Pre IPO Investors: Startups Considering an IPO in Bulgaria Should Rely on Sleeping Households’ Savings

The savings of the households might be the significant capital source for IPOing startups in Bulgaria ©Pexels
The savings of the households might be the significant capital source for IPOing startups in Bulgaria ©Pexels

Viktor Manev has over 25 years of experience in investment banking and within the capital market. Together with his partner Nikolay Martinov, experiences stockbroker, and serial investor, he has founded the growth stage and pre IPO investment fund Impetus Capital, to support entrepreneurs willing to grow. Both Manev and Martinov like to bust myths with numbers, but also try to help companies set the right management structures that would allow them to grow.

Manev and Martinov were behind some of the famous growth stories on both the digital and offline markets in Bulgaria. While Martinov led the first IPO in Bulgaria and personally invested in the media group (he exited the investment in 2013 with a 34% IRR on his investment), Manev advised and structured the growth financing for the national expansion of the food retail chain Piccadilly (which the investors then exited in 2007 with the spectacular 79% internal rate of return. The retailer collapsed in 2017). In their more recent history, the partners have established a fund with a special focus on preparing younger companies to grow and go public.

Impetus Capital now has €2.5M under management and its portfolio consists of companies like the logistics innovator Discordia, the IoT company Allterco (already public), the big-data tech AI-aaS Analytics for Everyone (A4E), life science data aggregator BioSeek, biometric company Biodit (to go public in the next months), Excitel, the fastest growing internet provider in India, and their last investment in Browswave, a BI-aaS tool for consumer electronics retailers and vendors. 

Manev’s thesis is that even though there’s enough seed capital on the domestic market, the capital needs of high-growth ventures and businesses are underserved in Bulgaria. In the same time, the Impetus believes companies are often unable to reach their full potential and are limited by the way their management operates and processes are set. We sat together with Viktor Manev and Nikolay Martinov to talk about the real situation on the local capital market, the opportunities for startups and scaleups and their vision for the right ways to grow.

Trending Topics: I’ve recently talked to a founder who’s considering an IPO on the Bulgaria Stock Exchange and he commented on a number we’ve put in an article: assets for around €9 Billion on the Bulgarian capital market, around €1 Billion under the management of mutual funds. According to him, only a small percentage of this could be invested in startups/scaleups a.k.a risky ventures. Could you elaborate?

Viktor Manev: Actually, the important number is that Bulgarian households keep €26B in savings in the banking system at almost zero and negative interest rates. If only 10% of that amount is channeled to the capital markets, there will be €2.6B for investments on the Bulgarian Stock Exchange. Mutual funds and other players are on the top of this number. They, however, not necessarily invest in Bulgaria

We speak that Bulgaria is systematically underserved with capital, especially for companies in the growth stage, and we look at this need. While the portion of startups could be as small as 10% of the entire economic system of the country, Bulgaria has more than 1,700 companies with annual revenue of over €2M that are growing at a double-digit pace in the past couple of years. These are the lower end of low-mid market. If we include startups, the number of companies is even higher and startups are growing with multiple hundred percent rates. All these companies grow at above the economy average growth-rate. They are financed primarily through their internal cash flow and bank debt financing. Such growth has its limits if it’s not supported by private equity and venture capital. If we allocate only €2M equity commitment per company for the fastest growing small caps, it means we’d need some €3.4B in equity funding to support the growth of these companies. If this money is allocated in the time horizon of two to three years then we estimate the demand for equity is around €1.1b to €1.7b per year. Then you will even need more to sustain and keep the growth of these companies.

How much is actually available and investable in startups? What’s the greatest advantage and which is the biggest risk when tech companies go public?

Viktor Manev: Invest Europe data shows that there is only €18M invested through private equity and venture capital in the entire Bulgarian economy in 2017. We estimate that currently there are roughly €135M of total venture and growth equity mandated for Bulgaria in the next five years. This makes a maximum of €25M investments per year. Pension funds are sitting on €7B of which nothing is invested in the segment of the fastest growing companies in the economy. Indeed, the largest institutional investors in Bulgaria don’t have the financial instruments to invest indirectly here, to invest in companies and sectors that grow sustainably with over 20% annually. Pension funds invest in regulated instruments and it is a matter of the regulator and the market to develop this investment niche.

Nikolay Martinov: Technology sector and startup can benefit if they go on the public market, as they will reach local institutional investors with deep pockets, not to mention the international ones in this category. Thus, these companies can spread the risk among a multitude of investors letting them share the risk/reward options. Now, more than ever, going public on the Bulgarian Stock Exchange and several other exchanges in Europe is affordable. Of course, it has its requirements.

What would be your three top tips for companies thinking of going public? What should they consider and how should they prepare?

Nikolay Martinov: You have to be transparent to your investors first and foremost. This means that you should be able to report on a quarterly basis and show your improvements. Second, you should be able to build a sustainable growth model and to show this growth to the public. This growth should be double-digit on year basis in order to attract attention. You should be able to build a strong management team, including independent directors.  

What’s the type of startup companies that you think would be most successful on the local stock exchange (consumer-oriented, b2b, verticals?)

Nikolay Martinov: This should come from the new economy, which gives double-digit growth across the world. These are the sectors of big data, artificial intelligence and subscription economy, for example.

There’s an argument that there shouldn’t be free money, grants etc. and startups need to start looking at other financial instruments like loans and debts. Otherwise, the founders get used to free money. What do you think about this?

Viktor Manev: I firmly believe high growth and startup businesses need investors, not creditors. Debt in any form is a promise that the principal money is returned to the lender. Ventures need entrepreneurs and risk takers to share the risk and the reward of the enterprise. Debt money is suitable for businesses with secure cash flow that is at the stage of their companies when they can predict that the cash flow can service principal and interest payments. During the startup phase, expenses are the only predictable variable. Debt does not provide the freedom of the entrepreneur to launch, develop and grow its enterprise. Risk capital gives them the needed energy and time to prove his/her ideas and business concept.

“Grants on the other hand help and can be instrumental in the big picture. However, building your business on grants only and chasing this money will distract you from your business target.” – Viktor Manev

The Bulgarian Stock Exchange has introduced a voucher scheme to support young companies to go public. Across Europe, there are also other exchanges, like NASDAQ in Sweden, that have lowered the requirements for startups to go public.  We also hear investors and NGOs proclaiming startups & scaleups should look to the capital markets. Why is all that and what’s the trend in Europe?

Nikolay Martinov: The stock exchange is the place where originally investors were embracing the risk ventures by providing them with capital. This is a return to the origins of capital financing for new ideas and ventures. As nowadays the stock exchange is a much-regulated marketplace, we see that Europe is looking for a way to provide a framework for bringing the process back and attract retail and institutional investors’ interest in investing in the startup economy.

Let’s take the two examples of tech companies that went public on the Bulgarian Stock Exchange – Sirma AI and Allterco, both successful IPOs. The first one, however, was not so successful in its secondary public offering. What happened?

Viktor Manev: For companies going public, it’s essential to establish the right structure and rules – it’s a matter of setting the limits the right way. It is easier to speak what to do right in the process. You have to set the valuation right in the first place – people often mistake value for price. Then you have to understand the market dynamics and its players, and set the right auction process for the IPO. Last, but not least in the process, you have to set the issuer’s internal dynamics right – amongst which the right corporate governance structure, reporting, lock-ups. And picking the timing with the right marketing you will attract the investors for the company.  We did so with Allterco, in which we’ve also invested pre IPO capital and supported the whole process of going public. In this case, we made sure to set the right holding structure for protecting investors’ interests while restructuring subsidiaries across Asia, Europe and the US. Other important details we did down the road of going public: the issue was marketed to hundreds of investors while many new, first-comer investors were attracted to the public market, while at the same time, the majority shareholders were locked up for three years with only a part of their shareholdings freed over time after the IPO. In other words, the majority shareholders that were key managers within the company couldn’t sell in the first three years, before they fulfilled their promises and executed the plans shown to the public.

Going public is a multiplayer game and you as an issuer should take a balanced approach to the process and the players if you want a long play with the public investors.


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