Investor Collaboration — Meeting recap
Iratel Ventures Breakfast Series #3
Iratel Ventures Breakfast Series #3
Last Thursday, we held the third meeting in our Breakfast Series in Tehran. We’ve been discussing collaboration and co-investment opportunities with our investment partners for some time. Since our previous event, we discussed more details with each and wanted to discuss these more formally in a group.
I started by suggesting two topics to speak about:
What existing framework do we have?
Collaborating on an open source angel and seed termsheet
Additionally, two other topics were proposed:
3. Should Iranian investors invest in a few or many startups?
4. Tackling challenges facing the ecosystem together.
(Existing) Collaboration Frameworks
Conversation started around collaboration frameworks and how in a young ecosystem collaboration needs to be part of the agenda. There is sufficient activity at the operational level, however, there needs to be more strategic collaboration at the investor group level.
Small differences in vision and strategy may turn to big gaps in the long term. This will make co-investment and collaboration more difficult which was considered in the context of two different types of investment:
Capital Investment, which is a routine type of investment in the world as a financial partner, and;
Company Builder, where the investor is a big operational partner as well as a financial one.
There may be a conflict between these two types making collaboration difficult. Sometimes (strategic) value is more important where an investor pays extra for when the perceived value is aligned and investor/operator DNA is similar.
Collaboration is necessary as the ecosystem is still in infancy phase. Investors can help startups by plugging them into their network or advise them using industry experience. Additionally, sharing investment experience of working with startups will help others. Many aspiring entrepreneurs would benefit from learning the basics of entrepreneurship.
Some believed that VCs and investors should focus on their main job and not over promise. A good VC should be busy with deal sourcing and origination rather than education and training.
The meaning of collaboration on training needs to be defined properly. Is it collaborating on creating the educational content or will agreeing on the bigger framework suffice?
There is a need for hard skills and more industry background is desired which is natural in a young ecosystem. Lack of specialist events focusing on targeted technical and management areas was also highlighted.
Group’s experience was that successful entrepreneurs usually need less time and can find their own way; however, VCs that provide strategy and operational help are seeing good results.
Role of universities to prepare graduates was then discussed especially since startups have very little resources to train new people.
A final comment was how VCs can collaborate to establish metrics to help in professional evaluation of a startup’s performance. This helps conversations become much more objective.
Open Source Termsheet
The second topic was collaborating on an Open Source Termsheet. Working on the legal infrastructure helps everyone in the ecosystem as it brings transparency and builds trust.
It was noted that legal systems usually lag the business changes. This is especially true in innovative technologies and may not be limited to Iran. The main part of the termsheet should address the economics of the deal. Especially for angel investors, the 20% bank interest rate is a big obstacle in terms of opportunity cost. However, a long term and holistic vision that understands the value of entrepreneurship helps overcome these challenges.
This means that money is expensive in Iran which doesn’t get reflected in termsheets at all. The usual Convertible Note elsewhere comes with a 20% discount rate. If we take the interest rate regime in Iran into consideration, this doesn’t make sense and needs to be something like 60%! VCs can help each other here to make this position clear and educate the market about why they make decisions as they do. The dynamics of the market for YC that takes a small equity with a large amount of money is different and may not apply here.
Another purpose of a termsheet is control. In addition to the bank interest rates, negotiating vesting rights is a major challenge since the legal structure for it doesn’t exist. Consulting experts who understand innovation business systems as well as traditional ones will help in building this termsheet.
An open termsheet helps the wider ecosystem as some may have the resources to allocate for in-house legal departments but others may not be able to do so. Examples are SAFE, KISS and NVCA who have published their termsheets.
A worrying remark was that the current termsheets in Iran have very little legal bearing in courts and are mostly translations to Farsi. Most investors work from a trust point of view and are working on the legal infrastructure in parallel. This has a direct effect on their business and the size of the cheques they can write.
Finally, the group agreed that once an open termsheet is produced, we need to encourage people to use it as a base with little modification to reap the benefits of transparency and trust and the standard format.
Should investors focus on few or many investments?
This topic was centered around creating success stories and how focusing on a few investments and big wins creates a self-reinforcing ecosystem. Every industry promotes itself through the prism of its success stories and ours is the same. It can be argued that this has contributed to the success of US startups.
We can see a real example of this in study abroad model. Until recently, not many students went to the US for graduate studies but this trend is becoming stronger now as the ones who studied there are showing success locally and globally. An example is the team who recently raised the largest seed round in the country.
Identifying the right startup is not easy, so depending on the investment strategy of investors, they may need to invest in many startups to see results. Creating success stories in talent, branding and communication and believing in people is the main driver. A VC should focus on creating synergies between these three, at what scale, is another question.
The global approach that some VCs and startups are adopting is believed to be beneficial to creating a bigger impact around the success story as the real entrepreneurial story is global.
Investing in many startups, also known as spray and pray, was regarded by one of the investors to be a good solution. A famous global program invested in more than 1500 in the last few years without the explicit aim of building a big success story (ie unicorn) but they ended up having more than one. On the other hand, it should be made clear that supply of big success stories (and your fund size) is limited and that the ecosystem needs to renew itself for the future generations.
An argument in favour of few investments was about managing the expectations. Failure rate is high so we shouldn’t encourage all our students to go and do a startup. We need people at all stages and not everyone should be an entrepreneur. Glorifying it may not be a good idea and may create bubbles (aaargh, we had gone on for 45 minutes without this word). The size of our ecosystem is small (<$10b, as mentioned) and a bubble may damage it permanently.
Others argued that a bubble may not be such a bad thing. If employees of bigger startups and established tech companies become successful it will help other people too and the energy grows. If you’re too cautious, it may never reach a sustainable momentum.
It was also noted that the “many-investment” strategy and the current market activity has increased salaries to an average of 5 million tomans positively impacting developers here. Building a bubble in entrepreneurship is probably the best type of bubble!
Macro environment and the risks facing all players
As time was running out, the last topic covered how some actions in the market might have a negative effect on all the players. For example, the innovative but rude marketing campaign of a few startups is jeapordising the good work of others.
The meeting was finished on a positive comment that some may believe bad publicity is still good for business.
As with our usual Breakfast Series, we don’t want to draw any conclusions and would like to build a friendly gathering for entrepreneurs and investors to discuss the ecosystem. Therefore, we encourage you to leave a comment or discuss the issues in this post. Which ones should we follow up and which ones would you like to discuss further in the next meeting?
In particular, we are going to speak to the attendees and other ecosystem players for their input on the open source termsheet. Please give us your comments so we can make this document as useful as possible.
This is the fifth in a series of posts about Iratel Ventures Events which was also posted on LinkedIn. We’d love to hear from teams with crazy (but commercial) startups. Get in touch or attend our breakfast series. Finally, don’t forget to get your IV Score or talk to our FundingBot to prepare for your next VC meeting.
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