Expert opinions, STARTUPS

How a startup can attract investments not losing control of business

MUST online platform is an ecosystem of digital services for commercial vehicle fleets. Our JSC MAST RUS company is registered in the register of the Russian IT companies (Mintsifra register). The company is engaged in risk profiling, assessment and forecasting for commercial vehicle fleets and insurance companies.

Throughout the development of the project, we use our own founders’ funds, investments from several business angels and borrowed funding. All funds were used to create a data warehouse and to train predictive algorithms based on machine learning technology, to develop multivariate risk analysis and to create a scoring system. All these needs require serious money. In total, more than 90 million rubles were raised. Now we announced the fourth round of financing, planning to attract about 100 million rubles in 2022 in two stages.

We have tried all external funding tools on the Russian market. Let’s consider the most affordable of them, taking into account the new reality.

Where money is

  • Bank crediting isn’t available to MSP long ago. Increase in minimum reservation levels on the high-risk loan portfolios that happened more than ten years ago, in fact, made crediting of MSP impossible. Now products, available to small business, don’t appear in the market.
  • P2B-crediting is quite useful instrument of attraction of loans for micro and small business from private investors. The law “About attraction of investments with use of investment platforms” that came into force in 2020 I established uniform rules of the game under control of the Central Bank for such organizers of loans. Various platforms of crowdlending gain popularity and volumes, they are highly competitive in comparison with banks. With business inside knowledge and modern systems of risk assessment, they are less conservative. Negative point for MSP is that new platforms don’t appear, sooner or later startups face restriction in volume of attraction of investments. There are several reasons — the limit of the size of investments for unskilled investors, obligation to pay a 13% tax on income from investments, absence of tax benefits. Most of MSP remain on the platform until they are ready for classical bank requirements to the reporting.
  • The market of venture investments in Russia is very young. Besides current crisis rejected it on several decades back. The average bill of investments grows — investors put the bigger amount of funds in smaller number of projects. They prefer projects at late stages and already having stable profit. It is necessary to be ready to the fact that the venture will estimate you cheaper, than you counted. And the main thing — a venture looks mainly at the projects focused on foreign markets (now it means the countries of BRICS, MENA, Turkey and classical Europe and USA). The startups focused on the domestic, Russian market are practically cut off completely from venture money.
  • Similarly, negotiations on M&A deals are concluding now, only the stakes will be even higher. As a rule, we are talking about the sale of 80-90% of the company and loss of control of the business. If today you can get for your company with the minimum revenue 200-300 million rubles, then with a good strategy after reaching profit its value will increase to several billion rubles.
  • The most realistic option for startups, especially in the early stages, is attracting angel investment. We attracted almost 30% of all investments through angels. The average amount of investments is at the level of $50,000 but may be higher. Attracting such investments may turn out to be a complex and long process. Finding an investor will require going through a big number of project presentations, reviews, deal discussions. You need an investor with expertise in your industry to understand and believe in the idea of your project and to assess objectively its prospects.

Perfect storm

Not everyone is ready to invest in startups, i.e. “high-risk companies”. We need to look for investors who do not seek to make money on short periods of time and have about $200-300 thousand for investment. According to financial analysts, in Russia more than 44 thousand people have more than $1 million on their accounts and about 300 thousand people have financial capital of more than $200,000. And year by year the number of such investors remains almost unchanged, even under pressure from external circumstances.

In my opinion, the ideal option for working with private investors is the sale of shares and the creation of a joint stock company. Few of the SME representatives are looking at this financing option, and completely in vain. In transactions with equity, we can talk about the purchase and sale of tenths and even hundredths of a percent in the company. Dynamic business will be able to offer investors also dividends and provide combined returns on both share price growth and dividends. The value of the shares of our company MAST RUS JSC for the last year, for example, doubled.

Such a shareholder financing model has several obvious advantages for business:

  • The status of joint-stock company will add to a startup and the young company transparency, that any small and medium business needs objectively. Joint-stock company is the field of the market regulated by supervision of the Central Bank.
  • It also an optimum form of responsibility for the companies on early and average development stages. A huge volume of a due diligence for the investor is already made.
  • The joint-stock company allows to construct investment strategy and to bring in plan point of an entry into the public market. Purchase of shares in Russia became long ago clear and simple process for retail investors, their quantity grew intensively and in 2021, according to the Central Bank, exceeded 12 million people. And, most likely, it will continue to grow in view of deficiency of an investment alternative, despite all storm and crises.
  • The IPO bet will justify itself. We managed to get an idea what a pre-IPO is when we raised money through the ICO in 2018. And now, when the law on DFA (digital financial assets) is adapting more and more quickly to the real needs of the market, the transition of the stock market (especially its over-the-counter parts) towards smart contracts and blockchain is just a question of 2-3 years.
  • In our opinion, an ideal investor for any project is its client or partner. If early followers, owners of the companies, that in the long term will begin to apply technology in their business, will become shareholders and co-owners of the company, it will accelerate significantly development of any business project. For a startup it is ideal model. Investors look not at your revenue in a present situation, but at your technology through a prism of usefulness for their own operational business. And it is already just other quality of basis for negotiation process.

By Anton Redko, the founder of the MUST platform on risk management of commercial vehicle fleets

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