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Alexey Priyatkin. Conflicts between funders and investors

Thursday, June 17, 2021

There are often conflicts between people, and the conflicts that arise between founders and investors are no exception. In the next issue of the Angel Talks video podcast, authors and presenters Ivan Lomakin and Sergey Belyaev discuss the reasons for their occurrence, the search for compromises, as well as advisors, scouts, and venture prospects with Alexey Pryatkin, a partner of the Orbita Capital Partners Foundation, a member of the Board of Directors of several companies, who closed 10 deals in soft and hardware in 2 years.

Startup Jedi

We talk to startups and investors, you get the value.

How often do you have conflicts with portfolio companies?

It is still too early for us to come to conflicts, rather “problems” between investors. Disagreements can arise between anyone — including investors. But I also had to deal with the conflicts of the founders, which mostly begin in a situation where there is not enough money.

The causes of conflicts on the one hand are similar. But, as they say, everyone is equally happy, but everyone is unhappy in their way. Sometimes the funder starts to come up with something fantastic, and this sets up negative investors. Another reason is the lack of transparency of information when the funder believes that the investor is only getting in the way. This comes from the fact that the investor is only financial and is term-limited if it is a fund.

The angel has much less time: he wants to get the money in 2–3 years. The average standard fund has a term of up to 10 years. When 20 years is acceptable for the founder, he may want to “build the Universe, conquer the world” — many failures now for him will pay off with success in 15 years. But such terms do not suit the funds that now want to earn more in order to “pump up” the capitalization and make exit more expensive.

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Is the founder right to look at the long term, or is it more of a fantasy?

It happens in several ways: sometimes the product needs to be sold right now, because then there will be more serious technological competitors who have invested more money, or Facebook, Google, and Apple will do something similar at home.

The funder does not always take into account all the factors that investors take into account. All issues need to be resolved through negotiations. Here, the role of the funder is greater, since the investor initially clearly understands what he wants, prescribes the conditions and budget in advance.

Founders are freer, can think differently, change their point of view, which is extremely rare with investors. Listening from the side of the funder is much more important, because investors, thanks to pragmatism, see financial risks. Even if the goal of the founder now is not to earn money, but to make a super product, it is better not to give in to your feelings, but to share your opinion with the investor.

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Recall the vivid example of Jobs, who was fired from his own company. Were there any situations in your practice when the founder had to be dismissed?

In the life of funds, everything is more prosaic, since ordinary companies are much simpler than Apple, and the size is much smaller. Apple — this is how gravity affects the Earth: there is a wind that also affects something, will raise dust, and there is gravity that affects everything. I’d only ever seen the Founder fired once, but there had been a theft in the company, so a quick shift was required.

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Does the company need a person who will help the founder resolve conflicts?

The founder must understand that he cannot be competent at all stages: at the start, growth and development stages. He can be a good psychologist himself, understand how to communicate with investors, but it is always good when there is someone to consult. An arbitrator is always useful — because sometimes it is really not enough for someone to moderate a difficult situation.

Most of the stories happen when the founder and the investor still found a compromise, corrected something, and tried the investor’s ideas. In more complex situations, the founder admits that he can’t handle it. For example, in the restaurant business: it’s one thing to communicate with restaurateurs, investors, write software with a beautiful user-friendly interface, and another — to hire, fire and understand why couriers bring half-bitten burgers. This is an example of the transition from the cool stage to becoming a terrible routine. Not every founder will pull the role of such a CEO, here you need to hire professional people.

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And has it ever happened that the CEO was fired, and he was right?

There was a case when they took a cheaper deputy, and then regretted that decision “and asked him to come back.” It is necessary to clearly assess competence because by reducing salary costs, you can save two hundred thousand rubles, and lose two hundred million.

I saw an attractive case when selecting startups, where one of the investors immediately specified how much programmers are paid. The salary was lower than the market — and these is the specialists who make the key product. And if the main specialists are underpaid — they are either bad employees, or they will soon move to a project where the level of payment will be higher. The investor considered this a big risk and stopped considering the company, since the points related to motivation are very important.

When a company grows, lacks the skills, understanding of all operational processes, there comes a time when you need advisors. How is it developed in our country, is it good to have advisors and give them shares in the company?

After the product is invented, implemented technically, the founder often stops at the entire business development or some part of it — and here the advisors come to the rescue with their ideas.

It is essential to clearly measure what they will do. You do not need to rush to give them shares immediately, as the option pool will still be needed for a team that will become large in five years. It is more correct to make a percentage of sales or a small option in the company for a certain amount of work performed as a reward. And the same services can be obtained much cheaper if you develop a network, communicate more, ask for help and advice.

What is the difference between BizDev and advisors? There is a fine line here: the adviser advises on smaller and simpler issues-legal, where to find the right people.

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Who are the Scouts and their role?

Scouts work on behalf of the foundation, looking for attractive projects. The foundation turns to the scout when certain types of transactions are needed, projects that the representatives of the foundation themselves can not get. The Scout, in turn, must find a suitable project for the foundation.

Attracting scouts is relevant and useful if you need a startup in some narrow area, where there are not so many cases, or when you are interested in being present in a certain region. And here the issue of reputation and the selection of scouts is very important. The venture capital market is not so large, and you can always contact the representatives of the fund and request projects that Scout brought there. Community investors usually do not refuse each other’s advice, so for a scout, it is a big risk to behave dishonestly.

If you look at the statistics around the world, the money of the venture industry is more likely to be lost than earned. But, if you take the statistics from 1990 to 2005, then in most of the projects it was not even possible to return the amount of money raised. This is because at that time there was no such innovative drive. If earlier companies used only fax, now most of them have an employee who is responsible for integrating innovative solutions into the business. In our time, you need to change something every week, making your company or product more effective.

The Russian market is well known in the venture capital world, and many companies are interested in finding a good team and technology here. Our products are often better than foreign ones, the implementation and idea are not far behind foreign ones — the whole problem is in the structure of the economy.

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Prospects for venture development — in reducing the share of the public sector in the economy

The government today affects the economy by 60–70% — a very large public sector, complex decision-making and long negotiations. If we take similar startups in Europe and Russia, where the indicators are all the same, then the cost of evaluating a domestic project is much less. If we compare the Russian market and the foreign market, then at the moment the gap is enormous: we can say that the Russian venture market for the year is the Silicon Valley market for the day before lunch. But in 3–4 years, a different reality for the economy in Russia should come, and the funds will earn money.

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Tell us about the most exciting deal

Recently, the deal was closed with a company that develops batteries for phones and electric cars, which must be charged in 5 minutes. The startup team is the authors of the flash drives that we all use.

One more thing is artificial intelligence, which can quickly recognize CT and MRI images. It immediately highlights the problem areas, which reduces the search to a minute, when usually a medical employee takes 15–20 minutes to view a series of images.

Artificial intelligence allows you to speed up many things, which will greatly affect the economy. If people at the age of 75 are as active thanks to technology as they were at the age of 35, then their needs will be much higher: they will want to change phones, clothes, buy subscriptions to channels, and travel. Nothing affects the economy more than life extension.

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Prospects for the development of ecosystems on the SBER example

The idea of creating an ecosystem is correct, especially if you look at it from the financial side. In the past, there was a system of a synergy of enterprises, when they were combined, enlarged, and, as a result, reduced and saved costs. Now the equivalent of the purchase price and operating costs is CAC (Customer Acquisition Cost — the cost of attracting a customer to purchase a product / service, with which any company can estimate how much they spend on attracting each customer — Startup Jedi), and the main marketing expenses are directed to maintaining this metric.

And when there is an ecosystem, as in the case of Sber, the company knows its customers well (habits, marital status, expenses, insurance claims, where they live) and can efficiently target them through its channels. And in a situation where another company will not pull out advertising costs — the ecosystem business will flourish. For example, the giant Lukoil can not go down this path, because it does not know anything about its customers who fill up with them (even about what kind of car they have) — at a time when Sber knows where its customers buy coffee and what they are treated for.

Those who have information about the client will be able to integrate many services — not only to issue loans and arrange insurance but also to invite them to the clinic or to training. Those who own a large database, such as banks, mobile operators, will try to make ecosystem solutions. Ozon knows more about its customers than Google. A new profession may soon appear — an ecosystem marketer.

For fresh companies, there will also be a place in the market, but they will progressively move into niches. For example, there is English for children, and you can make chemical and physical experiments and send them by subscription or develop professional education in a narrow segment. When describing companies, you can draw an analogy with the underwater world, where there are not only some sharks, but also flocks of small fish.

The ideal product for investment is one that has been able to enter different markets. Let it be a cockroach protein, a chip, a space telescope — anything that’s legal. The main thing here is the qualitative growth of the project, that is when you do not have to spend two dollars for every dollar earned. It should be a really selling product or a product that will make everyone instantly happy.

17 Jun 2021

 

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