise as little as possible in order to minimize the dilution, and on the other hand not endanger the start-up. Startups fail for one reason: They are running out of money.

The best founders are charismatic leaders who not only lead their team but also investors. They become like this because they put their heart and soul into the interests of everyone at the table and feel the weight of this obligation on their shoulders. This passion, together with the knowledge of the detailed questions of financing, gives them a clear and attractive vision of the future that unites everyone.

1 4x means that the investor will get back 400% of his investment with priority.

2 Data from CB Insights - The Venture Capital Funnel, Mattermark and Crunchbase Pro.