To kick things off, can you tell us a little about the history of Reflex Capital SE and your role there?
Eduard: Reflex Capital was founded by Ondrej Fryc after he exited Mall.cz. Originally it was Ondrej’s private activity but as the business was growing he decided to invite several people with whom he worked in his entrepreneurial past to join the fund as partners. We currently have 30 companies in our portfolio and few more to be added soon. Each partner has some specific vertical expertise. My primary focus is the transaction documentation, corporate governance, i.e. shareholders agreements, employee stock option plans etc., intellectual property rights and other legal stuff.
Why do you think startups should raise VC funds? What are the pros and cons?
Eduard: I haven’t seen any successful startup which would be able to finance an exponential growth from its operating profit (and cashflow). To be ready, as much as possible, for what will come in the future, the company has to act now. It’s too late to start when some part of the business gets overwhelmed by its volume. Lucky people who experienced - say - 500% year-on-year growth understand what I mean. Going international adds another level of complexity (different law, accounting, taxation, multi-currency) even in the EU which is trying to “harmonize” everything, except - unfortunately - what is really important for business. Also, each startup has a limited window of opportunity and if it doesn’t move fast enough somebody else grabs the market.
So the pros are obvious. Sustaining the growth and keeping the opportunity alive. The cons are also obvious, it’s like marriage, with a bit less freedom :-) but it very much depends on the partner. Some spouses are jealous, some are not. There are VCs who require comprehensive reporting, board representations, extensive veto rights, and there are other VCs who do not interfere much and are ready (or even - believe it or not - able) to provide some help if needed. We try hard to fall in that latter group.
Cool! You probably have startups applying to Reflex Capital SE at all possible stages. When is it the best time for startup founders to look for VC money?
Eduard: There is no simple formula. Each business is different and some founders may have access to some other sources of financing (family, friends, crowdfunding), make first steps on their own and look for VC funding when their business starts picking up. We, at Reflex Capital, focus on early stage companies (exceptions apply) who already generate some revenues and seek funding to accelerate their growth. It is a stage of growth where we - as former entrepreneurs - can add some value on top of money. I always say that we may prevent our portfolio companies from making mistakes which we made ourselves.
What are the 3 most common reasons based on which you decide not to invest?
Eduard: There is only one reason: we don’t like it. We are trying to identify opportunities with a global potential founded by people with a personal potential to make it. A business opportunity is a very complex jick-saw puzzle consisting of many different pieces. Few missing pieces do not prevent us from seeing the whole picture. But if too many pieces are missing we do not invest. Sometimes we get a box with pieces of different puzzles.
What are the 3 main values you are looking for in a Founder?
Eduard: I mentioned earlier that an investment is kind of a marriage. Typically people do not have a list of values which they are looking for in a wife or a husband. I have never had any Candidate-Spouse Verification Checklist. In founders, we seek the right mix of self-confidence, self-awareness, humility, ambitions, aggressiveness, ability to see the bigger picture, honesty, you name it. But at the end it is all about common sense, feelings, affection, intuition, and inevitable mistakes. Divorces and bankruptcies happen.
How long does the investment process usually take?
Eduard: Reflex Capital is not a typical institutional investor. We are a bunch of former entrepreneurs and as such we are not too much in bureaucracy. Also, we deal with our own money and only have few limited partners (mostly friends who also successfully exited their businesses). It gives us a lot of flexibility and we can move fast. The partners usually red light/green light the opportunity within 2 or 3 weeks and if they decide to go ahead and shoot out a term sheet the whole process can arrive at the finish line within 2 or 3 months. But it also depends on the legal complexity (if on the other side is a single legal entity or a group of companies) and the deal structure (convertible debt is simpler than equity which requires more extensive paperwork).
What’s the first thing you want your startups to do after closing?
Eduard: The first thing? To grow their business as fast as they can - this is why we invest in the first place, don’t we?
Of course, there are many milestones on the road from a startup to a real company. The founders and the management they hire over time must do a lot of work in many different areas to make the company ready for Series A round. But without a booming underlying business the other work is meaningless.
Awesome! My last question is what was the boldest thing a founder did on an investor meeting, when looking to raise money from you?
Eduard: Aah, I see. A dark room full of clever people in Burberry suits who have been everywhere already twice (at least) and a poor sweating founder making his or her powerpoint presentation. A setup which makes a joke not only a bold thing, but an act of pure heroism. This is not who we are. Pitch deck, meeting one or two Reflex partners who then sponsor the case if they like it, filling data into our investment brief template, a simple financial projection (to which - to be honest - we do not pay too much attention because in the startup environment 12 months mean long-term and 3 years mean “behind the horizon”) and max. 2 hour Q&A session with other partners, and we are ready to make go/no-go decision. We either like the founders and their business or not. We either trust the founders or not. I do not remember who was bold but I do remember who was honest …and I shall never forget who was not.