Central Europe Accelerator

StartupYard 2016 Applications Are Now Open! Mobile, Data, IoT

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StartupYard is happy to announce that applications are now open for StartupYard 2016. This will be StartupYard’s 6th overall cohort of startups, and Managing Director Cedric Maloux’s third.

Sorry! Applications are now closed

Applications Close November 1st, 2015

Applications will be open until November 1st, 2015, and as was the case last year, StartupYard will share an application pool with our CEED Tech partners. For startups, this means that all teams who apply to StartupYard will have the opportunity to list any of the CEED Tech accelerators as a “second choice,” and these accelerators will have the opportunity to evaluate those teams when and if StartupYard decides not to invite them to our program.

Acceleration Starts January 2016

Startupyard 2016

The application review process will proceed through November and December, with our selections being made by the new year. Selection will proceed from written applications, to intermediate steps which will be announced to the pool of applicants directly. At the end of the process, we will invite between 15 and 25 finalists to visit StartupYard, where we will make our final selections.

We have decided to make some changes in the way we conduct our selection process, in order to give a fairer and more complete opportunity to every startup that chooses to apply. These changes mostly apply to the middle of that process, where differentiating between startups that are ready for acceleration, and those that aren’t, is the most challenging. We’ll talk more about that in a future post.

As with the previous cohort, we will aim to select between 7 and 10 teams to invite to the program.

For some perspective on the final selections (and how difficult they can be), for the 5th cohort, we invited about 15 teams to final interviews out of a pool of about 240, from which we invited 9 to join the program. In the end, the cohort included 7 teams, of which one was subsequently fired, leaving 6.

It is an accomplishment to be selected for final interviews (less than 10% of companies are), and we do hope to see those who we selected last year applying again this year, if they are still interested.

€550,000 In Available Funding

startupyard 2016

Terms between each of the 5 CEED accelerators are similar, with €30,000 of seed funding available for each of up to 10 teams, per accelerator. For participation in the accelerator program, StartupYard takes a 10% equity stake in each of its portfolio companies.

As part of our program, StartupYard provides office space at our homebase Node5 for the full three months, meals for the first month of the program, dozens of invaluable, exclusive workshops from industry experts, including representatives of Google, Seznam and others, and more than 500,000 Euros in program perks, provided by corporate partners and sponsors like IBM, Microsoft, Mazars, SendGrid, Google, Softlayer, and many others.

In addition to the €30,000 available as part of a European Commission grant program called Fi-Ware, an additional €250,000 in follow-on grants (given free of any equity exchange) will also be available following the 2016 program.

These follow-on grants are given through the EC at the recommendation of StartupYard, and can be awarded in varying amounts, usually tied to the startups also gaining outside investments.

Data, Mobile, and IoT, Global Products, Platforms

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As in previous cohorts, StartupYard’s continuing focus will be on companies that leverage data and mobile technologies for products with global applications. We are seeking teams that have a proof of concept, and ideally are already working with a few customers, and looking to scale globally.

What does global mean? In general, it means that StartupYard accepts teams that are working on ideas which can be marketable and disruptive regardless of their geographic location. Language independent, and globally scalable products are our “bread and butter,” and a look at our most recent cohort gives an idea of the sorts of products that we might be interested in.

As you can tell from browsing our portfolio, StartupYard particularly favors companies that are developing unique and valuable platforms that leverage big data and are attractive to mobile users and enterprises.

Some of our biggest successes, including BrandEmbassy, Gjirafa, Travelatus, Shoptsie, Trendlucid, and BudgetBakers, among others, whose technologies now together serve millions of users worldwide, are SaaS platforms that leverage big data sources to provide value to businesses, as well as end users.

At the same time, StartupYard is not afraid of entirely new ideas, and we have considered and accepted startups in the past that are in an earlier stage of development, even without a working proof of concept.

If your team is hard working and passionate enough about your ideas, there is no absolute minimum requirement, either in your level of experience, or in your progress on the project you want to pursue. We invest in people, even more than we do in their ideas. So if you believe in yourself and your ability to follow your passion, then you should definitely apply for StartupYard.

IoT: Big Data Gets Physical

Finally, this year, StartupYard will also be welcoming teams with products in the realm of Internet of Things (IoT). While we are not a device accelerator, and so will not be focusing on design and development of physical hardware, we will consider teams with fresh and interesting ideas about leveraging IoT data and devices to make life better for users, or to help enterprises find new efficiencies.

Conservative estimates, including those of Gartner, suggest that the Internet of Things will encompass at least 26 Billion connected devices by the year 2020. Higher estimates reach up to 10 times that amount.

Clearly then, with an order of magnitude more devices connected to the internet than people in the next decade, there will be an increasing need for platforms and applications which are able to manage, control, analyze and utilize these networks of devices for a universe of new purposes. StartupYard is interested in your take on the future of IoT, and so we will be considering applications from this field with increasing interest this year.

B2B, B2C, B2B2C, Human-Centered

At the same time, StartupYard is most interested in projects that are “human-centered.” Instead of abstract or academic exercises employing IoT, or big data, we prefer projects that speak directly to the human experience, and to human behavior. How can we make people’s daily lives better– either in the way we work or live, or in the way we accomplish the simplest or most complex private tasks?

We have no preference regarding the market for these ideas, whether it is a B2B or B2C idea, as long as that market is a global one.

With one exception: We are not particularly interested in startups whose primary business model is advertising. Startups are much more likely to interest us if they have a transaction-based business model in mind.

Is your startup reliant on the local market, or is it globally scalable? Is it advertising based, or transaction based? Is it just a cool feature, or does it solve a real problem?

These are the questions that any applicant to StartupYard should ask themselves about their product ideas, because they are certainly the first questions we will ask about them ourselves.

Sorry! Applications are now closed

TeskaLabs Co-Founder CEO Ales Teska On TechStars and StartupYard; London Vs. Prague

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I spoke this week with Ales Teska, Co-Founder and CEO of TeskaLabs, We talked about TeskaLabs’ acceptance to TechStars London, their move to the UK, and their recent successful fundraising. Here’s what Ales had to say:

Ales, it’s been a big summer for you and your team at TeskaLabs. What have you been doing since leaving the StartupYard program?

Well, we were selected for Techstars London immediately following StartupYard, so we’ve been quite busy. We’ve opened a new office in Prague, where our development operations are located, and we’ve moved to London for the Techstars accelerator program. We plan to maintain our sales operation here [in London]. We have also finalized negotiations with a few existing clients, helping us survive this move to London.

But despite all this, I still managed to take a few days off this summer, which is very exciting!

The TeskaLabs team in the UK.

The TeskaLabs team in the UK.

The move to London was a lot of work in itself. Finding accommodation here is not easy, especially if you are working with a startup budget. We had to go back to our student years a bit, but that’s the price you pay, and we are all focused on the future.

We managed to rent a few rooms in a house in East Ham, near a tube station, so I am quite satisfied with the results.

Can you give us your impression of the TechStars London Program. How did it differ from your experience at StartupYard?

At first glance, there are a lot of similarities. The model is generally the same: a 3 month program, in 3 sections. We start with mentoring and networking in the first month, then the “build phase,” which involves a lot of workshops and practical knowledge, and finally a month or so of preparation for the Demo Day. That will be sometime in October.

But the similarities really ended there. The programs are quite different, but they complement each other perfectly, at least in our case. We’ve discussed the differences quite a bit in our team, and I must say it was surprising how different the programs really are.

The TeskaLabs team with other startupers from TechStars London.

The TeskaLabs team with other startupers from TechStars London.

First, I have to emphasize that StartupYard is a world class program- and that’s as honest an appraisal as I can give. StartupYard gives you access to knowledge and people like yourself and Cedric, who can share a great depth of experience when you need it.

Techstars, on the other hand, throws you into the deep water and makes you swim. They just make sure you’re swimming well enough and fast enough. You do a lot more things on your own.  Here too, mentoring has been faster and more intense. Whereas 3-4 meetings with mentors a day in Prague felt fairly intense, here we had 6 or 7 in a half-day. That’s very tough, mentally and physically.

But it hasn’t been all grind. Techstars also treated us to a resort weekend in the mountains with hiking and relaxation.

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Ales Teska on the TechStars retreat hike.

That said, again I found that to be a lucky and nice combination for TeskaLabs. StartupYard has a “softer” environment, where things are a bit more personal and you get more individual help. We needed that at the beginning. Techstars is harsher, which suits the business environment here. That’s a transition we needed to make, but I don’t think we could have gotten here without going through StartupYard first. A lot of the skills we are using here, we learned at StartupYard.

How would you describe your experience so far with running TeskaLabs in London? What are some of the striking differences between doing business there instead of in Prague?

I have a nice example from yesterday that highlights the differences. We launched a campaign targeting nationwide transportation and logistics companies recently, and we have already had a meeting with a large international logistics outfit. The very first meeting was concerning a fairly massive project.

Anyway, in Prague, I think it’s fair to say that this first meeting would have involved some skepticism, and action would have been much slower, or possibly non-existent. But this company said to us right away: “we are not afraid of startups. We know they’re a necessary part of the economy.” That’s a striking difference with companies in the Czech Republic.

There, you have pretty high barriers when it comes to cooperating with large companies. To them, startups equal small companies, and not “startups,” which can become big and influential, or which may have novel new processes and ideas that can revolutionize a project. So in Prague, we relied on personal connections and our reputations to get us deals. There was no other way that clients would listen to us or take us too seriously.

But in London, we have been able to establish real relationships with big clients, even through cold-calling. That’s something I can’t imagine happening in Prague, frankly. And because of that, and I know it sounds crazy, but we’ve been converting 100% of our initial meetings so far. There is very little wasted time, no excuses, and more appetite for cooperation and experimentation here. There’s no fear that a startup won’t be able to deliver or will be unreliable- these big companies are willing to accept those risks.

Will you maintain operations in the Czech Republic?

We will absolutely stay in Prague, especially as concerns our R & D operations. We also have important clients there, and hope to have more in the future.

Our sales operation will shift to London for now, and we plan to expand to Germany, Switzerland, and Italy in the near future (possibly as early as the start of next year). In London, it’s been very easy to increase our sales pipeline, even with only one dedicated sales person.

My sense is that we will be concentrating on this market until the end of this year, and opening a seed investment round in at about the same time. By then, we will have validated our model and ability to market our products.

Let’s talk about investment. You’ve raised nearly 350,000 Euros. How did you put together that round so quickly?

There were a few contributing factors. First, mobile security as a market is very hot at the moment, both with clients and investors. There’s an awareness among clients that they are not secure enough, and need to offer more robust solutions to their own users and clients.

From the investor side, there is an awareness of that need that is growing. When you can deliver a product that really works, it’s easy to sell right now.

Our team is another factor, and I think that’s very important. We started as more than just a technical operation. Sales and Marketing have been baked into our team since the beginning, and that has shown investors, as well as clients, that this is not a purely technical operation, and that we are capable of handling business concerns as well as technology needs. You have to be able to do both. We’ve consistently heard from investors: “your team is amazing!”

We were also able to demonstrate quickly that there is a global market for our products, and that we have the aspiration to fulfill that need, and the necessary ambition to get there. We’ve communicated well, and clearly, thanks in no small part to StartupYard, who have been super supportive, and have contributed far more than we expected at the beginning- and we had high expectations I must say.

Credo Ventures, another investor, was considered very early on, partly because of their involvement with Cognitive Security (another security startup), and their relationship with StartupYard, obviously. We liked their team quite a bit, and we chased them from the beginning, making sure they saw that we understood how they could help us and contribute. I’m happy to have them as investors.

Techstars is also huge. We didn’t join because of money, but that came as part of the deal. It’s a validation for people who are looking to invest in us, that we are serious about going global, and using their network has been amazing. You just ask, and you get intros and contacts that are great. They’re very experienced and skilled in dealing with investors and startup challenges in terms of fundraising and hiring.

Are you looking to raise additional capital immediately?

This is a question for us right now. The plan is to open a seed round by the end of the year. We will be asking for 1-2 Million Euros. This will go, as I said, to expanding our success from the UK market to other European markets.

We are well funded for our plans in the UK, including for hiring sales people, but the seed fund will be about expanding on those operations abroad that I mentioned. If anyone reading this is a sales superstar in Europe, then please get in contact. We’re looking for the right people.

Have you faced serious challenges with hiring so far?

Well, I’m not calling it a challenge, but it’s difficult to hire people for startups by default. Particularly the caliber of talent we are looking for.

The Czech talentpool is not as ready for Startup offers as in the UK. We offer stock options for new employees, and people are not as familiar with the value in that, and they look for more traditional compensation. A monthly salary and benefits that we can’t necessarily offer right away.

We also offer participation in our success, which makes negotiations more difficult, but we have still attracted some great talent. When running a startup, a huge amount of your time is taken up seeking talent, so that has become a much bigger part of my role.

We aren’t hiring technical people in the UK, and we’re seeking a very specific profile, which takes time. The type of person we are looking for isn’t necessarily available (they are already employed) and that makes the process slower. But I think thanks to the attractiveness of our products and segment, we have had some initial talks, and it seems to be going well.

What is the state of your product offering to date? What are you currently selling, and what do you plan to provide in the near future?

Our flagship product is the mobile secure gateway, which we call SeaCat. The pricing structure has changed from a license based approach to a subscription model, which shifted us into a much more modern sales approach. I’m happy with the changes we’ve made. It makes us more flexible and more able to sell in different segments.

When you sell licenses, you lock yourself into B2B business, particularly enterprise sales. But with a multi-tier subscription model, you can talk to smaller companies, and find something to offer them as well. This allows us to scale much more smoothly from small to big business.

And from a partner perspective, the subscription model makes a lot more sense. Partners are able to secure recurring streams of revenue by selling our products along with theirs. When a mobile dev house develops something, that comes with a one-time fee. But if they can resell our solution, which is constantly updated and trouble-free for the end-client, the partner can see a monthly revenue stream, and deliver a much better and more secure product at the same time.

It’s a win for everyone, including end clients who don’t need to worry about constantly redeveloping their products to meet new security challenges.

I also have a fairly big announcement, and this is the first place I’m sharing it. We have agreed with Rackspace, Amazon, Microsoft, and Google, that we will cooperate on installing our mobile secure gateway to every data center in their cloud platforms.

This means that there will soon be 60 of our gateways across the globe, available to customers operating their backends on these cloud platforms. A huge win for us. We will cooperate on marketing this solution with the cloud providers. In addition, these providers have given us over 500K USD in services for building this solution into their services. The cost of the infrastructure is free for us.

We will be the only mobile secure gateway available on these platforms, and it will launch within the next few months. That’s a major step for us in bringing TeskaLabs’ solutions to a broad global userbase.

Announcing StartupYard FastLane Prague: September 2nd at Node5

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As we announced recently, StartupYard is hosting a series of Fastlane events, giving startups in 7 European cities the opportunity to pitch directly to StartupYard, and advance to our final rounds of selection for StartupYard 2016, kicking off in January.

StartupYard FastLane Prague: September 2nd

Our event in Prague will take place on Wednesday, September 2nd at 6pm, at our homebase, Node5.

Time: 18:00-20:00

Place: Radlicka 50/180, Prague 5

Anyone interested in learning about the StartupYard accelerator program is welcome to attend. We have guest speakers from startups who have attended in the past, and we look forward to being able to answer questions about StartupYard, our partners, and our program.

How to Pitch StartupYard

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If you’re interested in pitching your startup to StartupYard, all you have to do is fill in the short form below.

Pitch Us at StartupYard FastLane Prague

We will inform you the week of the event whether you have been selected to pitch on stage.

Preparing Your Pitch

On September 2nd, StartupYard will host open hours at Node5 from 14:00 to 16:00, which any interested startup may attend. We will also host a pitch training session for those startups that are selected to pitch at the evening event.

But we highly recommend that you start working on your pitch right now. We’ve published a number of pieces about pitching in the last year or so, and those are a good place to start.

6 Things to Remember When You’re Pitching Anyone, Anywhere

Three Pitching Disasters and How to Avoid Them

4 Tips for Targeting Your Elevator Pitch

Making Your Pitch “Real” From Day One

TeskaLabs, a StartupYard Company, Raises €337K in Pre-Seed Round

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Today we have the great pleasure of announcing that TeskaLabs, a StartupYard company from our most recent 2015 cohort, has raised €337,000 in “pre-seed” funding from a combination of private and institutional sources including StartupYard, TechStars London, and Czech VC firm Credo Ventures.

The investment round was announced on Forbes.cz yesterday (article in Czech).

TeskaLabs, which produces cutting edge enterprise-grade security for mobile platforms and devices, joined TechStars London shortly after leaving StartupYard in June of this year.

The company will employ this financing to recruit top technical talent, and expand their research and development in Prague, as well as their sales operations in London.

Prague is no stranger to successful high-tech security firms. Avast and AVG, both billion dollar companies that were founded here, have both developed over the past decade into worldwide leaders in the field. AVG became the first Czech company ever to IPO on the New York Stock Exchange in 2012.

Ales Teska, TeskaLabs, StartupYard

Ales Teska, Co-Founder and CEO at TeskaLabs

TeskaLabs: Prague Born


TeskaLabs was founded in 2014 by Teska and Vladimira Teskova. The pair, both highly experienced in enterprise mobility and network operations, started TeskaLabs in response to their experiences with the internal security practices of large enterprises, particularly the challenges of staying up to date with a rapidly changing security environment. TeskaLabs provides an always up-to-date, plug and play security layer which can scale to even the largest of operations, operating on thousands of devices within a single company.

“The really key danger right now in the enterprise mobile and Internet of Things (IoT) security market is that the focus has been from the wrong angle, and existing solutions are difficult to adopt,” said Teska, CEO, TeskaLabs. “We take secured enterprise mobility to a new level with our robust, pervasive protection, active monitoring, and easy-to-implement solution so that organizations can go secure- and do it right now.”

“This is the biggest funding round a company coming out of StartupYard has ever secured in such a short time after leaving the program,” commented Cedric Maloux, Managing Director of StartupYard.

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TeskaLabs creates a single pervasive security layer to protect large scale enterprise mobility applications.

“We invest in smart, innovative companies that show creative solutions and promising futures,” said Max Kelly, Managing Director, Techstars London. “We are excited by their vision, approach and its progress toward positioning itself as the leading provider of security solutions for mobile and IoT.”

“We believe in the vision of Ales and his team, and we’re happy to back them,” said Ondrej Bartos, Partner at Credo Ventures. In the emerging field of IoT, we believe security will be of increasing importance, and we are keen to work with TeskaLabs on delivering a solution for it.”

TeskaLabs provides Enterprise-grade Security Solutions for industrial, consumer mobile, and Internet of Things applications. With its robust and efficient plug-and-play security platform for any connected device, they offer an active, up-to-date security layer via software, hardware, and cloud products based on industry best practices.

For more information, visit www.teskalabs.com. 

Guest Post: VC Andrej Kiska: Term Sheet Guide Part 4

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While our regular blogger, StartupYard community manager Lloyd Waldo is on holiday during August, the StartupYard blog will feature a series of guest posts from StartupYard mentor and VC investor Andrej Kiska. 

You can check out Andrej’s  fascinating blog on Medium, and tweet to him @kiskandrej

Term Sheet Guide, pt.4: Equity Investment continued

Final post focusing on the more complex clauses of a standard term sheet

This is the second post devoted to equity-round term sheets and the concluding part of my term sheet guide. If you haven’t read the first part on equity term sheets, I strongly recommend doing so before moving on. For a general introduction to term sheets and the trade-off between high valuation and complex investment structure, please refer to theintroductory post to the guide. For an overview of a convertible loan term sheet, please refer to this post.

Let’s dig into the remaining set of terms entrepreneurs can typically find in an equity-round term sheet, which the first post didn’t cover. They are mostly the complex points, which are often misunderstood and can lead to serious quarrels.

The terms

Liquidation preference: a very important clause that is sometimes overlooked by entrepreneurs. It is one of the key terms used to protect an investor’s downside. Generally you will find one of the two variations of the liquidation preference definition in a term sheet: participating or non-participating, or their combination (i.e. capped participating, even though that’s quite rare in my experience).

The easiest way to explain liquidation preference is using an example. Let’s say an investor invested EUR 1,000,000 for 10% stake in the company. If this investor has a non-participating liquidation preference, he has a right to choose at a liquidation event (i.e. exit, or any kind of transaction that involves a buy-out of existing shareholders, not just a bankruptcy sale, which is the most common understanding of liquidation) whether he would like to receive the preferred return specified in the liquidation preference clause or 10% of the exit price. Most typically, the preferred return is equal to the amount invested (in our example EUR 1,000,000), but can be a multiple of that amount (e.g. 2x liquidation preference corresponds in our example to EUR 2,000,000). Let’s say the investor in our example has 1x (also called “simple”) liquidation preference, i.e. EUR 1,000,000. When the company gets sold, he can choose whether he would like to receive EUR 1,000,000 or 10% of the exit price. Using simple math, it makes sense to choose EUR 1,000,000 if the exit price is below EUR 10,000,000, and choose 10% of the company if the exit price is above EUR 10 MM. Likewise, if the investor has 2x liquidation preference (and thus his preferred return is EUR 2,000,000), the exit price at which it becomes interesting to take the 10% of the company instead of the preferred return is EUR 20 MM.

Things get a bit more complicated with participating liquidation preference. In this scenario, the investor at exit first gets his preferred return, and then the rest of the exit proceeds get distributed pro rata among all shareholders. Let’s take the example above: investor has provided EUR 1 MM for 10% of the company with 1x participating liquidation preference. If the company gets sold for EUR 10,000,000, the investor first gets EUR 1 MM, and then also 10% of the remaining EUR 9 MM for a total of EUR 1.9 MM.

In general, we tend to stick with simple 1x non-participating liquidation preference, which is the most entrepreneur-friendly alternative. Entrepreneur-friendly liquidation preference is also important for attracting future investors or exit partners, who don’t want to see a disproportionate amount of acquisition price going to investors as opposed to entrepreneurs. Nonetheless, if the entrepreneur has unreasonable valuation expectations, we tend to include stricter liquidation preference (2–3x non participating). We recently (and after a heated debate) decided not to use participating liquidation preference in the future, since we consider it too entrepreneur-unfriendly. Simply put, if we can’t reach an agreement on acceptable valuation, we would prefer to walk away from a deal rather than include harsh terms that can cause fights between founders and an investor and deter future investors from investing.

Drag along right: this right allows an investor (or, in case a startup has multiple investors, after agreement among all existing investors) to drag all remaining shareholders (including the founders) to sell their shares if the investor decides to sell his. Typically, this right can only be exercised after certain time period; standard is between 1–3 years after the transaction. Sometimes, the execution of a drag along right has to be approved by startup’s board of directors.

A lot of entrepreneurs worry about this right and it is easy to see why: at first glance, it seems that the investor can decide the fate of the company without consulting the founders. What the founders must realize is that no buyer will buy a company if they don’t want to sell, because the founders and their team are an essential part of what the acquirer is buying. That’s why a drag along can only work in practice if it also endorsed by the founders. We at Credo have never exercised a drag along right before, but still want to have it in the term sheet. It is for the unlikely event that some shareholder (typically a non-essential one, such as a fired angry early employee who has a stake in the company and wants to damage it) will try to block a transaction.

Founder’s vesting: another right that deals with founder quarrels. Essentially, when founders take an outside investment, they will not own their entire equity outright. Instead, it will vest over time. If you are not sure what vesting is, please read Fred Wilson’s post.

Let’s describe the mechanics in an example. Our typical terms are the following: at signing, each founder directly owns 30% of his stake. The remaining 70% of the stake gets vested over the next 4 years. How does this look in practice? Let’s say a founder is supposed to own 50% of the company once the investment is made. According to founder’s vesting, he will own 50% * 30% = 15% of the company outright. In two years, he will own 50%*30%+50%*(1–30%)*(24/48 months)= 32.5%. In four years, he will own the full 50%.

At first glance, this may seem like a very entrepreneur-unfriendly clause. Nonetheless, we use it especially in our seed investments, where the founders are working on their first venture together. It has a simple reason: let’s say there are four founders, where each owns 25% stake in the firm. There are plenty of real life cases where one of the founders gets in an argument with others and leaves. If there is no founder’s vesting, all of a sudden you have a 25% shareholder in your company who not only doesn’t add value to the firm, but may be angry and on a mission to sabotage the rest of the firm just to get back at you. Founder’s vesting thus helps mitigate the consequences of founders’ quarrels.

Reporting: be prepared that an investor will typically want to see a monthly report, or at least a quarterly one in very early stages of startup’s lifecycle. In general, this includes monthly income statement and balance sheet (which your accounting firm can produce) along with a short qualitative commentary from the CEO about most important news of the month. These materials also serve as supporting documents for a board meeting.

Closing remarks

These terms might initially seem quite controversial. That’s why it is very important to sit down with the VC who offered the term sheet, and let him walk you through the logic of each term. If something sounds fishy to you, it is very easy to Google each of the terms. Plus, if you really want to take a deep dive on term sheets, you can always order some literature on it. I can recommend this piece by Alex Wilmerding.

Some people say that accepting an investment from an outside investor is like getting married. It is true that you might spend more time with your investor than with your wife or husband. If that is so, signing of a term sheet is like getting engaged. How often do you see couples starting a happy relationship by having a long argument? Just keep that in mind when you will be negotiating the term sheet. The way you start the relationship with your investor might be very indicative of where it might be heading.

Guest Post: VC Andrej Kiska: Term Sheet Guide Part 3

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While our regular blogger, StartupYard community manager Lloyd Waldo is on holiday during August, the StartupYard blog will feature a series of guest posts from StartupYard mentor and VC investor Andrej Kiska. 

You can check out Andrej’s  fascinating blog on Medium, and tweet to him @kiskandrej

Term Sheet Guide, pt.3: Equity Investment

Overview of some of the most common terms in a standard term sheet

In the introductory post to my term sheet guide, we covered a general introduction to term sheets and the trade-off between high valuation and complex investment structure, while the second one focused on the basics of a convertible loan. The goal of this post is to shed some light on terms in a standard equity round term sheet and provide some context as to how we at Credo Ventures look at each of them.

Our term sheets try to mimic what we consider a standard set of rights used by U.S. venture capitalists. By using a “Western” structure since the very early days in its lifecycle, a startup can in our opinion improve its likelihood of raising future rounds from Western investors.

The terms

Investment tranches: right after the investment size and valuation (topics I’ve already covered) you will typically find the investment tranches. In order to protect his downside, investor can split the investment into multiple tranches and include conditions/milestones (customers, revenue, product, etc.) under which each of the tranches will be released. In the seed and Series A level, we tend not to tranche the investment too much, since it is very hard to set meaningful milestones in such early stages. In seed, we tend to give the whole amount at once or sometimes have it divided into two tranches. Series A is very similar; if it is a larger investment we might include an extra tranche.

Stock options plan: I have already devoted this and this post to employee equity. We typically want to devote between 10–15% of company equity in the stock options plan at the seed level. Timing of creation of the SOP is important: if the term sheet says the plan should be created before the transaction is closed, the equity will go from the stake of original shareholders. If the SOP will be created after the transaction, the investor will get diluted as well.

Board of directors: this one is tricky and pretty important, because some investors (especially the non-standard ones or occasional business “angels”) may use the board to usurp the control of the startup.

Since we try to add value by being hands-on in our companies, we typically nominate one director to the board by Series A at the latest. We have some seed investments with no board of directors or with a board consisting only of management. We have never taken majority in a board at seed or Series A level; i.e. the management should, in our opinion, always keep the majority of the votes (by having more directors than the investors have) at this stage. Our boards of directors typically meet monthly. Beware of investors that want to take majority or an equal number of seats as management in the board by Series A.

Important caveat for European entities: board of directors is not always a statutory body of the firm supported by legislative framework in a given jurisdiction; the board can be a newly created body backed up by the transaction documentation of the investment. The board has a list of items that it must approve (e.g. expenses greater than XX EUR, hiring of key people, sale of shares in the company, etc.), some unanimously, some by majority of the vote. The item list is also part of the term sheet.

Lock-up rights: they limit founders’ ability to sell their shares without consent of the investor. The investor invests in the people — why would he want to be part of a company in which the founders can sell their shares and leave at any moment?

Tag-along / co-sale right: based on a similar logic as the lock-up rights, tag-along clause describes the right of an investor to tag along in a sale of the firm if the founders choose to sell a larger portion of their shares. Example: if the founders decide to sell 10% of their stake to a third-party, investor will have a right to sell his entire stake under the same terms as the founders. If the buyer does not want to buy investor’s stake, he can’t buy the founders’ stake either.

Right of first refusal: another right in the same class as the lock-up and tag-along rights. Right of first refusal states that before any shareholder sells his stake to a 3rd party, he must offer his stake to existing shareholders at the same terms. The selling shareholder can only sell the stake if remaining shareholders don’t want to buy it the stake.

Pre-emption / pro rata rights: this clause essentially reserves the right to participate in the future financing rounds. Typically this includes a pro-rata right: let’s say that an investor owns a 20% stake in a startup, which is about to receive additional EUR 5,000,000 investment. A pro-rata right allows the investor to invest EUR 5,000,000 * 20% = EUR 1,000,000 at the same terms as the rest of the investors. In our seed investments, we sometimes include more than a pro-rata right to make sure that we can deploy more capital into really promising companies.

Anti-dilution: this one can also get very tricky, and some investors use it to limit their downside risk. The anti-dilution clause describes how each shareholder gets diluted in a “down round”: a future investment round with a lower valuation than the current investment round. There are two basic concepts: full ratchet and weighted average anti-dilution. While full ratchet essentially means that only the founders will get diluted (i.e. investors don’t get diluted at all), weighted average approach assumes dilutions of both investors and founders. If you want a deep dive on the technicalities of the anti-dilution clauses, check out this post by Brad Feld.

Credo has to my knowledge never used full ratchet, since we consider it very entrepreneur-unfriendly.

I think we have covered more than half of the standard terms. In order for the post to not get too lengthy and complicated, I will cover the 2nd half in the next post in two weeks.

No lawyers

Just one closing remark: I strongly recommend resisting the urge to invite a lawyer to review the term sheet, especially if it is not a Silicon Valley lawyer who has executed hundreds of similar transactions. Most of the local lawyers don’t understand startup investing but want to have as much input as possible so they can clock in (and bill) more hours. Things can get very counter productive very quickly; unfortunately, we had to walk away from a couple of transactions where the startup invited their friend-lawyer to review the term sheet, which resulted in a total mess.

If you want advice on a term sheet, read blogs of other VCs like mine, or get help from respected startup mentors, which any accelerator or angel can recommend. Just please avoid inexperienced lawyers who are more interested in billing their hours than helping the startup succeed.

Guest Post: VC Andrej Kiska: Term Sheet Guide Part 2

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While our regular blogger, StartupYard community manager Lloyd Waldo is on holiday during August, the StartupYard blog will feature a series of guest posts from StartupYard mentor and VC investor Andrej Kiska. 

You can check out Andrej’s  fascinating blog on Medium, and tweet to him @kiskandrej

 

Term Sheet Guide, pt. 2: Convertible Loan

Everything you need to know about convertible loans

This is the second part of my mini series focusing on term sheets. For a general introduction to term sheets and the negative consequences of pushing for high valuations, please refer to the first post.

Before we dig into individual terms, it is important to distinguish between the two most common methods of investing: convertible loans and equity investments. In an equity investment, an investor receives a stake in the company in exchange for cash. Plain and simple. If the investor provides a convertible loan instead, he will provide a loan with a maturity date, interest and a special twist: the right to convert the loan into an equity stake in the company at some point in the future.

The goal of this post is to cover the convertible loan – in general the less commonly used investment method. Nonetheless, it typically contains just a few terms that can easily be covered in a single post.

Definition of a convertible loan

As mentioned above, a convertible loan is short-term debt that converts into equity. Usually it converts at the next investment round. Example: if you receive your seed investment in a form of convertible loan, it will convert to equity when you raise your Series A investment.

The advantage from the perspective of an entrepreneur is that a convertible loan before its conversion behaves very much like a standard loan: the investor typically does not have many of the rights of a preferential shareholder (board seats, liquidation preferences, etc.). Since it is a fairly short and simple document, it also gets executed faster (that’s why convertible loan investment can be processed faster than an equity investment, typically by a couple of weeks). Additionally, a standard convertible loan does not require an immediate payment of interest. Instead, it gets accrued and converted to equity, as explained below.

The disadvantage also comes from the very nature of the loan: until the loan gets converted to equity, the investor has a priority right at maturity date to claim any assets (i.e. cash & hardware for most startups) in order to get the loan and interest repaid. Needless to say, most startups don’t have enough cash to repay the loan at maturity and thus are forced to liquidate all assets and close down the business.

Why and when to use a convertible loan

There are a couple of scenarios when a convertible loan can be used. First, it may serve as a source of “bridge financing” before an anticipated large financing round. Say you raised a EUR 200,000 seed round and are now in the process of raising EUR 2 MM Series A, but still need a few more months to complete the round. So you take a EUR 100,000 convertible loan as an extra cushion for the fundraising process. As mentioned above, convertible loans are faster to execute from a legal perspective, so the whole transaction can get processed in a matter of few weeks. Bridge financing can be tricky, though: if investors are not 100% convinced that things are going well, asking for a quick convertible loan may give rise to major concerns regarding performance and outlook (i.e. the question: why would you need more cash in order to fundraise?). Losing existing investors’ confidence is a very bad way to start the fundraising process.

Second, the convertible loan is used at times when investors and entrepreneurs can’t agree on valuation, especially when they define a conversion discount but not necessarily the valuation cap (explained below). I am not a big fan of this use case: instead of facing a major issue straightaway, both parties decide to shift its resolution to some later point in time. Such a strategy can very easily backfire, creating nasty arguments between investors and entrepreneurs, which can block further fundraising and thus kill a startup.

Convertible loans are also increasingly being used at the seed stage. There is plenty of criticism against this practice from VCs, especially if the notes are overused and include harsh terms. I recommend reading this piece by Mark Suster on the topic.

Terms you can find in a convertible loan

Maturity date: This is the time by which the loan matures. First thing to understand: the investor can require the repayment of the loan at the maturity date. This is used to protect his downside: if the startup is not doing well, the investor can still recoup his investment and interest at the loan’s maturity date (and kill the startup if it doesn’t have enough money to repay the loan).

Interest rate: This is the interest the startup shall pay on the loan. It is typically a PIK (payment in kind) interest, i.e. startup doesn’t actually pay the cash. Instead, interest gets accrued to the principal of the loan. In such case the accumulated interest gets converted into equity together with the principal of the loan. Example: if you raise a EUR 100,000 convertible loan with an 8% interest that gets converted into equity in 12 months, the actual amount that gets converted is EUR 108,000. The most common rates we have seen hover between 6–8%.

Conversion: very important clause that describes the conditions under which the loan is converted to equity. The most typical mandatory conversion scenario is upon “qualifying financing”: once a startup raises more than EUR XX (i.e. raises a “qualifying financing” round), the loan under gets automatically converted into equity. The most investor friendly alternative for conversion is at any time the investor chooses, but this scenario is very rare if the startup has raised additional capital. Typically, if the startup doesn’t raise any new capital before maturity date, the investor has a right to decide whether he wants to convert or not.

Qualifying financing: the minimum amount a startup has to raise in the next financing round in order for the convertible loan to be automatically converted to equity. The amount varies widely depending on whether the startup is raising seed, Series A or more later-stage capital.

Conversion discount: The investor typically converts his loan to equity with a conversion discount in valuation compared to new investors to compensate him for the additional risk of having entered the startup earlier than the new investors. Example: Say new investors are entering the startup at EUR 5,000,000 valuation. If the note has a 20% valuation discount, the holder of such a loan can convert the entire amount of the loan (and interest as explained above) to equity at 5,000,000 * 80% = EUR 4,000,000. A standard discount we typically see on a convertible loan is between 10–30%, with 20% being the most common.

Valuation cap: In addition to a conversion discount, investor can also set a valuation cap, i.e. the maximum valuation at which the loan will convert. Let’s use the example above, but say that the terms also included a valuation cap of EUR 3,500,000. Without the cap, the investor would convert at EUR 4,000,000 valuation, but with the cap, the investor can convert at EUR 3,500,000.

These are the most common terms an entrepreneur can find in a convertible loan, at least based on what we at Credo Ventures have experienced.

Nevertheless, we tend to prefer equity rounds: rather than hiding/avoiding terms or valuations, we agree on the whole structure at the beginning so we can focus on what is important: creating value for the startup. More on how we set the structure and how we think a fair equity round term sheet should look in the next post.

Guest Post: VC Andrej Kiska: Term Sheet Guide, Part 1

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While our regular blogger, StartupYard community manager Lloyd Waldo is on holiday during August, the StartupYard blog will feature a series of guest posts from StartupYard mentor and VC investor Andrej Kiska. 

You can check out Andrej’s  fascinating blog on Medium, and tweet to him @kiskandrej

 

Term Sheet Guide, pt. 1: Introduction to Term Sheets

– Andrej Kiska

And why a high valuation can hurt your startup

In the past five years, seed-stage investing has experienced a boom. In North America, seed funds now represent 67% of all VC funds, up from 33% in 2008. The CEE region is no different: according to European Private Equity and Venture Capital Association, the number of seed deals has increased 19x over the past four years. Even considering the fact that EVCA’s data is not fully comprehensive, since many investments are not announced at all or are not made by EVCA’s members, it still illustrates my point.

Hand-in-hand with the rise in seed funding naturally comes an increasing number of issued term sheets to all sorts of startups in the earliest stages. Most of these, especially in the CEE, are issued to first-time founders who might not have seen a term sheet before. Therefore it is not surprising to see so many entrepreneurs asking for help with or revision of a term sheet received by another investor. This puts me in an awkward spot, since I don’t want to criticize someone else’s term sheet. So I decided to devote a couple of blog posts to this topic in order to create a term sheet guide that should help founders of seed-stage companies in Europe navigate through their term sheets.

What is a term sheet

Before we dive into individual terms, it is important to understand what a term sheet is: a non-binding summary of key terms of the proposed transaction. There are typically just two binding provisions: exclusivity and confidentiality.

Confidentiality limits the amount of information an entrepreneur can share with anyone besides the investors who have proposed the term sheet. Basically, once you sign a term sheet, you should not discuss the terms with anyone who has not signed it. While this clause only becomes valid after the term sheet has been signed (just like exclusivity), it is important to treat the information sensitively even before a term sheet is signed. You will not make your potential investor too happy if you forward his term sheet to other investors to solicit a better offer.

Exclusivity prevents the entrepreneur from negotiating with other investors for some finite period of time. At Credo, this period ranges from 45 to 90 days after the term sheet is signed (the amount of time we expect it will take to close the transaction). The goal of the exclusivity provision, similarly to confidentiality, is to ensure that the entrepreneur doesn’t use the signed term sheet as a negotiation tool to attract more investors / better terms. If the transaction does not occur within the specified time frame, the entrepreneur can resume negotiations with other investors.

Why focusing too much on valuation can damage your startup

Let’s start the discussion with the provision that many entrepreneurs consider the most important: valuation. I have already devoted an entire post to valuations and investment sizes. This post is about structure, not numbers.

I agree that valuation is very important. At the same time, I would argue that many entrepreneurs (especially the first-timers) overemphasize its importance, which entails quite a few risks.

First, you might not get a deal done with the fund you prefer. Sticking with a fund that provides the best valuation can have short-term gains but can cost you in the long run. A fund that competes only on valuation is indirectly saying that such a fund can’t add much value. Choosing the right partner whom you trust can really boost your startup; even if it means a cut to today’s valuation, it can result in a much more valuable startup later on. I have seen too many startups get killed because they chose the wrong investor.

Second, a high seed valuation sets a high hurdle for subsequent rounds as well. Say you want to raise your seed round at EUR 3 MM valuation, and you expect that valuation to triple or quadruple by Series A to make it an attractive proposition for your investors. Do you know how many companies raised a Series A at EUR 10 MM valuations or higher in the CEE? A handful. Would you not prefer to raise your Series A at EUR 5 MM, if you were much more likely to raise such a round? The numbers I’ve used are just for illustration, even though I do strongly believe that you are much more likely to raise cash in subsequent rounds (i.e. once you achieve your product/market fit) if you don’t push too hard on valuation in the earlier stages.

The third and the most important point I want to mention is the structure: the more you focus on valuation, the more incentivized the investor is to include other harsher terms in the term sheet in order to protect its downside. I have borrowed a very simple diagram from Jamie McGurk to illustrate the point.

These terms and the resulting complicated structure can often be much more detrimental to your startup than a lower valuation. As a first time founder, you will have a very hard time going through a complex term sheet and identifying what impact these terms can have on your startup. And that’s precisely the point of my small term sheet guide: to explain to founders each of those terms and the implications they may have for their startup.

The next post will tackle the intricacies of a convertible loan, while the subsequent two will focus on all the terms you can find in an equity round term sheet.

Guest Post: VC Andrej Kiska: The Startup Investment Cycle

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While our regular blogger, StartupYard community manager Lloyd Waldo is on holiday during August, the StartupYard blog will feature a series of guest posts from StartupYard mentor and VC investor Andrej Kiska. 

You can check out Andrej’s  fascinating blog on Medium, and tweet to him @kiskandrej

The Startup Investment Cycle

             – Andrej Kiska

Investing in startups — how does it work?

“So I think I figured out the next Facebook. Now where do I get money to build it? And heck, how do I get money out of it?”

This is an introductory post to a mini series that analyzes the startup investment cycle: while this first post discusses what the cycle looks like in mature markets such as the Silicon Valley, the next post will analyze specifics of the cycle in the CEE region. Subsequent pieces will dig deeper into each phase and its CEE players, starting with Credo Ventures and the seed/venture investments.

Before we venture into the wild, a couple of disclaimers: the series (just like the rest of my posts) target high tech startups, not small and medium sized businesses. More on that distinction here. Further, I am part of the Prague-based, CEE-focused venture capital firm Credo Ventures and I am sure that makes me very biased towards our startup community. Love it or hate it.

The history and evolution of the investment cycle

A lot has changed in the startup investment cycle since the days of the first high-tech VC investment that was made in 1957 (at least according to Ben Horowitz) — the Digital Equipment Corporation (DEC). Companies like DEC or Tandem had to manufacture their own products, which meant that product prototyping required for example building a factory. Considering that a startup also required a direct sales force, field engineers or professional services, it is hardly surprising that the payroll included 50-100 employees before having a first customer. Back in the day, establishing a startup meant spending massive amounts of money and undertaking huge risks before having any functional version of the product.

Luckily for all of us (maybe aside from factory builders), almost all modern startups today are able to divide this early stage investment cycle into different phases. Thanks to modern software and the power of outsourcing, startups can start prototyping on their product within minutes with almost no capital. It still takes a lot of money and massive risk to build a successful company (according to CrunchBase, the average successful startup with an exit since 2007 has raised USD 41 MM), but the cost of developing and testing the initial product has shrunk dramatically.

What are all these angels, seeds and venture capitalists good for?

Today’s investment cycle very much copies the company development cycle: first there are founders who come up with an idea. Then they turn the idea into a product prototype, to test whether there would be any interest in market. Building upon initial feedback from the first beta users, founders would fine-tune the product to come up with the first version to be released to the public. If the product gains significant interest, founders need to hire more people to help get the product to as many people as possible. As competition and alternative products emerge, the company finds itself under pressure to innovate again and thus it raises even more money to help the company drive innovation and buy out competition, and so certain phases of the cycle start repeating themselves.

Each phase in company’s lifecycle is associated with a different problem set that the company faces and different funding requirements. Furthermore, as the company advances in the cycle, its risk profile is decreasing. In mature financing markets, there are investment professionals who focus specifically on each development phase. In the CEE markets, we have a few VC/PE firms trying to address some of the stages, but we are far from having all bases covered well.

Please note that the graph above is just an approximation serving explanatory purposes, the lines between different financing stages are often blurry, and so is the investor focus (again, especially in the CEE region).

The investment cycle overview

Angels & Family, Friends and Fools (FFF): these are the guys who take by far the biggest risks, since they invest solely into the entrepreneur with an idea. FFFs are a bit of a separate category, we fundraise from them every time we ask for pocket money and they don’t expect much in return (in most cases). Angels on the other hand tend to be investment professionals who generally invest their own money with the goal of allowing the entrepreneur to build the first versions of the product. A good angel investor is a well-connected, wealthy individual who can offer operating expertise and his network of contacts. This investor class typically does not encumber the entrepreneur with any corporate governance typical for later stage investors such as a seat in the board of directors or lengthy due diligence processes.

Seed Funding: entrepreneurs operating in mature markets such as Silicon Valley or Israel have access to specialized seed funds, whose expertise typically focus on product development and sourcing of technical co-founders. While I don’t want to get into the intricacies of the CEE region just yet, since that is the goal of the next post, I will say that it is quite rare to see in our region a professional seed fund that can truly add value needed for this phase of the company life cycle. Seed funding is typically used to develop the product to a phase where it can be used by general public (or at least early adopters, who can swallow a few crashes and bugs here and there), and ideally securing a customer or two (customer, as opposed to a user, is someone who actually pays for the product).

Venture Capital: the typical venture capital investment, also called Series A or B depending on the stage of the firm, is used to scale company’s business model: having secured a couple of paying customers, the goal of the Series A investment is to build out the sales force and establish foreign offices to really get the product out on the market. A good VC fund should among other skills have the network to (i) source the senior sales people and (ii) open doors to flagship customers. A venture investment typically comes from larger institutional funds, so the entrepreneur must be prepared for a full fledged set of corporate governance rights: investors conduct lengthy due diligence, take a board seat and secure a host of rights such as liquidation preferences or tag along/drag along rights.

Private Equity & Public Markets: the company might be crushing it on an international scale, but it can still feel the need to expand more aggressively (often times via acquisitions of major competitors), or actively innovate on its product. It is also not uncommon that the original founders want to move on to something new and are seeking a way out. The private equity funds together with public markets fulfill all these roles: they can provide large amounts of liquidity or in some instances even acquire up to a 100% stake in the firm.

It is a very rare feat and a great accomplishment for a company to navigate through the entire startup lifecycle. It is even more rare to see the founding entrepreneurs staying for the whole journey. In fact, I can think of only a handful of entrepreneurs in the CEE region who can say they managed a company from the idea phase all the way to an IPO. Nevertheless, going through just the first few phases can be a thrilling and in some instances very rewarding journey.

The next post in the series is going to look at the investment lifecycle through the lens of the Central and Eastern European region: what are the specifics of our region, who are the players and what to expect when you approach them.

VC Andrej Kiska: Czech Investors Not as Conservative as You Think

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Andrej Kiska is a StartupYard mentor, and a partner with StartupYard backer and prominent central european venture capital firm Credo Ventures, joining in October 2011, originally on a part-time basis. Andrej is also a private equity analyst at Benson Oak, where he focuses on early stage investments.

Andrej graduated from University of Virginia’s McIntire School of Commerce with concentrations in finance and management. Andrej is the son of the prominent entrepreneur, philanthropist, and current President of Slovakia, Andrej Kiska Sr. 

Over the next few weeks, the StartupYard blog will feature a series of articles penned by Kiska on investments and investment strategy for startups, from a VC and angel investor perspective. If you don’t want to wait for them to be republished here, you can read Kiska’s fantastic blog on Medium.

Hi Andrej, why don’t you tell us a bit about your background, and how you came to be a partner at Credo Ventures?

After spending five years in the United States and graduating from college there, I wanted to come closer to home and ended up joining a Prague-based growth fund Benson Oak Capital. I had a pretty incredible time with Benson Oak, since we managed to execute the only IPO of a Czech company at the New York Stock Exchange in the history of our country, AVG Technologies. We were the first investors back in 2004 when AVG had about 3 million dollars in revenue, and it went public in 2012 with more than 350 million dollars in revenue. Thanks to AVG I witnessed the fact that companies from Central Europe can indeed become global, billion dollar behemoths. Benson Oak invested in Credo Ventures in 2011 and I joined the team in 2012 to help more companies achieve similar successes as AVG did.

About how many investments have you looked at in your 4 years with Credo Ventures. Of the companies you’ve invested in, what are a few things that make them stand out?

We see about 600 business plans a year, so it is in the thousands. Yet, we invest in less than 1% of what we see. This is because there aren’t too many companies like AVG, with a product that is in some way unique on a global scale with a team that has the capability to deliver the product to a global audience.

Praha, Andrej Kiska, Credo ventures

 

How has the landscape changed for early-stage investments in the Czech Republic since you started with Credo?

A: Back in 2010-2011 we would receive only about 300 business plans a year. But it is not just the startups. There were no accelerators, or coworking spaces, and very few angel investors. Heck, even Startupyard didn’t exist back then 🙂 The community has grown radically since then.

Where do you hope to see Credo Ventures in the next 5 years?

I hope we can create another AVG. The sale of our Cognitive Security to Cisco has shown that our startups can attract the attention (and a lot of cash:)) of the largest technology players in the world. I am confident that the stars of our portfolio can become the next Ciscos themselves.

What would you say is the biggest misconception that startup founders tend to have about your job, and about venture capitalists in general?

 I am not sure about general misconceptions, but I really enjoyed the surprised faces of entrepreneurs when they visited my apartment. I guess they expected a big pad or a villa, but the truth is that for the past six years I lived in a living room in an apartment with two roommates. Now that I am starting a family, however, that lifestyle has come to an end.

It is entertaining to see entrepreneurs realizing that many venture capital investors are not extremely wealthy guys who work for an hour or two per day while sipping margaritas at their swimming pool.

You were educated in the US, and you write quite a bit about how Central European startups can compete with US startups. Do you think the local ecosystem is getting better in this regard? How so?

 I think it is getting better only very gradually, and I don’t think this pace is going to change significantly in the next couple of years. The truth is that the overwhelming majority of startup founders we see have no prior exposure to building a product and a team with global potential. These things can in my opinion only be learned on the job, i.e. by doing them.

Therefore, until we will have a generation of founders with prior exposure to global startups as early employees or at least with a few attempts to build a global startup (and ideally succeeded at it), the ability of our startups to compete on a global scale will grow only gradually. We need to build a generation of Jakub Nesetrils, early employees (or founders) of successful Central European startups such as Good Data who decide to start their own startup and know how to do it. These people can then crush it on a global scale like Jakub is doing with Apiary.

Creating such generation will take time, and, of course, money. And I think we are heading in the right direction. Nonetheless, the one thing which is good today and has has not changed over the past five years is the fact that we are continuously able to find heavy R&D teams in Central Europe that are able to invent unique technologies. While turning these technologies into a product and then delivering it to a global audience remains a big challenge for these startups (and one that we at Credo are trying to help to mitigate), companies like Cognitive Security, Comprimato or Codasip serve as great examples that this can indeed be done.

We often hear that Czech and European investors in general are “too conservative.” Do you think this is accurate?

I think one could actually argue the opposite. In my opinion, most of the startups that Czech investors invest in would not receive an investment in the United States at a stage when Czech investors are willing to invest. From this perspective I could make the claim that Czech investors are actually more liberal than their Western European or U.S. counterparts.

 That’s an interesting point. But we hear this all the time- it’s almost a cliche now that Czech investors are overly conservative. So why do you suppose that this criticism is so often leveled at Czech investors?

I think it is a result of very effective marketing of U.S. startup success stories. The buzz around companies like Snapchat, Whatsapp or Tinder makes it look like as if startups in the U.S. effortlessly raise money with no traction and nice powerpoint presentation, while back at home conservative Czech investors require user base, revenue and financial projections.

But let’s take a deeper look for example at Snapchat. It received its seed funding of USD 500k in mid 2012, same year it achieved 50 million snap views per day. If there is an app in Central Europe with no funding that boasts 50 million interactions per day, I would be very happy to give it 500k as well. As a matter of fact, I would give it much more than that. At Benson Oak we invested in an Israeli startup with 40 million users 7 million dollars.

The criticism leveled at Czech investors comes especially from startups, which are misled by awesome self-promotion capabilities of the U.S. startup ecosystem. And this should be a lesson learned for our ecosystem: we are terrible at self-promotion. Look at AVG. On the day it went public, the prime focus of the Czech media was on the fact that shares went down on first day of trading, mostly ignoring the fact that there was no other company in the Czech Republic that even managed to IPO at the New York Stock Exchange. What do the Czech media say now, when AVG is trading 75% above its IPO price? Nothing. And that’s a big shame.

The Czech Republic has taken some steps, such as lowering the costs of incorporation, to be more competitive with Western European and American startups. Has the government here done enough to lower barriers to entry for startups and investors like Credo?

Current “direct” steps such as lower costs of incorporation are marginal improvements that don’t make or break a startup. We learned how to handle all of bureaucratic nuances of the Central European region by now anyways and can navigate these waters for any startup in our portfolio. I think the government will do enough if it simply doesn’t interfere with the ecosystem that is able to take care of itself.

If the government wants to help, the form of such help should be more indirect and long term: encouraging entrepreneurial spirit in young people and eliminating the negative connotation (and economic impact) of failing, motivating more people to invest in startups, providing better education that will help entrepreneurs compete globally and so on.

What are some specific governmental policies that you would like to see improved in the Czech Republic to allow the local startup ecosystem to compete on the world stage?

 I don’t think any governmental policy will dramatically improve the quality of the startup ecosystem, at least not in the short term. The quality of the ecosystem will increase gradually as the ecosystem will gain more experience with competing on the global markets, there are no shortcuts around that.

When it comes to long term initiatives, which I mentioned above, they require more of a mindset than specific policies. Let’s take encouraging entrepreneurial spirit. I heard some people in Slovakia say that Slovak Aeromobil has been the biggest boost to Slovak national pride since we won the Hockey Championship in 2002. I loudly applaud the fact that Aeromobil received government support: it will be tough to turn it into a sustainable business, but has done a tremendous amount of promotion of entrepreneurship in Slovakia. Or look at my father (the president of Slovakia) taking promising Slovak startups to Silicon Valley. I am very much looking forward to the day when Mr. Zeman [President of the Czech Republic] is going to pick promising Czech startups and take them to the Valley.

It is not easy for a government to think outside of the box, but that’s exactly what it needs to do if it wants to be helpful. How come Sweden has allowed autonomous cars on some of their streets? How much talent and innovation could we attract if we build an autonomous car zone/ecosystem in Mlada Boleslav?

 We recently interviewed Ondrej Krajicek on this blog, and he pinpointed education policy and immigration as key areas of public policy that demand attention in order to foster innovation in the Czech Republic. Does the Czech education system put Czech entrepreneurs and investors at a disadvantage today? What about immigration policy?

A: Surely a lot can be done in both areas. With that being said, we invested in multiple university spin-offs already, one of them was already sold to Cisco and others are doing very well, so I guess at least something in education at the university level must be going right. 

In terms of immigration policy: this is obviously a big topic in Europe today, but has been in the U.S. for decades. It is fairly easy to answer from the point of view of startups: yes, we want as much as free movement as possible, so we can attract the best talent to the Czech Republic or move to the U.S. when our business demands it. Yet, looking at it from a holistic point of view, the solution becomes a lot more complicated e.g. if you have 200,000 immigrants (of whom many are unskilled or in unproductive age) heading to European Union annually.

You often write about company culture and organization as a key aspect of competitiveness for Czech and Central European startups. Does the Czech Republic have unique deficiencies in terms of company culture and employment habits or traditions? How should these be improved?

Well, Central Europeans are simply Central Europeans. We are affected by decades of collective ownership, distrust in entrepreneurs of the 90s and a host of other peculiarities. These obviously impact how we go about building businesses. We are proud when we rip off the state by optimizing taxes and frown upon people whose startup idea didn’t work. Many of us are hesitant to share the stake in our business with our employees. Or prefer owning a big stake in a smaller business as opposed to a smaller stake in a potentially bigger business. We want to be either CEOs or corporate employees, not early startup employees. We think we are going to win the World Hockey Championship every year, even though we are ranked number 8 in the world. But I guess that’s just Slovakia.

I think these traits make us who we are, there is nothing to feel ashamed about. As we try to compete in the global marketplace, we have to learn how to leverage our culture and skillset to turn it into a strength, not necessarily how to change it or improve it. Slovak startups for instance might want to consider buying a big TV for the hockey champs to boost team bonding (and don’t have to worry about loss in productivity since this tournament doesn’t last long for our team). But this is for every startup founder to figure out on his own.

You can Tweet Andrej @Kiskandrej