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Serbian.tech Podcast 5 questions for… Vladimir Pavlovic

Podcast 5 questions for… Vladimir Pavlovic

Listen to the podcast below

Transcript:

Vladimir Jelic:

Hello everyone and welcome to the first episode of the SerbianTech podcast from the “5 Questions for …” series.

No less or no more than the first episode of Quarantine.

We have been thinking for a long time whether to launch a podcast and what new things we can provide to our audience and how we differ. We decided to start with the format in about 30 minutes, but the novelty is that we want to crowdsource questions. That is, we want to ask the interviewee questions that you would like to hear answered. So every week you will have the opportunity to see the announcement of the speaker on our site and to ask a question or like a question you like, thus including it in the first 5 questions that we will ask.

Don’t forget to follow our social networks and website to ask the next speaker a question, but also to hear the answers to my current guest’s questions.

Vladimir, thank you very much for breaking the ice by hosting the first episode, which we are recording as we have to because of the pandemic. from the warmth of our homes. I hope the sound is good, and I would ask you to say a few words about yourself as an introduction.

Vladimir Pavlovic:

Thanks a lot for this introduction, my name is Vladimir Pavlovic. I am the managing director of the consulting company WM Equity Partners and for ten years we have been helping small and medium-sized enterprises and innovative companies to find funding sources. What we are focusing on is not banking sources of funding but alternative sources of funding, primarily equity financing from regional private equity and venture capital funds.

In this regard, let me say that we support many companies to present their business to regional funds, all in the hope and desire that such funds will emerge very soon in Serbia and will be able to offer equity financing to companies.

And in that regard, I would just like to emphasize and this part ends with the recent adoption of a new law on alternative investment funds, and the adoption of the by-law is expected in the next couple of weeks so that we will have a complete domestic legal framework where private equity and venture capital funds can also be established in Serbia, and then I expect to see a larger supply of capital for domestic companies.

Let’s start with the question that got the least votes, so here’s a start.

Vladimir Jelic:

What advice would you give to startups in this situation? Is it a reduction in the number of employees or before cost optimization or something like that.

Vladimir Pavlovic:

So let me tell you, we all hope that this state of emergency will not last long. It seems to me from previous experience that this crisis will be quite lasting if we make a parallel with the 2008/2009 crisis. But I do not see this as any great threat for innovative companies to continue their business. Just every crisis imposes a drastic change in the business of all, including traditional companies. And this is now a great opportunity for innovative companies to have as much and as much contact with traditional companies as possible, to help them digitize their businesses, to offer them their innovative services and thus reach their first clients. So, as long as a crisis is always difficult, it can also be an opportunity for some new ways of doing business. And above all for innovative solutions and digitization, because we have seen that most companies are forced to work from home, and this is precisely where the space is for innovative companies to offer their solutions.

Vladimir Jelic:

That’s right, and we’ve seen a lot of announcements that quite a number of innovative and now successful companies actually started in times of major crisis.

Vladimir Pavlovic:

That’s right. Well people are usually, so to speak, lazy as long as everything goes right, while all is well they are not exactly working to change some of their habits. When a crisis comes, this is an ideal opportunity to change something dramatically, and it is up to innovative companies to take advantage of it now.

Vladimir Jelic:

Yes. Okay, so deficient startups should continue as planned. To possibly tailor their service to these times. But definitely to continue looking for investments, to continue financing the project so they simply might be more agile in this period.

Vladimir Pavlovic:

Now, you asked the other question that we saw in the list of questions, what is the focus and what should startups focus on: seeking clients or seeking investors? (“What is more important for startups – finding the first client or the first investor?”)

And this is an old dilemma, so let me joke a little bit about starting a chicken or an egg and I would say that unlike some statues that can’t get to the stage when they have their product without some initial investor. Everyone else who has the luxury of coming up with an MVP should take this opportunity to customize their product and help traditional companies change their business as soon as possible. In that way they reach their first clients and their first income, and later that is exactly what will help them significantly to reach investors, to represent their business, the revenue they already generate and will be significantly more successful in the fundraising process.

Vladimir Jelic:

I definitely agree and that leads us now to perhaps the next question. That is, at what stage do companies invest most. Or maybe we better ask at what stage startups or companies should look for an investment? And certainly adding to this, that definitely if there is already some shift, some turnovers in any segment of the company or startup, it is easier for them to get an investment tomorrow than a fund, an investor or anyone.

Vladimir Pavlovic:

Well, there are generally investors for every stage of a company’s development from the initial stage where they can be supported by angel investors or, to say the least, some accelerators to certain later stages when it comes to global expansion. What is specific to our region and therefore to be even narrower for Serbian startups is that we do not have a very wide range of investors in Serbia and as the company progresses in its further development, the closer it is to some stable and not so negligible monthly income, it becomes more interesting for regional VC funds. So, from our experience just this year and last year when working with regional VC funds, a company that can generate between € 10 and 20,000 stable monthly income has a very wide range of regional VC funds with which to talk about investing. On the other hand, those companies that are not at that stage, which are still in the pre-revenue stage, are, I say, mostly focused on domestic investors who unfortunately do not have many yet and they are mostly or angel investors who also do not have many in Serbia or certain accelerators that have started their business in the past few years. So, here we are once again encouraging startups to reach their clients as soon as possible, to start generating revenue, because when they already have income then their investor pool is much larger.

Vladimir Jelic:

That’s right, maybe for someone who is not so much in the finance field, therefore, revenue doesn’t necessarily mean profit. That someone has a profit of € 20, € 30 or € 10,000 a month or whatever.

Vladimir Pavlovic:

That’s right, that’s right. To be precise, no profit is expected in the early years of a startup company, but the space of verification of your product, that there are clients who have signed a contract with you, use your product, where you generate revenue from which it is not necessary to cover all costs which will encourage mutual funds to support your further development.

Vladimir Jelic:

We’ve seen that even a lot of successful and fairly well-known startups aren’t really, let’s just say, not yet profitable. Already have huge trades.

Vladimir Pavlovic:

That’s right. Yes Yes. The aim of investors in startup companies is to make the greatest leap not only in domestic but also in regional markets. And then in the last phase and in the global, world markets because only when, to say, such volume and such market coverage is reached, then will the expected rates of return for investors be realized. So, companies, innovative companies do not have the pressure to be profitable by investors, but what investors want to see is the expansion of their business model from local to regional and even to the global market.

Vladimir Jelic:

Great. Simply crisis times affect issues, so the question is about the state’s assistance that has been announced and how much it affects the ease of running a startup. Do you need to meet certain requirements and how much do you think domestic startups meet? It means that it is a certain number of employees, if they do not currently have employees and in this period they are hiring, whether they are getting the opportunity for certain benefits, announced assistance and the like. I do not know how much you have followed and how well it is still defined, but there may be some point about it.

Vladimir Pavlovic:

Well, here I would like to make two general comments on that. First, this new support package applies to micro, small and medium-sized enterprises, and partly to large companies. In this regard, startup companies are usually classified as micro-enterprises, and thus are certainly in the pool of companies that the state can and wants to help. And the whole package of measures also applies to the start-up of the company, that is, they are in no way excluded from that package of measures. The only criterion I understand that should satisfy them is that they do not reduce the number of employees by more than 10% compared to the cross-section of March 15 this year. So this is something that every company really needs to fulfill, and given the opportunities that startups will face, I believe that most startup companies can meet that requirement.

On the other hand, what is very important to point out is that using this state aid package, the state did not say that other state aid packages could not be used. On the contrary, they are complementary so that startup companies also have a tax credit available for investing in innovative companies, which was adopted last year, for new companies. Employment, incentives can be used in terms of non-payment of taxes and contributions of new employees and the whole set of these other measures adopted by the state. So, here I am saying, besides these general and general measures, startups think more about these measures from the previous period. So, they should focus more on them.

Vladimir Jelic:

Great. And it seems to me that the current measures are a little less conditional, that is, more companies can be found to be eligible for… That is, a large number of companies are eligible, that they can apply and can actually receive help.

Vladimir Pavlovic:

That’s right. I would say these new support measures are very broad in scope and very broad in scope, and in terms of financial effects, they aim at companies surviving this period of emergency. And in a financial sense, these previous support measures are much, I would say, more abundant and companies need to focus on them.

Vladimir Jelic:

Thank you and we move on to the last question that received the most votes. So, does your review mean … Do our owners / founders of companies and startups have an awareness of the value of their company and their project? And is there any simple calculation tomorrow if I want to sell my company is it worth it, I don’t know 12 times monthly revenue or 20 x monthly profit? And is there such a simple calculation that we can roughly say, ah my company is worth it or is it simply some more complex calculation.

Vladimir Pavlovic:

I would first point out that when comparing startups to traditional companies, I would say that statap company owners are much more aware of their company values ​​than traditional company owners, who are often often confused by different valuation methods. On the other hand, given that all investors face a great deal of uncertainty about how a startup will grow its business and how successful it will be, there are not some exact valuation methods on the one hand, but practice has shown us that at different stages of development Companies certain amounts of financing are available. So, to say the very beginning, when a startup has either an MVP product or an idea, from angel investors or certain accelerators, they have at their disposal funding sources ranging from € 10,000 to € 100,000. In a seed seed round when first clients already exist, the startup can finance its further business with amounts of € 50,000 to € 500,000. Whereas in the next round of A, when there are already stable passes this funding can range between € 500,000 and € 2,500,000. Of course, for later rounds of financing, when it moves to the global market, these funding amounts can be much higher.

So once again, there are not so many exact rules for valuing a startup company, but at certain stages companies can count on certain amounts to say financing and as a rule, investors are always looking for a minority stake, so the founder will really benefit most if his company is to be successful globally. So, if we already have some ranges defined, in terms of financial resources, that the startup will get, if we already know that it will be a minority owner as a new investor, then there is still a fine negotiation around the exact percentage. Whether it will be 15% or 20%, 25%, and this again often depends not on some financial model, but on the investors’ assessment of how good and reliable the team is, how much the product that the startup has developed and how innovative it is, how much it will be unique, that is, how long it will not have any significant competition. And that will all contribute to making a global expansion globally and ultimately, after X years, investors will have a profitable company.

Vladimir Jelic:

Clear, great. To think that maybe now the difference between traditional companies and maybe, let’s say, innovative is that the founders of innovative companies are counting on some exit at the end of the road. Whereas, perhaps, traditional companies are more likely to see it as a company that will last for the next 20, 50 years and the like. I don’t know if you agree with that, do you have the same view.

Vladimir Pavlovic:

That’s right, a good portion of traditional companies are established as family-owned companies whose purpose is not to sell one to another investor one day, but to provide a job for their children. However, as time goes by and how the founding children have the opportunity to go abroad, study, and get better business deals somewhere, we are increasingly told by founders of traditional companies with a request to look at their business, see what needs to be changed, and how to prepare them for investing by some or strategic investors or mutual funds. On the other hand, usually the younger generations who are the founders of innovative start-ups know that if they want to be global players, they will certainly have to receive some institutional investment at some point in their ownership structure, then from the very beginning, the whole system and the whole business of the company is based on some much better and more transparent bases.

So, I would say that in that sense those younger generations of founders of innovative companies are at an advantage, it is much easier for them to approach some institutional investors by these traditional companies that have often mixed business and family, so it takes considerable time to the link is appropriately severed without some major consequences for the founder.

Vladimir Jelic:

Clear, clear. I am not sure if you were also practically acquiring, that is, going out to founders and selling an entire startup or a traditional company. And just a quick look, if it happens that a founder wants to completely sell his company, can he count on an amount. Can she self-calculate, and says ok my company has a monthly turnover of € 100,000 a month so I can sell it for hundreds of thousands or something.

Vladimir Pavlovic:

Well, our innovative companies are generally quite young and we have not had the opportunity to help them in exit, at least for now. On the other hand, we have a wealth of experience for traditional companies that, where the owners wanted to offer either a minority or majority or, to say 100% ownership to a strategic or financial investor, for one reason or another. And often, here we are, to comment on, two methods of valuing companies. One is cash flow discounting, when the investor appreciates the value of the company based on the potential profits the company will make. Due to the subjectivity of the assumption, this method is much less used now, relative to the relative valuation of where the indicators of a particular business of a company are taken. Say EBITDA or say the amount of net profit or total revenue and it is compared between similar companies in the industry and multiplied by the appropriate multipliers to arrive at the value of the company.

These are, to say some, two general valuation methods. What is important to note is that in this relative valuation we cannot find two identical, same companies, so this method is, again, not so easy to use and it is always important to start with the specifics of each company. That is, whether the company has any assets that it does not need to perform its core business, whether those assets can be sold, monetized or can remain the initial owner, and the new investor can only buy the business. So, of course, we are also at the disposal of interested companies to help them evaluate their capital at exit. And let me just say, not just valuations, but also to connect them with regional investors who invest in family businesses in our region as well.

Vladimir Jelic:

Perfect! Thanks a lot, Vladimir for answering the questions. I hope the listeners will be interested to hear and I hope that we will talk soon in some better conditions, that is, live.

Vladimir Pavlovic:

Thank you very much for the opportunity to apologize, although the conditions were not ideal for me it was a great pleasure to be your first guest. So I wish good luck in your future work.

Vladimir Jelic:

Bye!

Vladimir Pavlovic:

Thanks a lot, bye.

Vladimir Pavlovic WM Equity Partners

Vladimir Pavlovic

WM Equity Partners, Director

Vladimir has more than 20 years of experience in Serbian and regional financial markets. He has a proven track record in the creation of legal and institutional framework (National Bank of Serbia, Serbian Central Securities Depository). But also as an active participant in financial markets (CEO of FIMA International-brokerage, Portfolio Manager and Chairman of the Board of the Asset Management Company FIMA Invest).
Vladimir is a managing partner and CEO of the WM Equity Partners since its incorporation. He participated in numerous access to finance transactions, financial restructuring procedures, M&A mandates, and corporate governance improvement projects. He was the team leader in numerous projects financed by international financial institutions (IFC, EBRD, etc.) and donor projects (EU Delegation, USAID, etc.).
He obtained his bachelor and master’s degree from the Belgrade Faculty of Economics and Ph.D. in Public Finance on the Faculty of Political Sciences. Since 2006 he is a CFA charter-holder and from 2019 he is the member of the Board of Serbian CFA Society.

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