What is ‘founder friendly’ investments according to you?
It is very much about the terms and the level of control. Founder friendly investments should be simple and straightforward. Sometimes, I hear about founders who have accepted terms, where the investor has an option to invest at the same valuation later, liquidation preference even in early-stage, or even a ratchet. All three terms are completely no-go’s in a founder friendly startup culture.
Another important thing, when talking founder friendly investment culture, is that the investor gives especially early-stage startups the time and freedom to find their right business model.
Sometimes, I see investors require board seats and demand huge involvement – even with smaller tickets (<500K DKK). Again, a no-go. An example of a founder friendly investment form is Y-Combinators SAFE.
It is important to emphasize that a reason for these misunderstands is that some of the investors in the ecosystem have a lack of understanding of what drives returns in startups as an asset class. I believe that one of the reasons for this is that we do not have a great number of former founders who invest as angels due to the low number of Danish exits. Instead, most angels come from the financial world where the rules of the game and the path to driving returns is different.
Typically, the error occurs at two levels: 1) investors try to protect the downside instead of optimizing upside, 2) investors misunderstand what is decisive for a startup’s success.
It is quite telling that it is never former founders or early employees who ask for unfriendly terms.
Danish investors often forget that the startups they are funding, are competing in an international market. If a Californian competitor can raise more money on better terms, they will be hard to beat.
According to you, what do we need to do in Denmark, if we want to keep the successful start-ups here?
I think the most important thing is access to Series A / late stage capital. The primary reason why startups (including us) turn to e.g. the US is that we get access to capital at a completely different level. One other point, that however can be hard to counter, is that several of the major US funds do not want to invest in Danish ApS entities, because they are not familiar with that type of entity, and their LPs simply will not let them invest in anything that’s incorporated outside of Delaware.
This forces the Danish and Nordic startups to flip their entity structure – most often to a Delaware C Corp as the parent company, with an operating Nordic/Danish unit owned wholly by the parent.