How an investor chooses a project
The venture fund RSV Partners invests in projects at an early stage. Often there is an idea, but not even a prototype or beta version has been created yet. Essentially, we invest in the team, in the people who will work on the project. And first of all, when considering an application, we pay attention to the project participants.
A mandatory part of the application to the iDealMachine startup accelerator is a video with a presentation of the project. We don't care about the quality of the recording. We look at how future CEOs behave in front of the camera, how they speak, and how the project team communicates. From this much becomes clear.
On one recording, we were embarrassed that the project partners were behaving strangely; there was no sense of team spirit. After some time, they disagreed, and one of them left the project even before the investment proposal.
The investor needs guarantees that the project will actively develop, that the team’s eyes are burning, that they really want to make their project. Therefore, the selection of teams is very careful.
How and where to find investors
When searching for an investor, you should use all possible methods, not skipping those that seem unpromising. You can carry out the search on your own , or you can hire a specialist, which is certainly more expensive, but will save time. This video explains how to find an investor yourself:
When searching on your own, it is better to start with your close circle: relatives, friends, acquaintances, work colleagues. Even if they do not allocate funds for business development, they can recommend an interested private investor or company.
The next stage of your search should be to contact an investment fund or venture capital company. Such organizations do not hide their contacts and can be easily found on the Internet. The most popular in Russia include:
- "SBAR" (Russian Business Angels Community).
- Russian venture company.
- Non-profit organization “Fund for the Development of Internet Initiatives”.
- Russian Association of Venture Investment (RAVI).
- Group .
When applying to such funds, it is worth considering that it is easier for entrepreneurs opening production , Internet startups, as well as scientists involved in innovative developments to obtain the necessary financing.
Unfortunately, funds are rarely allocated to build a business in such areas as trade, tourism, cosmetics, credit and other types of services.
The easiest way to look for a business angel is at various specialized exhibitions, presentations, conferences - where investors come purposefully. The disadvantages of this method include:
- paid participation;
- time limit for communication with the investor;
- the need for a detailed study of each event and its guests, which requires significant time investment
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One of the effective, but expensive ways to attract the attention of potential investors is to place advertisements in popular specialized media , as well as on electronic platforms.
A service such as selecting a database of investors can be purchased from independent financial consultants. In addition, specialists can help you correctly draw up a presentation and business plan for the project, obtain licenses and patents, and draw up a legally accurate confidentiality agreement.
The advantage of contacting a specialist is that he selects sources of financing, knowing the areas and specifics of the projects in which each specific investor prefers to invest.
What if the startup idea is stolen?
Business is built on trust. If you don't trust an investor, it's better not to work with him. Nothing good will come from such a partnership. It happens that novice startupers are afraid to share the idea of their project. They are afraid because they believe that an investor will take their great and unique idea and implement it. But I will say that normal investors invest in teams that develop and turn their ideas into a product.
No investor wants to sit down and write software code. Even having hired a team, it is unlikely that he will be able to implement the idea of your project. Because only you know (and before contacting an investor, you worked out a business plan, technical implementation of the project, know-how) how everything can be implemented relatively quickly and efficiently. The investor has other tasks. And only the team that organized the idea is able to implement it.
In fact, a bare idea is worthless. You can generate tens or hundreds of ideas. But only the implementation of some of them really brings profit.
There was such a case, a man came to us and said:
- I have a super idea, it will bring a lot of money. But investment is needed.
- What kind of idea?
- I won’t tell you until you sign documents stating that you will not use it.
He's probably still looking for investment.
Sources of business financing
Where can you find resources and sources of funding? In the economic literature, there are 3 types of such sources:
- internal, for example, revenue from sales of goods;
- external, which in turn are divided into debt and gratuitous;
- complex, which can be obtained by contacting investors.
To obtain borrowed funds from a bank, you will definitely need clear figures and calculations , balance sheets, goods, materials or fixed assets, which can be the subject of collateral.
The advantage of turning to a private investor, the so-called business angel, is that you can get the funds you are looking for even when there is nothing left as collateral and you only have a promising idea and a team.
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What percentage should I give to the investor?
This question is, on the one hand, simple, but on the other, very complex. On the one hand, the smaller the percentage the founder gives, the more he will have left for himself. On the other hand, if the percentage is large, but from a failed company, then why is this necessary? Therefore, the founders need to take from the investor at the early stages the smallest amount of money they need - the valuation of the company at the early stage is low and, accordingly, the money is expensive. As the company develops and reaches certain milestones, the valuation will increase, the investor’s risks will fall, and it will be possible to raise more money by giving away a smaller share. At the same time, there is no need to be greedy; there is nothing worse than taking less money than necessary and not being able to achieve what was promised to the investor.
Sergey Fradkov , managing partner of the American venture fund RSV Partners
Photo in the announcement: Unsplash
How to properly formalize a deal with an investor?
To formalize relations with an investor, it is best to use the legal form of LLC (limited liability company). Individual entrepreneurs are avoided because of the risks, because according to the law, an individual entrepreneur is responsible for all his property, except for his only apartment. JSCs (joint stock companies) are not popular among startups - opening them is expensive, quite difficult and time-consuming.
In short, an investor can become a member of your LLC and contribute equity or lend money. Let's take a closer look at the mechanics of these paths.
1. The investor becomes a member of the LLC
This model is known in the business community as “investor entry.” Regardless of whether the investor will enter an existing LLC or create a new one, the procedure is essentially the same. The volume of investment is agreed upon, proportional to the nominal share in the authorized capital. The investor then pays the agreed amount, after which the share in the company is transferred to him, and changes to the constituent documents can begin.
Recently, the practice of concluding investment agreements between a startuper and an investor has become more frequent. The main points of the investment agreement: financing scheme, management structure (whether the investor has the right to interfere in operational management or not), the procedure for participants to withdraw from the project, methods of conflict resolution. On the one hand, the investment agreement establishes key agreements; on the other hand, it may contain very specific details (for example, you can determine the court in which the conflict will be heard if it arises).
Entry of an investor into an already existing startup LLC
In the case where the startup already operates as a registered legal entity, the investor sends a formal application to the general director for admission to the company and contribution to the authorized capital of the company. At the same time, even if you have an existing LLC, some investment funds may also require you to register another new LLC with their participation - this is normal.
The investor's statement states:
- the amount of money contributed or the composition of other property (the value of the non-monetary contribution is determined on the basis of the report of an independent appraiser);
- the planned period for making a contribution (counted from the moment the decision to accept a new participant is made by the general meeting of LLC participants and cannot exceed 6 months);
- the size of the expected share as a result of admission to the LLC participants (as a percentage or as a fraction);
- other conditions for making a contribution and joining the company that do not contradict the law and the company’s charter.
The decision of the general meeting of company participants to accept a new participant and increase the authorized capital through his contribution is made unanimously and must fully comply with the investor’s application. The fact that the decision was made and the composition of the participants present must be confirmed by notarization. At the time of making the decision, the current charter of the LLC should not contain prohibitions on increasing the authorized capital by accepting contributions from third parties or other similar restrictions. If your charter contains such a prohibition, you must first amend it.
The process ends with the investor paying for the share and registering the changes that have occurred with the tax office.
Creation of a new joint company with the participation of an investor
If your startup does not yet have a legal entity, creating a joint company with the participation of an investor looks like the most logical investment option.
The contribution of the entrepreneur himself, as a rule, will be intangible assets (rights to use the results of intellectual activity transferred under a license agreement), technological equipment or real estate. If you have any of this, then first have your property appraised by an independent appraiser.
The relationship between the co-founders of a new LLC should be described in as much detail as possible in the charter, including the rules for the distribution of votes at the general meeting of participants, the principles of participation of partners in the company’s profits, the procedure for participants’ withdrawal from the company and conflict resolution, as well as many other essential conditions. Few people remember the charter while things are going well, but inattention to detail and a formal approach can significantly complicate and shorten the life of your business, or even become a breeding ground for abuse by unscrupulous investors.
2.The investor does not become a member of the LLC
Not every entrepreneur is ready to share the management of their project. In this case, the solution may be debt financing from an investor who agrees not to interfere in the operating activities of the startup.
Providing investments in the form of a loan
The investor can provide an interest-bearing or interest-free loan - it all depends on your agreements. The amount is returned, as a rule, in a lump sum after a long period of time (2-3 years).
Securing investments depends on the risks of the project and the requirements of the investor. In practice, most often a pledge of intellectual property (for example, programs, inventions, know-how) and shares in an LLC is used as collateral for loan repayment.
To ensure that money is spent efficiently, the loan agreement may provide for the condition that the borrower use the funds received only for certain purposes (targeted loan). This condition also presupposes the investor’s control over the expenditure of funds. If the money is spent inappropriately, the investor may demand early repayment of the loan with interest. The forms of control and the repayment procedure are agreed upon in the loan agreement.
Combined investment scheme
Its essence is that the investor provides a loan for a share in the company in the future. This is a modern way of investing that takes into account the interests of the startup and the investor equally.
The flexibility of this scheme lies in the fact that the preliminary agreement for the purchase and sale of a share in the LLC is subject to execution only upon the onset of the so-called suspensive condition - usually after the startup reaches breakeven. The terms of the loan agreement will be similar to those discussed above.
Possible options for the investor to exit the startup - at the actual cost of the share or through repayment of the loan (interest on the loan) - are fixed in the charter when the contract is executed.
This scheme is similar to convertible notes, popular in Silicon Valley, through which a startup receives financing with the right of the investor to convert the debt into company shares in the future, taking into account a risk discount. In this case, the size of the investor’s shareholding will be proportional to the ratio of the amount of his loan to investments in the next round of investment.
The combined scheme takes into account Russian realities to a greater extent (for example, the peculiarities of an LLC, where there are shares, but no shares), however, it requires assessing the value of the company in a preliminary agreement long before the events occur.
What is important to remember when entering into a relationship with an investor?
Whether an investor insists on a particular form of investing or not, be careful when choosing it, especially if you are dealing with a non-professional investor who is investing occasionally or for the first time.
Remember that when there is a team of professional lawyers on the investor’s side who are experienced in formalizing relations with startups, they work in the interests of the investor. Therefore, at a minimum, you should play it safe and involve an independent legal expert who will check all documents to ensure that your interests are met.
We hope that this information will help you understand a complex and important issue. For our part, we will be happy to help if you decide that you need live consultation.
Investment FAQ for beginners
Tinkoff expert Kirill Komarov continues to answer our questions about investments. Use his tips! Perhaps they will help you start making money from investments.
What else, besides stocks, can you buy to make money?
Bonds, ETFs, a lot of things. But in general, stocks and bonds are enough for an ordinary investor to create a normal portfolio.
What is the minimum amount required to start investing? If I only have $50 in my pocket, is that okay?
This is normal, but not enough for investment. The average share price in the S&P500 index is about $130. To assemble a diversified portfolio, you need at least 20 securities. We get a portfolio of stocks worth about $2,600. If we add bonds in the standard proportion of 60/40 (60% shares), then taking into account the minimum lot it will be two bonds - we already get a portfolio close to $5,000. If you collect it from Russian papers, you can get by with a smaller amount. But 50 dollars is still not enough, even for a share of Lukoil. You can, of course, buy ETFs on the Moscow Exchange, but you will have to wait a very long time for mountains of gold.
How quickly will the first profit come?
It’s better not to wait for quick profits. In general, you should not consider investments as a source of income. They should be treated as savings. Quick profit is only in a mousetrap. Good and correct investments are long-term and boring. As George Soros said, “if investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring."
How much does a good investor earn on his investments per month?
A good investor does not get involved in stocks that are too dangerous and volatile; he diversifies his portfolio, holds part of his assets in bonds, reinvests coupons and dividends, and trades infrequently. Such a cold-blooded and long-term investor will be quite happy with a 10% return per year, and will celebrate everything above that with a bottle of champagne.
Don’t miss the results of the year in Lifehacker’s investment challenge and look for answers to questions about investments in the following materials. In the meantime, place your bets! Who will be left without money and without a beard?
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