In the last 8 years, I have been deeply involved in numerous startup-investor negotiations and worn different hats: the entrepreneur’s as I was raising capital for my two ventures, the investor’s as I was making investment decisions, and financial advisor’s as I was representing my startup clients at the negotiating table. At Very Good Advisors (VGA), the firm I co-founded with Konstantin Besfamylnyi, we interact with business angels, VC funds, family offices daily to support startup founders in raising capital.
In order to help aspiring and established entrepreneurs land funding from angel investors, I’ve put together a series of blog posts to share actionable insights from my experience.
In this first column, I will discuss:
- When may an angel capital come in handy?
- Angel investors in Ukraine. Who are they?
- Five profiles of Ukrainian business angels.
- How to reach angel investors in Ukraine?
In the follow on post, I will cover:
- What attributes angel investors are looking for in your startup?
- What are angels’ expectations of your pitch deck?
- How to prepare for a meeting and deliver your presentation?
- How to negotiate a startup valuation?
- What are the financing instruments commonplace amongst the Ukrainian angels?
- Other practical considerations in planning interactions with angels.
When working on the columns, I wrote to a 2012 edition of myself contemplating what I wish I knew when I started my fundraising journey years back. To add the investors’ insights to my introspection, I’ve interviewed two experienced business angels – Michael Puzrakov and Murat Abdrakhmanov. They kindly agreed to share practical tips for getting financial backing from business angels. Michael is a Ukrainian tech entrepreneur and a co-founder of Intellias – a leading IT Ukrainian outsourcing company (#10 in DOU Top 50 list) and a founding member and President of Lviv Tech Angels.
Murat is a serial Kazakh entrepreneur and active “super-angel” who invested in the top Ukrainian startups like Skyworker, 3DLook, Dmarket, among others.
► When may an angel capital come in handy?
Many founders see investors as a (un)necessary evil and prefer to grow their companies by bootstrapping. This is a good strategy, but an influx of non-VC capital may nonetheless come handy when:
- The economic downturn hit and startups need to build up cash reserves to overcome the gravity of a situation;
- The cycle of product development is longer than expected, and reserves are not enough;
- VC funding slows;
- Founders want to move faster by making bold moves like hiring the best talent or ramping up investments in sales, marketing, or online distribution to take advantage of the new emerging trends, etc.
► Angel investors in Ukraine. Who are they?
Angel investing is still a new phenomenon in Ukraine, and very few business angels have made successful exits to demonstrate their peers that startups deserve their share of asset allocation. Many angels continue to view venture investing as a mark of status and an opportunity to “buy” an association with the tech community. However, with the rapid growth of the local startup ecosystem, Ukrainian angels build expertise and acquire investment experience.
Speaking of the ticket size, a vast majority of Ukrainian angels invest between $10 thousand and $200 thousand with an average check of $50 thousand and growing. Super-angels like Murat are more the exception than the rule and write higher checks – between $150 thousand and $1,5 million. “I invest in seed, round A, and round B startups, but my sweet spot remains later stage companies with strong traction, experienced teams, and proven business models. That’s why I write higher – “super angel checks” said Murat Abdrakhmanov.
Many startup founders grumble that angel capital in Ukraine is scarce and chose to seek funding outside. Though it remains true that Ukraine is by far an investors’ market (investors are still in a position of relative power due to supply-demand imbalance), there are hundreds of prominent angel investors who are looking to deploy capital into the next Ukrainian unicorn. When speaking about Ukrainian startups, Michael Puzrakov notes: “The overall impression is that there are still not that many startups in the country and especially there are too few outstanding startups that capture my attention. But the number is growing every year.“
► Five profiles of Ukrainian business angels.
I’ve divided the local investor base into 5 groups of individuals similar in their investing patterns. Each of these profiles has its distinctions, as outlined below.
- FFF (Family, Friends, and Fools): 3F refers to the first tier of investors and perhaps the most common level of raising seed funds for entrepreneurs’ startups. While your friends and family may not understand the investment space and broader startup industry, these are the only people likely to believe in you and your idea. Besides, it is almost always quicker and easier to get backing from someone you know well and trust.
- Tech entrepreneurs and executives: this is a distinct group of individuals who have years of entrepreneurial experience. “Techies” have developed business acumen; they live and breathe technology and can become a great source of “smart money” and valuable partners for founders. Many of these angels tend to look specifically at the verticals, in which they have practical knowledge so they could be involved and share the experience. As anyone busy with their day job, they may be slow but sure in handling the investment process.
- Entrepreneurs from traditional industries: being relatively new to tech and startups such angels typically enter a deal with their own set of expectations regarding business control, valuation, level of involvement, etc. Founders should be aware of the knowledge and experience gap, carefully consider the pros and cons of dealing with a “traditionalist,” and reach agreements on the key terms and conditions of such cooperation early on. Even though “traditionalists” have been through thick and thin Ukrainian business and may carry that business mentality in the boardroom, they may still be good partners in getting your venture off the ground. For that to happen, startupers should preserve a healthy cap table after closing the round with “traditionalists” and be prepared to fill the knowledge and experience gap on things like startup valuation, future fundraising cycles, startup dynamics, etc.
- High Net Worth Individuals: A high-net-worth individual (HNWI) is somebody with $1 million in liquid financial assets. Such angels come from various walks of life and may or may not have business or investment backgrounds. The trend of direct investment in startups by HNWI is growing as the returns generated by other asset classes, including real estate, are declining. The good thing is that if an HNWI finds value in your product, the chances are that the decision will be quick (and frequently emotion-driven). Valuation may not be that important – we see HNWI investing at relatively high valuations. On the flip side, the lack of investment experience may lead to unpredictable and sometimes irrational behavior of this type of investors following the round closure. Having said that, I know of many cases when founders and HNWI completed great projects together and were quite happy with their “alliance.”
- Career investors: Career or professional investors include investment bankers, private equity principals, traders and portfolio managers, M&A professionals, and executives of major financial institutions. “Pros” know the nuts and bolts of the investment process and may be savvy in early-stage investing too. They are quite efficient in vetting startups, tend to make quick decisions, and are quite helpful in dealing with structuring and sorting out other issues along the way. Due to the sheer size of their business network, career investors can be very helpful making connections/ introductions during your follow up rounds, leveraging synergetic investments to add value to your offering, or planning an exit strategy
- Angel syndicates: A syndicate is a group of angels formed to aggregate checks from individual investors into Special Purpose Vehicle (SPV) – a legal entity created for executing a single investment into a startup. Syndicates make the lives of founders easier by taking away the burden of finding individual angels and structuring a deal. The downside of working with angel syndicates is that they usually take a commission and carry (percentage on the return) from each contributing investor, thus not every angel is willing to engage because of the fees they charge. Nonetheless, syndicates present an excellent opportunity for funders to take a single large check rather than lots of little ones from individual backers.
► How to reach business angels in Ukraine?
A lot of networking can make a difference. Do your research, talk to friends/ colleagues, attend startup events, connect via Linkedin but brush up your Linkedin profile in advance. Building a network of investors takes time and focused effort, so be prepared to do so well before you need funding. On that token, Michael Puzrakov adds: “Typically, startups are referred to me through my network, including other angels, VCs, investment bankers, and startup founders. Since the launch of Lviv Tech Angels investors’ club, more startups are applying through it.“
Here are some suggestions:
- A warm introduction to an angel from a shared contact work much better than cold outreach. However, cold contacts, if appropriately arranged, are also an effective tool despite some popular stereotypes. For example, I found my first investor by starting a conversation with an absolute stranger who was taking a breath of fresh air outside the conference hall.
- Research and review recent deals and find their backers. Most of the investors can be reached via Linkedin; others have websites with contact details.
- Approach different associations and groups of investors like Lviv Tech Angels, AngelSyndicate, etc. Web-resources such as AngelList and Crunchbase can be quite valuable for researching angels in Ukraine and elsewhere.
- Reach out to angels abroad. For example, Polish, Lithuanian, Estonian, and other Central European angles are actively looking at Ukrainian deals. One of the Polish angels noted to me that ~ 25% of his incoming pitches come from Ukraine.
That was part 1 of two 2, hope you found the read useful. Please stay tuned, to be continued…
Prepared with love for the Ukrainian tech community.
Vladimir Pyrozhenko, Founding Partner at Very Good Advisors (VGA)