‘I see a dysfunctional market between startups who need money and people who’d like to invest but cannot connect to startups in the right way.’
Angel investors, just like their heavenly brothers, guide startup’s path in business. They’ve been entrepreneurs themselves, some still are, and have exited companies successfully. They have advice to share and some money to spend. They are ready to take a chance and invest in your startup at a very, very early stage.
But they, too, are occasionally lost in the big and complex world of early-stage startup valuation and need a little help.
I had a chat with one of these people helping both angel investors and startups connect and set up deals easily. Merien ten Houten, who has played on both sides of the table and is now in the midst of his next venture, Leapfunder, has plenty to share with you.
Leapfunder is an alumni of Startupbootcamp Amsterdam’s 2014 program
‘I entered the startup world as an entrepreneur back in the 90s. I faced the difficulties of raising money the hard way, and I also had the luxury of getting money the easy way. Those were flattering times when people would call to ask ‘Do you need money?’
However, as soon as the internet bubble burst, those good times were over. After Google’s success, it became once more easy to get funded. And today, finding investors, convincing them, and closing a deal is, frankly, hard. You can’t just automate this away.
Sophia: Why did you choose your current venture?
‘I’ve been both an entrepreneur and an investor, and I’ve seen the problems Tienko and I are trying to solve from both sides. These are very real problems: good startups can’t get the money they need because, say, the market is not functioning very well. And people who want to invest in startups don’t always know how, where and when to do that. We are very aware of that.’
The Startup Situation
A regular early-stage startup’s profile looks like this: 3 smart people with a great idea, some code or prototype, and no idea how to validate what they have. The number varies between something like 100K and 1M with the tendency of startups pulling towards the million and investors – towards the hundreds.
This is a huge problem, especially when it comes to early-stage startups. Having no track record makes it difficult to convince investors your company value belongs in the higher range of investment.’
‘What you see now is that there is an equity gap between spending your own money and spending VC money. Usually, a startup would like to find an angel investor for that period who takes a high risk only to gain a potentially high reward.
The thing is that not every country enjoys a good number of big, professional angel investors. On this occasion, a startup resorts to bundling a couple of investors and this is hard to do. One needs to get them on the same page regarding terms and conditions, management, etc.’
The Angel Situation
For an angel investor it can be quite hard to decide on a startup. Conversely, big VCs have all it needs to do that. Additionally, they know the contracting inside-out, and have the fiscal knowledge to do it the right way.
Angels, on the other hand, are on their own or in small bunches and are not always equipped with the right financial instruments to prepare the documentation for a deal.
Actually, there is no need to evaluate the company at that early stage and this is why we at Leapfunder have developed the right solution for many of them – our own convertible note.
Convertible Note to the Rescue
‘A convertible note solves the painful discussion over and most inconsistencies of the early-stage valuation. It is basically a debt – the money lent to you by investors is later on converted into shares. By postponing the evaluation, a big part of the discussion is taken out.
What Leapfunder does is manage the whole process of raising that money. We have a very sophisticated way of combining investors.
Tienko, Merien, Matthias,Jan-Jaap
What we’ve managed to do is handle this issue, we’ve developed a standardized contract which makes it easy to attract up to 20 investors for a round of say, 200 000 euros, and not worry further. It’s all digitalized, so the investment takes place online and the startup is supported by us through the whole process.
Standardizing this part can be pretty helpful for investors. It makes a deal more appealing during the critical phase of negotiation. Smoothing the deal process and shortening the time needed for it will eventually lead to more capital running free on the market. After all, the startups of today will be the companies building such campuses [as High Tech Campus Eindhoven] tomorrow.
On the Personal ‘Why’s
Sophia: How does it feel to be an investor?
‘Straightforward investing is not my thing, I’ve discovered. I’m too much hands-on and I want too much involvement to be just an investor. Being an entrepreneur fits me like a glove; it’s exciting. I can’t imagine why people choose to work for a ‘boss’.
Ok, startup life makes it difficult to focus on one thing, since there’s all the administration, tax and many more you need to take care of on your own. On the other hand, you can really make a difference. We’re not just a small shackle of a huge machine, we can control our own destiny.’
Sophia: So how did it feel to exit your first companies?
‘In the beginning – hard. With time I learned a lot about myself and most of all that I am good at building, innovating, and not so much at managing. I wouldn’t like to manage a big company. So, once a company is up and running, it’s time for me to move on.’
Sophia: Is it as easy to start a new company as it is to leave it?
‘There always are more ideas than time to execute them. Ideas are not so hard to come up with. I think there are enough ideas but there are not enough good entrepreneurs. Getting from idea to company is hard and it takes a special type of people to do that.’
Sophia: What more does it take?
‘Really executing… and daring, and saying ‘This product is not there yet’. Having the dream and the motivation to get it there, bring it on the market, solving all the problems you encounter on the way. Face the fact that you will not have all the knowledge to build your product, but you can and will find a way – this the the particular feature an entrepreneur bears.
I’ve failed startups and in retrospective I now know why. From my last startups, which failed spectacularly, I’ve learned that being too dependent on a small number of parties who have the power to block you in the market will kill you.
I think here in the Netherlands we are a bit too critical of our failures. We see them as wrong while in the US they take them as experience. I guess you cannot innovate unless you take the risk to fail. If you do something to which you know the outcome in advance, if you walk the beaten path, that’s no innovation.’
Crowdsourcing, VC, Angels, Loans, Grants or…?
‘A startups should first consider the specific type of product they are developing, the market they are targeting and, sure thing, look at all the possible sources of capital.
An important aspect I would like to stress is the speed needed. If you are in a market that is changing fast, you cannot always afford to bootstrap. Bootstrapping will for one cover your costs only partially, and two – might not work as charm for your startup. To accelerate, you often need a serious amount of money.
Angel investing is another possibility of course, but is also not fit for everyone. What angel investors offer, however, is a lot of advice and expertise. Having a few angels on board adds more value to leverage your company beyond the money.’
Merien ten Houten is Chief Information Officer at Leapfunder and co-founder of ilse.nl and nu.nl, the latter being the best known news site in the Netherlands. After its acquisition by VNU (currently Sanoma) he stayed on as board member for some time. Merien has been active with various new media projects, such video hosting platform Bits on the Run, now part of JWPlayer.com, online magazine Sync.nl and television platform Iphion. As an Eindhoven habitant, Merien is an established pillar of the Eindhoven startup scene.