Penta Bank discusses with EthosData how a startup organizes a seed round. Penta Bank, a German digital-only bank for startups and small and medium entreprises, raised early this year €2.2M seed.
We talk with Lav Odorovic, Penta's founder and CEO, on how they did it and how they also organised the due diligence process. Click below to listen to the audio (transcript below):
EthosData - Hello, I'm Maria Rubio, from EthosData Data Room Services.
Today I'm talking with Lav Odorovic, co-founder and CEO of Penta, a digital-only bank for Startups and small and medium enterprises (SMEs).
Lav, thank you very much for making the time to join me today. I'm very excited to get your insights on how a startup organises a funding round.
Penta - You're very welcome Maria, It's a pleasure to talk to you.
EthosData - Lav, as mentioned we are going to be talking about fundraising and Penta just closed an impressive seed round, you raised more than €2 million - congratulation on that! - What do you think this transaction means for the future of Penta?
Penta - We are very very excited. We have been working so hard going live, even with very limited funds and finally this gives us resources to show the world what we can really do with proper funds. It's just beginning of something really great, I hope.
EthosData - Why did you decide to raise capital on the first place?
Penta - No matter how lean and agile we want to be, Penta came to a position where we have customers, where we have partners, where we need more and more developers, more senior ones; and where we just outgrew the first dream when building a new bank we never really had on our own when we entrepreneurs, because we really hated the experience, so we now really came to a stage where it needs to reach more people and for that we need funds. The funds will be mostly spent on further development and connections for our partners as well as on reaching new users and growing in the following months.
EthosData - Once you decided that it made sense to raise capital to grow and expand Penta, how did you structure the process?
Penta - First of all, I would really advise to anyone going through a fundraising process to really think it through and maybe this has been repeated hundred times but I always feel that this a very good advice for all fellow entrepreneurs, to really go to users of first revenue with as little money as possible because this is when the relation goes up and this is when raising money means that founders don't have to give the majority of the stake to the investors.
We really took this approach and managed to delay this but once this became inevitable and once we went live this put us in a better position. The entire process took us at least twelve months. It took us five to six months to find the right partner, which was also not the easiest task because there were huge amount of venture capital firms (VCs) and huge amount of other investors but it takes time to find the right match. It's not only about people willing to give you money, it’s also about how good the match is: is it smart money or is it just someone writing a cheque; what kind of conditions are involved, etc.
There are a lot of angles that they need to get lined in order for this to work and then finally we sort of felt that we found the perfect partner, it took us quite a bit of time to go from handshake, "yes, we'll do this" to the moment where we actually signed the contract.
It's a lengthy process, it usually starts, and it also happened for us, with the due diligence phase - and this would be also a good word of advice that I would love that someone told me, it would be much more helpful to prepare all the document in advance for when the due diligence process starts and to have everything neatly organised. This is where data room is extremely helpful. In our case, we used EthosData Dataroom and it really helped a lot.
It's a process that last months where there is a lot of information that needs to be run diligently, not only where we store the files but also how do we access to them, who has different permission… Some of the files you don’t necessarily want to disclose them unless the other side wants them and you only share this with your lawyers; but on the other side most of the documents must get disclosed and then this is where a data room helps a lot. All this can be managed easily, and even going further to have visibility on what documents were actually accessed by the investors and which have been opened ten times by ten different people, etc. It also helped us speed up the negotiation along the way knowing what information they have accessed.
After the due diligence we went to negotiations of the terms sheets. Actually, we got the preliminary terms sheet even before the due diligence process and this will be another big piece of advice to everyone else. Previous to this we lost a couple of weeks in a serious due diligence process with a potential partner who was not really there yet with our expectation. It would be worthy to have at least a ballpark, and only once both sides know where this is going start a formal due diligence process. Afterwards there is a phase where what it’s agreed needs to be converted into legal documents and the lawyers get involved. Who are you working with it’s crucial, an entrepreneur with no background in law can get lost in the process and it’s really important to stay on top because every word could dramatically change the conditions of the agreement.
I hope this answers your question, maybe I could focus on one of those phases a bit more.
EthosData - Lav, thank you very much for your insights. As you were mentioning you run the entire fundraising process. From the kick off where you are discussing with potential partners to further negotiations and signing of the final agreement with your partner. What would be the most difficult step?
Penta - The hardest thing is that the business cannot stop. On one side, you are 100% involved into reading hundreds of pages of legal documents, discussing with your lawyers, lawyers of the other side and being super emotionally involved, and also there is a business to run. For me wearing these two hats was the hardest thing to do. If we talk about the phases and the process we went through, all of them were equally critical, I don't think there is one to be pointed out. It’s just the complexity of the process and the time and how focus we needed to be for doing this. There is also a thing I learned from Francisco Lorca, who was leading the Startupbootcamp program at a time when we joined and later on helped us a lot as mentor. It is very hard to do many important things at the same time. As he would say, “when you wake up in the morning and take shower, you think about one thing and this is the thing you should do that day”. For me this was the biggest challenge, focusing on only one thing and not trying to do ten at a time.
EthosData - Your new investor is London-based VC Inception Venture Capital, which is very focused on fintech as well. How did you go about meeting all the investors? Any of the investors actually did contact you? Or how was the entire engagement with potential partners?
Penta - We lucky to attract some press attention, from very early on it's probably due to the nature of the product we are serving and because of the capital requirement to do what we are trying to do. We have media attention we had VCs contacting us directly. However, I don't think any of those contacts were serious enough. Some people also came as a natural consequence of connections with Startupbootcamp, and also some potential investors were referred to us by our network. It’s was really a combination. There were also personal connections, with VCs it is very difficult to get in touch just by writing an email, normally it doesn't work if you don't have some warm introduction from someone who already knew them. They somehow don't find these leads serious, which I personally don't agree with, but maybe psychologically it’s difficult to filter if you receive tones of emails everyday.
So, there are multiple ways to approach this process. We were really shooting from all cannons and really trying to get the best deal for ourselves, it's a mixture of different channels that we used. I think all startups at our stage would have to do.
EthosData - And if you could go back to 2016 Lav, and 2016 Penta team, what would be the biggest piece of advice you would give them?
Penta - Probably just to be extremely focused. I guess all of startups there are hundreds of ideas coming to one’s mind and ideas where we spend a lot of time prioritizing on. In the end, now from the distance it seems that it was very obvious from the beginning. Maybe it would have been better if we just stuck to it, went on and do it and then ask questions later. But it’s always easy to be a general after the battle.
EthosData - Any advice is useful for sure. As you said, sometimes from the distance you realize that you were losing a lot of time doing other things. Following what you mentioned of Francisco Lorca’s piece of advice, you should focus on one thing and try not to do ten at a time. For whoever is thinking about embarking a due diligence process or fundraising, is going to be very valuable.
Penta - Yes. And let me explain that a bit better. We always knew we wanted to be a business bank, that we never really had with our previous startup. We spent a lot of time investigating and thinking about all directions we could take, and that was something we could be doing at that moment. All these tactics are very clear at the beginning. If I could turn back time, even though we really did it in a record time and we are really proud of this, I think we could have done it even quicker and faster. We would have been able to get many learnings far quicker to get to see from on top of the hill not just trying to think at the bottom of the hill what actually we are supposed to do.
EthosData - Maybe you can put that into practise for the second fundraising stage.
Penta - Hopefully. yes. Hopefully we all get better over time and learn from “doing”. I think this is a great entrepreneurship skill. Most of entrepreneurs are doing the same as us, they wake up everyday with a task they have never done before, and most of the time they invest a lot of time thinking about three ways to approach it and just making an educated guess. But all about entrepreneurship is doing experiments, being able to do it faster and then quickly learning mistakes. This is the best way to operate both in terms of the business and also personal development.
EthosData - Perfect Lav. Again, thank you very much for your time. I'm really looking forward to seeing what’s next for Penta.
Penta - Yes. Thank you so much. We all are excited as well as you can imagine.