Rocío Álvarez-Ossorio, the Director of the EAE Lab incubator, interviewed Ernesto Muñoz, a partner at Fellow Funders. In the alternative investment expert’s opinion, “this is an unexplored terrain in Spain, an opportunity that is so far hardly used in a country in which bank financing is still the most commonly used option”. “Investors here are still unprepared to take high risks, preferring to minimize their exposure to risk when investing”.
The lack of familiarity of alternative investment in Spain is a challenge for Ernesto and the team at Fellow Funders, who believe that it is “a good option for diversifying your portfolio effectively”. Although there is no master formula for investors to approach alternative investment, at Fellow Funders, they have overseen more than a dozen projects financed in this way since the company was founded in December 2016. The innovative equity crowdfunding platform gives potential investors the opportunity to “hold a stake in a company’s capital in exchange for the capital invested”.
To successfully achieve their mission, Fellow Funders undertakes a significant internal diligence process, from the perspective of the business, financial and legal models. “They more time you spend in tis respect, the better the results”. In fact, they strive to help the project developer as much as possible, validating that the project and the team are suitable. The platform scores each project using objective parameters (team, market, scalability, timing and potential success of the project) and the project has to score at least 65 out of a possible 100 for investment possibilities to be considered.
How alternative investment works
Fellow Funders’ requirements include 6 months’ worth of sales metrics. Regardless of whether a profit or loss has been made, in Ernesto’s opinion, “the important thing is to show that the MVP (Minimum Viable Product) has been validated, it can be commercialized and the project has achieved a number of real customers willing to pay for the product or service”. These two requirements encourage the entrepreneur to take the leap to become a businessperson and convert their project into company, “the real key to entrepreneurship”.
In terms of the most attractive sectors for the equity crowdfunding platform, Ernesto explained that the key aspect that they look for in a startup is that it focuses on the real economy. “We don’t like technology for technology’s sake, but rather it has to enable us to optimize the company’s processes”. In Ernesto’s opinion, there has to be a clear division between a real need and the emergence of an innovation that makes no contribution. “We are interested in any project that contributes towards improving processes and the real economy”.
For Fellow Funders, the scope of operation is a limitation. “We can only work with Spanish companies or firms that are based in Spain but operate abroad”. If these requirements are met, to submit a project on the equity crowdfunding platform, you simply have to register, completing the fields and attaching the required documentation. Once they have studied the proposal, the contact the applicants to schedule a personal interview.
Entrepreneurship and investment projects
The financing process for the startup begins in its comfort zone, in which the investors fall into one of the categories of the 3 Fs (Family, Friends and Fools). The company’s next challenge is to obtain funding from public bodies (with innovation grants from national, regional or even European public institutions). Then, when they test the MVP, confidence in the project gradually grows and the they can consider including private investors in the company’s capital. “At this point, the most important thing is to develop a good project presentation, being able to convey what you have done and what you are going to be able to do, making the person you are presenting to (the investor) really believes it” explained Ernesto. This is the point at which “increasingly professionalized” Business Angels play a key role, as well as Venture Capitalists in the following step. The last phase consists of heading out to build market recognition. “In most cases, the best way to do it is being listed on the market”, added the partner at Fellow Funders.
With respect to the contact between the investor and the startups, Ernesto emphasized the in-depth and serious learning process that occurs between the two. Far from believing in love at first sight, he said that he is “more of an advocate of getting to know the person you plan to marry very well, because the project developer needs to know what the investor expects of them”. At the end of the day, there has to be a good working relationship, which is achieved through dialogue, discussing the potential scenarios and considering all the possible reactions. “This can’t be done in a single day”. As far as Ernesto is concerned, the first thing that the entrepreneur has to do is verify whether the potential investor can help them in the way they really need, find out about their background and get references from third parties. “I would never consider an investor who is financially strangled”, he explained. Meanwhile, he warned against new project developers asking for large amounts of money, emphasizing that “their request has to be aligned to a real context”.
At Fellow Funders, they have seen an extremely varied range of projects, from proposals with very carefully designed financial plans that are adapted to the reality of the market, right through to incoherent proposals with illogical business models, unsuitable teams or significant areas for improvement. In Ernesto’s opinion, “coherence means being able to explain what you are going to do with the investors’ money. You have to define and control how you are going to use this money perfectly because they are lending it to you to do things with”.
One of the pieces of advice that the investment experts emphasized to the entrepreneurs at EAE Business School was to strike a balance in their teams “because the HR side of things is a black hole that many companies fall into”. We have to be aware of the difficulties because the problem arises as the project evolves, when it comes to specializing and the division of tasks. In the acquisition phase for new profiles, ”we have to be able to convince and excite that person” explained Ernesto, before advising caution. “There is no single ideal formula. It is extremely complicated to reach an agreement. The project developer has to be keenly aware of what they want, how, within which timeframe and what the role of the person they want to take on is going to be”. Therefore, it is essential to define the profile of the position. “In startups, the roles are complex and you have to accept that, in the future, the roles you establish now in the company may change with the natural evolution of the business, so you will have to review and redefine them” concluded Ernesto.