Madis Müür – Active Angel Investor
“I’ve invested into 20ish growth companies such as Cleveron, Funderbeam, LeapIN and Ampler Bikes. Also helped 4 companies to raise up to €950k on Funderbeam as Lead Investor.”
When and why did you start investing in equity? Could you tell us a bit about your job and interests at that time?
I started investing on the stock market in 2006 and into startups in 2015. I started to invest into early stage growth companies because I was building my first company at that time and I wanted to get better at entrepreneurship. I learnt a lot from books and VC blogs, as well as from the television show Shark Tank but I thought I could learn more by investing in actual companies.
How did you first encounter crowdfunding?
As I had invested on the stock market through an online marketplace it was only natural to look for an online platform to invest into startups as well.
In 2015-16 there was only one active equity-based crowdfunding platform in Estonia. This platform was run by somebody, who had done reward-based crowdfunding but had no experience in entrepreneurship or raising equity. Therefore, it was very easy for a company to raise from the crowd, the shareholder agreements (SHAs) were terrible and very little reporting was done by the funded companies.
What has changed since you started investing in campaings? Has the process improved?
With Funderbeam both the process and the deal flow has been significantly improving. They have their own legal team, and they support the selection of a Lead Investor to each campaign who is to verify the company as investable and negotiates the shareholders’ agreement (SHA) with the crowdfunder. Lead Investors are also becoming more experienced and the platform is better at selecting companies. They don’t let too early stage on board as high failure rate would be really bad for business. They also fact check pretty much everything, do quite thorough Due Diligence and so only 2% of companies can fundraise publicly, of the 70-80 company applications per month so far only 1 or 2 have reached the actual fundraising stage. It’s quite thorough process as well, many weaker projects quit it by themselves also. Today, there is more interest and feedback from experienced investors, investing alongside local and international VCs also with their very thorough due diligence and mentoring before and after the campaign. Also, companies report monthly or at least quarterly through the platform, so transparency is improving all the time.
What kind of problems do you see in the ecosystem that could be solved by crowdfunding?
In Estonia there are 500-550 startups but only 10-20 financing rounds under €1 million happened last year so there is a big funding gap in the early stage here. A lot more funding is needed in order for successful companies to grow. On the other hand according to studies investors have historically got between 22-27% returns in Angel investing with diversified portfolios with good mentoring. And that is in UK and US where there is lot of capital chasing those returns, very competitive markets, the returns have been even better in Baltics and Scandinavia for more professional angels. So it helps more companies to get funding, introduces lot of new investors to startup investing and EstBAN and also gives great returns to investors.
Also, even if Funderbeam has a list of more active investors on the platform and follows what EstBAN is doing so they have investors to choose from for Lead positions, still it can be problematic, there are not enough investors willing to step up, take the responsibility and say: Let’s invest into company XYZ! Some campaigns have not reached the funding because of that.
What are the responsibilities of a Lead Investor at Funderbeam?
The Lead Investor together with Funderbeam platform does the due diligence and verifies that the company is indeed investable. Also, he sets the terms together with the company, so that the terms are good enough to attract professional angel investors, industry insiders or entrepreneurs who could be good mentors as well. There is not enough optimistic money to fund a campaign, smart money has to be on board to provide great help to companies. For example Bikeep with over 650 investors has about 100 different people who have offered their help to the company in various different areas.
The Lead Investor helps go through with the fundraising campaign, helps to get investors interested and also closes enough of them to become actual investors. Helps with communication between the company and investors, in some cases votes for the syndicate, negotiates the SHA and sets the final terms.
The Lead Investor usually invests between €10-30 000 but €5k and up to €300k have also been the cases. It’s more important that the lead can put the round together than that he invests big part himself. If he has wide investor network then €10k is good already.
After the campaign he will help with the investor communication, what KPIs and else to show in monthly or quarterly updates. He also mentors the company, helps with hiring, connections, communication towards investors and follow-on financing when needed. It’s made very easy on the platform, lot easier than to email to each investor separately.
How did you become a Lead Investor and what kind of experiences did you have as such?
When some of my portfolio companies were raising their second round they needed lead investors to raise a bigger round. I quickly googled what it meant to be a Lead Investor and as I had a network of wealthy people, investors and professionals with rising incomes I volunteered. Ampler chose me as their lead, I helped them to raise over €400k and they have done very well since, therefore other companies have asked me to be their lead as well. Now it’s second time I’m at €1 million mark for a company as Lead Investor.
The companies I’ve chosen to lead have mostly come to me, there is real shortage of active lead investors. Some have been my previous portfolio companies, some through Funderbeam. Funderbeam is doing a pretty thorough due diligence, they can’t accept too early stage companies as high failure rate would be too negative for them so the dealflow they have offered me is surprisingly good. Mostly they have been companies with over €10k MRR (monthly recurring revenues) already and as such with many of the most common reasons for startup failures already behind them: product-market fit is there, they are often beyond their breakeven already and have operated for 2-3 years at least, the team is competent and works together well.
Can you provide us with some general insights regarding the terms of investment? Are they different from the terms of a VC investment?
Term sheets are similar to other deals that have been done in the region and in the Industry. The valuations and terms can’t be too different, otherwise smart money won’t come on board. We have quite good materials as templates and it’s up to the Lead Investor and the Company to negotiate the exact terms. The more professional angels on board the platform, the better for the terms also.
If there is a Lead Investor, does the crowd join his/her term sheet? Are voting rights transferred to the Lead Investor?
Everybody signs the same SHA. Voting has had different solutions on Funderbeam, the earlier SPV syndicates have mostly had Lead Investor voting for the syndicate which is much better for the company than contacting several hundred investors on the cap table. Newer solution of nominee structure has investors voting through the platform, which solves most of these problems. Still the threshold of 75% of syndicate having to agree to proposal makes it very difficult to get the approval, a lower threshold of 55-60% is needed in most cases.
How long does it take to set up the final terms of the SHA? And how long does it take a startup to prepare for the campaign, including the search for the lead investor?
Now the SHA takes a week or up to a few weeks depending on how fast the Lead Investor and the company can come to terms.
Usually the company gets the campaign ready in 1-2 months for the closed part of the round but I’ve seen up to 6 months as well when the founder is very busy running the daily operations as well. Sometimes they are not familiar with producing the video for the campaign or they need to achieve certain milestones, certain KPI metrics for them to be a good deal for the investors as well.
How much it costs a company to go crowd? What was the case for your companies, what is the general cost of capital?
If it means Funderbeam fees then €3500 is set aside for SPV administration and Funderbeam charges 4% of funds raised.
How important social media is in fact for the communication of the campaign?
Social media and other channels where investors are: investment forums, Facebook groups, influential investors’ blogs, traditional investor and tech orientated media, etc. are very important in order to get as many investors as possible and raise bigger amounts. It has to be everywhere and discussions have to be active through the whole campaign, especially in the beginning and in the end. Seeing one news story about fundraising makes small number of people invest but if experienced and influential investors talk about it for weeks then that makes all the difference. New information about the campaign, the industry and also crowdfunding success stories, exit opportunities do have an effect. The goal is to get people familiar and comfortable with crowdfunding, to show that it is profitable and actually one of the best asset classes contrary to popular but wrong belief.
What kind of people would you recommend to be an investor or even Lead Investor of a crowdfunding campaign?
Crowdfunding has proven to be a very good starting point for different kinds of investors: technology employees and founders, stock market investors, industry insiders, entrepreneurs and just everyday people wanting to diversify their portfolio with €250-2000 tickets to startups.
Many great possible mentors such as founders or early employees of younger technology companies don’t yet have big enough savings to build 10-20 company portfolios of €5-10k ticket each and so for them it is a great starting point as well, it’s a great way to get new people on board.
Many investors have joined EstBAN by being investor on Funderbeam first and it’s a great tool to speed up the investment learning curve for startup workforce many of whom will have lot of money after an exit 2-5 years down the road and will do great things in investing then now with bigger pockets and already being smart money.
Apart from financial reasons, why do you think it’s worth investing in crowdfunding campaigns?
I really like to see companies grow from 3 people in a garage or coworking space to +30 employees who build great products, create well paying jobs, help to bring in millions with great value added export revenue to the country and become succesful real world companies. To see the growth both in companies and in founders as entrepreneurs and individuals, it’s a very awesome journey! The founders and investors are some of the most interesting people out there and I’m very happy I get the chance to share the journey with them and help create the future with them.