It's been now more than 6 months that the Skok123 Angel Group has been actively evaluating investments in the Ex-Yu region. We have talked to 31 companies and their founders about their business models, in-market performance, fund raising, entering the USA market and more. While the sample size is still very small, I felt this was a good time to do our first analysis of the landscape, and get a directional sense where things stand.
Disclaimer: The following analysis does not constitute investment advice. It has been conducted for the purposes of educating myself to help me with my investment decisions. The analysis may contain faulty assumption or misrepresented data that was communicated to me in conversations by the companies evaluated. Different data points and assumptions may therefore yield different conclusions.
Ex-Yu Pre-Seed and Seed stage companies are too expensive!
The analysis shows that the valuations asked for by pre-seed and seed stage companies in the Ex-Yu regions are on average about 25% higher vs. USA based companies that have received an investment.
It's important the emphasize that what companies ask for and what they get is not necessarily the same, so we are to an extent comparing apples to oranges, but nevertheless the "gap" of expectations vs. reality is significant.
Why does this matter?
The reason we started the Skok123 group is because we believe that for a startup company to succeed, it has to make it in the USA market, and to do that they need smart investors from the USA. Of course, the USA market is not the only way to make it, but it is the largest homogenous market that is willing to pay higher multiples and transaction sizes then non-US markets. And obviously, it's where this group is located and connected to.
Funding by Stage Comparison
In the period from November 2021 to July 2022, we talked to 31 companies of which 2 are seeking Series A financing, 15 Seed financing, and 14 pre-seed financing. Eighteen are from Croatia, twelve from Serbia and one from Slovenia.
The table below shows company valuations, amount raised and % of equity given away for the financing round. For example, in 2021 the median valuation for a USA based pre-seed company was $6MM, and the average amount raised was $1MM. This amounts to companies giving away 17%.
Looking the equivalents in Ex-Yu region for the past 6 months, startups are willing to give away 14% of their company. This means that for every $1 investment an investors made in a USA based pre-seed startup in 2021, they would have to make a $1.23 investment into an Ex-Yu pre-seed company to get the same amount of equity.
This is even more drastic for Series A funded companies where the $1 investment in USA would require a $2.67 investment in Ex-Yu. It is however important to emphasize that this is based on only 2 companies, and therefore the analysis may be significantly skewed.
The below tables shows average numbers for the different stages of companies in term of their Revenues, past money raised, current amount raising, pre-money valuation and the Valuation to Revenues multiple, which is at a staggering 34x for seed stage and 31x for series A stage companies.
Why this is a problem?
The reality is that USA based investors are apprehensive about investing in high risk investments outside the USA in general. Their view of Ex-Yu region is:
Geography that is viewed as part of Eastern Europe
Unknown legal and regulatory system
Proximity of the war in Ukraine
More difficult access to capital and clients
The investors default mode is, "why would I invest in a region i know nothing about when I can invest in US based company where"...
I can easily access company if I need to visit them or talk to them
I know the legal and regulatory system that protects me as an investor
I believe the USA has a more stable economy and political system
If and when the company needs to raise money and/or access clients it's much easier in US
USA Investor Expectations
Based on the above, for an investor to take a greater risk, they want to get a greater potential return. A return on an investment is largely driven by the price the investment is purchased at, ie lower price = higher return.
This analysis shows that current pre-seed and seed stage companies in Ex-Yu region are asking for valuations that are overvalued by about 25% vs. actual USA investment figures for 2021. Given the current market downturn Ex-Yu startups, who want to raise USA capital for USA market entry, may have to accept a 25% to 50% lower valuations to raise capital.
No one knows for sure how the market will evolve and what impact it will have on early stage investing. What we do know that ones perceptions become ones reality. The current perceptions for the USA based investors are:
Market is down 20% and everyone is saying it will get worse.
Most of my capital is "locked" in the market and no one knows how long that is going to last. With less liquidity I can make less investment so I have to be diligent and choosy.
Based on everything I read and see in my network, valuations are coming down and will continue to do so.
I don't need to rush as it's a buyers market.
IMPORTANT: What may also skew this analysis is that many of the Ex-Yu company valuations were based on a Euro exchange rate that has dropped approx 15% since November 2021. If one were to average that out over the past 6+ months, it would mean that there is potentially a 7.5% adjustment that would put the 25% estimate to a 17.5% premium, which is still significant.