We recently hosted an online session with Marius Istrate, Chairman of the Board at TechAngels, alongside the Startup community from Moldova. Get ready to discover Marius’s candid insights on how business angels invest in Eastern European startups and understand their investment thesis.

What do investors expect from a startup in terms of product development, market validation, and team composition to consider them ready for investment?

Marius: Investors vary greatly. There are business angels, individuals who invest in companies, and institutional investors like venture capital funds, which also vary. There are pre-seed and seed funds that invest very early in a startup’s journey, Series A funds that invest once there is market validation, and larger investment funds like Series B, C, and D that invest prior to a public listing. Different types of investors have different expectations. From a business angel’s perspective, what we primarily look for is a team that has the capability and credibility to solve a real problem. The team is the main factor at early stages of investment. We also like to see a minimum viable product developed—it’s an additional validation. If you have design partners who could become potential clients and are currently refining the product with you, that’s a plus. Interest from other investors in your company is also favorable.

How do you identify a startup’s valuation?

Marius: A key element is the size of the market or the magnitude of the problem needing to be solved. This helps us answer other crucial questions, such as how investors determine the valuation of the company they wish to invest in. 

There are four main methods we here in Romanian use to assess valuation:

1. Empirical Method: This method is based on the investor’s experience. For example, investing in Romanian companies, a successful company can be sold between 1.5 million and 2.5 million euros, with an average of 2 million. This method acts as a guideline, especially for companies solving local or regional problems, preventing overvaluation in smaller markets.

2. Discounted Cash Flows (DCF): This method evaluates a company based on its future financial projections. The future revenues are discounted to present value, providing a monetary valuation. It’s mainly used as a verification tool rather than a strict valuation method, ensuring the financial feasibility of the projections made by the startup.

3. Comparable Method: This common method involves comparing the target company with similar ones in the same industry to gauge its value. Adjustments are made based on risk levels associated with the company’s location (e.g., Romania might have higher perceived risks compared to countries like Switzerland or France).

4. Instinctive Method: If a problem being solved is significant and broadly recognized as critical, an investor might choose to invest without a formal valuation. This rare situation applies when the problem’s scale and importance are evident, making it compelling for immediate investment, even without detailed evaluations.

How do we determine the valuation of a company that is still at the MVP stage?

Marius: The developmental stage of your Minimum Viable Product (MVP) is not a barrier to attracting investors. Instead, it’s crucial to connect with investors who are familiar with and suited to your company’s stage. These investors will apply appropriate valuation methods. If they encounter difficulties in valuing the company accurately, they often prefer to use a convertible investment tool. In Romanian, this is known as “investiție convertibilă,” in English, it’s referred to as a “convertible note,” and you might also know it by the American term “safe note.” This financial instrument sets a valuation cap and floor—essentially a value range—and stipulates conditions under which the investment converts into equity during a liquidity event, such as receiving venture capital investment or returning funds if the founder opts not to pursue further venture capital funding.

In the end, each business angel has a unique investment thesis, which becomes apparent during discussions. Sometimes, your project might not align with an investor’s valuation perspective. For instance, some investors insist on acquiring at least 1% of the company at the time of their investment, with specific upper limits. This requirement can pose a challenge during negotiations. Regardless of how promising your idea may be, if there’s no alignment, the most disciplined and principled business angels will adhere strictly to their investment thesis.

What are the red flags for a business angel when considering an investment in startups?

Marius: For me, the most critical red flag is a team’s lack of honesty. It’s when they claim to have achieved something, or to possess something that doesn’t actually exist—and then I find out the truth.

Also, I will mention a few more, though they’re quite obvious, so I won’t list them now as red flags. Simply put, do not lie. You must not conceal anything; instead, state things as they are. There are some ‘orange flags,’ as I would call them, which are significant because they can quickly turn into red flags. I’ve observed these across various nationalities and regions over the years.

Perhaps I’ll offer you a tip now, so you don’t fall into the same traps. Many founders often believe that telling an investor, ‘This week I’ve resolved something,’ or ‘I’ll sign something,’ or ‘Something will happen,’ will impress me. But what about the past year and a half, or the year, or six months you’ve been building your company? Isn’t that what you do? Don’t you have discussions to solve problems? Don’t you sign clients? Don’t tell me, as an investor, ‘This is the gem, I’ll sign the client.’ How impressed you must think we must be! We should be told after you’ve signed. If you have a signed client, show me. Show me the contract. Show me the money they are paying you.

It doesn’t impress us, the investors, when you say, ‘By the end of the month, I expect to have a monthly recurring revenue of I don’t know how much.’ Tell me what you achieved last month, not what you expect now, this month, that will impress me with a 300% increase. Let it be. That’s what we hope for. But what is important to me, as an investor, is to understand what you have managed to achieve during the work period, with the effort you have put in. Tell me what you have done. Not these PR stunts designed to create a sense of urgency, or fear of missing out. Saying to investors, ‘I’ll sign the first client this week,’ won’t make me rush to pull money out of my pocket to give to you. That’s not how it works.

And founders make the mistake of trying to push, in the discussion with the investor, to create hype. Or saying, ‘I’m in discussions with five investors and need a quick answer.’ Discuss with those five to get a quick answer if they are willing to give it to you. For me, as an investor, it takes as long as I say it takes. If you want my money, great; if not, that’s fine too. There are others who can invest.

So, know that attempting to create hype is not seen as a positive sign. It’s more like an orange or yellow flag, which can quickly turn into a red flag. Consider what happens if I promise you’ll sign the first client by Thursday, and then on Friday, I call you asking for the contract. You tell me, ‘Oh, but there were complications, the cat had to go to the vet, it couldn’t happen…’ What then? What do we do? You’re putting unnecessary pressure on yourselves with this need to create urgency or this kind of marketing in front of an investor, which is not welcome.

Ultimately, it comes back to honesty and transparency, which I spoke about earlier. I believe that if you can be authentic and open about the challenges you face in your business when discussing with an investor, you will be much more successful in sparking their interest, at least enough to continue the conversation and see if there’s common ground. So, do not idealize what is actually happening in your business—idealize, if you wish, in terms of vision. That’s where I expect you to idealize. That’s where I expect to hear from you. ‘This is my grand vision. This is how I see the problem being solved.’ That’s what I want to hear from the founder. But do not idealize what is really happening in your business, because that is verifiable.

What makes a startup successful?

Marius: I invest primarily in serial founders or executives—individuals who have previously managed businesses or significant teams within a company. My preference is rooted in the belief that such experience equips them with crucial pattern recognition skills necessary for navigating the uncertainties of launching a tech or tech-enabled business. This approach significantly reduces effort because these individuals are adept at building effective teams. Their extensive experience, whether in corporate environments or entrepreneurial ventures, involving countless interviews, has honed their ability to quickly identify patterns and assemble competent teams. When starting to work with a team, I first start with lunch or dinner, and then I pay close attention to whether one member consistently dominates the conversation, as it reveals much about the team’s dynamics.

Could you discuss the AI regulations and compliance in the EU?

Marius: Whenever you have a question related to regulations or legislation, ask yourself who is financially impacted if those regulations are violated. Who holds the ultimate responsibility? The final responsibility lies with the entity using the technology to achieve their business objectives. It’s not necessarily the startup, as no one is going to severely penalize a struggling startup that has raised a million dollars for delivering questionable technology to a bank; rather, it’s the bank that would be at fault. Banks have the obligation, when integrating technology into their toolchain, to ensure it is compliant and adheres to the law. However, startups can and should also ensure their compliance.

I recently invested in a startup based in Croatia named TrustPath AI. Currently, it’s an early-stage product that aims to help startups understand how close they are to being compliant, at least with the EU AI Act. I advise those of you developing a startup in this field to use this tool to check your level of compliance at no cost.

Remember, as was the case with GDPR in terms of EU regulations, the buck stops with the large corporation. It is primarily the major companies that have a significant stake in how they choose to implement these regulations.

Is there a difference in attracting funds for a startup in the EU compared to non-EU member states?

Marius: Yes, it’s a fact that the investment risk is higher in non-EU countries like Moldova, the former Yugoslav states not in the EU, and Georgia. This is similar to Romania, which, despite being an EU member, faces more investment hesitancy compared to Western European nations like France or the Netherlands. The reason is straightforward: investors have ample attractive options locally, so why should they look elsewhere, say in Moldova or Romania? The key lies in providing compelling incentives for these investors to consider places like Moldova.

Moreover, there’s a notable difference between investing in EU countries and non-EU ones, and even within the EU, between developed and emerging economies. It’s essential to understand why this investment disparity exists and how to mitigate the associated risks. For attracting European investors, consider establishing within the EU, serving its markets, or targeting the US where the origin doesn’t impede opportunities. At UiPath, I found that many in the US didn’t even recognize Romania’s geographic or economic context, confusing it with countries like Ethiopia. 

The lesson here is not to lament why others don’t recognize or invest in your region, but to focus on building strong, problem-solving companies. That’s the goal, regardless of whether you’re in Romania, Moldova, Serbia, or Bosnia.

We also passes few questions to the TechAngels team to seek answers to questions such as:

What are the most important metrics or indicators that investors look at when assessing the potential and progress of a startup in the educational technology sector?

Radu Vucea – I consider retention and completion rates one of the most important key metrics in any educational product. These are also the hardest to nail, as it’s incredibly difficult to keep customers engaged and motivated, especially when most if not all of the interactions are online.

Sebastian Cochinescu – Impact on society, repetitive growth, innovation.

Any vision for future development and influence of AI technology?

Sebastian Cochinescu – If we overcome the potential threat posed by AGI to our civilization, then AI could improve almost all aspects of our lives, from human workforce replacement to breakthroughs in science, technology and health.

Are AI-based startups really bringing economic value? currently or in the near future?

Sebastian Cochinescu – Definitely yes, from enabling businesses to make more money, to savings and process optimizations, AI startups are creating both economic and social value in the current business environment and we can only expect this trend to continue at an accelerated pace