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Takeaways from the 5th IBA European Start-up Conference

Wednesday 23 November 2022

Rapporteur

Merlin Seeman

Hedman, Tallinn

merlin.seeman@hedman.legal

Overview of the startup ecosystem

At the 4th IBA European Start-up Conference, Pii Ketvel remarked that this series of IBA conferences came about because ‘we noticed that, while the European, whether the startup or scale-up, companies’ sector was growing, lawyers were not keeping up.’[1]

As in previous years, the 5th IBA European Startup Conference brought together delegates including lawyers, startup founders and investors from Europe and further afield. The purpose of the conference was to exchange ideas, learn about the latest trends in the legal and startup world, learn about new challenges, and give lawyers a chance to get away from their usual day-to-day routines.

Warm reception

The beautiful city of Dublin hosted this year’s event, which was held at Croke Park Stadium, of the renowned Gaelic Games. We kicked off the event on 27 September, with a tour of the Guinness Storehouse, which has been the home to the famous Guinness beer since 1759. Shortly after the tour ended, we were treated to a welcome reception by the host committee law firms.

We were impressed by the wide range of explosive topics, discussions, and even insider tips that dominated the second day of the conference. The event was brought to a close with a drinks reception followed by the conference dinner.

Startup 101 from the Conference

As two other blog posts are to be published about this Conference: one on the imparting and inspirational messages shared at the conference; the other on Web 3.0, this report is dedicated to sharing impressions from insights shared on the startup ecosystem.

Two particular sessions, namely: ‘Exits – preparation and execution’ and “Market insights – The impact of public markets turmoil on growth company valuations and funding’, discussed some quite exciting issues and divulged insider perspectives on the startup sector, including the following topics.

Keeping up with astronomical levels of growth

One of the issues that fast-growing companies face is keeping up with the pace of organisational changes as they scale up, as well as the enormous burden of keeping up with the current growth rate and profitability.[2]

‘We saw several of these companies steadily climbing, briefly dipping over Covid, but then climbing up to record levels in valuation – generating multiples of the next 12-month revenue of over ten times, in just 2021. And now, they are falling off quite drastically,’ said Huw Lloyd, Managing Director of Arma Partners. He then revealed that quite a number of them were from the collaboration, productive, and e-commerce software as a service (SaaS) companies’ market, which experienced a massive boom at the height of the pandemic.

The unsustainable startup culture

Fiona M Darmon of Jerusalem Venture Partners (JVP) and Borja De Ramon from The Power Business School, Spain, raised the issue of the fast-paced, flexible, and primarily informal culture of startups and its symbolism for the quick fade out of some of even the most fast growing startups. ‘They’re not stopping to think. They just have their eyes on the goal. They’re going to run out of money in six months if they don’t get this customer and that customer’, said Fiona.

‘They’re not stopping to sort things out or handle the legal documentation. They are not thinking about the next fundraiser. They’re thinking about how fast they can sell and convert that prototype into a product. They’re not stopping to think about documents. That’s on you as their running mate’, she continued.

Where startup lawyers come in

This is where startup lawyers come in. Their role is to groom them and help them build an organised, structured, and documented set-up that is ready to scale-up or ready if an unprecedented buyout offer comes unexpectedly. And at the same time, to help them be a company that can stand the test of time.[3] But whipping these startups into a structured and well-cultured shape is seldom easy.

‘When suddenly an external lawyer comes and starts telling these startup guys what to do, all they see is that the little related things are adding more complexity to their decision process and making things slower’, said Borja. For this reason, they are rarely fond of input from their lawyers or any other entity trying to change how they work.

But according to Fiona, what they don’t know is that ‘if you have a company where everything looks bulky and messy, then the valuation is going to look that way. That is if you can even get any money.’

How can startup lawyers make cultured startups happen?

‘Sometimes you’ll just have to swallow super hard and see how you can be flexible, not in the documents but in adapting yourself to them’, Fiona advised. ‘You need to earn the trust of the founders and employees. You should do this by making them know that you’re involved in the project, that their project is your project, and that your decisions are in the company’s best interest,’ Borja added.

Fiona agreed with Borja, in that letting founders know what’s best for the growth of their startup growth is paramount. ‘You need to explain to them that their document is their calling card; their employment agreement is their calling card,’ she said. ‘The importance of documents is not to overly bog them down, but to make them look tidy, to make them look organised, to make it look like there’s a governance’ she continued.

Should we keep raising more funds?

Fast-growing companies can raise massive amounts in multiple funding rounds within a relatively short period of time, enabling them to scale-up quickly from startups to large businesses. The problem with this swift growth is that if not managed and appropriately advised, most of these businesses, after becoming unicorns, either turn up dead or become horses. This is now even more pressing with the current volatility of the market.

For instance, in the past couple of months, massive layoffs have occurred in the biggest tech firms. Crunchbase offers possible reasons for this.[4] Due to the current market instability, Ilkka Rantanen, Co-Founder, and Partner at AshGrove Capital, advised startups to raise less capital, spend less and shift their focus to unit economics. ‘Make more, raise less, spend less’, he said.

When to make an exit

Huw noted that now might not be the best time for an exit. According to him, growing a business from the ground up to the stage where one can make a successful exit is not easy. So, throwing all that away in these volatile public markets is not worth it. ‘Except for specific sectors, the IPO market is closed for now, so try not to force an exit now. Rather, keep listening to the market. Keep your preparation and keep your commercial conversations with all relevant parties. But don’t try to force water uphill’,[5] he advised. He, however, noted that private equity is ‘still pretty strong’ and ‘paying very high prices.’

As much as we would have liked to, we are unable to cover all the crucial takes on the startup sector that the outstanding speakers explored during the Conference. The startup sector is definitely an exciting terrain, and we are glad to have had access to all these insights.

 

Notes

[1] IBA European Regional Forum '4th Annual IBA European Start-Up Conference Film' https://www.ibanet.org/Regional_Fora/Regional_Fora/European_Forum/4th-Annual-IBA-European-Start-Up-Conference-film accessed 20 November 2022.

[2] Joanna Glasner, ‘Fast Unicorns Frequently Fade’, crunchbase news, 5 October 2022, https://news.crunchbase.com/venture/unicorns-venture-valuations-public-markets accessed 20 November 2022.

[3] Ranjay Gulati and Alicia DeSantola, ‘Start-Ups That Last’ Harvard Business Review, March 2016 https://hbr.org/2016/03/start-ups-that-last accessed 20 November 2022.

[4] Keerthi Vedantam, ‘What’s Spurring Tech Layoffs Today? July Wasn’t Good’ crunchbase news, 14 September 2022 https://news.crunchbase.com/layoffs/tech-layoff-analysis-july-august-2022-goodrx-thredup accessed 20 November 2022.

[5] Noah Higgins-Dunn, ‘The IPO market went from “boom to bust” in 2022. Here’s what’s driving the massive slowdown’ CNBC, 23 September 2022, https://www.cnbc.com/2022/09/23/stock-market-ipos-went-from-boom-to-bust-in-2022.html accessed 20 November 2022.