Thursday, 14 February 2013

VIGO FUNDING – Should Entrepreneurs Be Warned?

Approximately two years ago I was requested to write a column for the Finnish Tekniikka & Talous magazine on the cleantech sector in Finland. In the story, I highlighted some problematic aspects of public funding that are different in this business field compared, e.g., to the game or high-tech industries. Several developments have taken place since. For example, Finnish start-ups have received approximately €100M of funding from the so-called Vigo Accelerator Programme. In this blog, I wanted to share a lawyer’s experiences of deals with Vigo accelerators and why entrepreneurs should be careful with these deals despite the very high-level political support and popularity enjoyed by this programme.

The Vigo accelerator programme was launched in 2009 to address perceived gaps in the high-growth venturing ecosystem. According to a recent report published by the Ministry of Employment and the Economy (TEM), the programme "…has created a new channel that makes world-class competence and private funding available to growth companies, enabling the start-up of high potential growth companies and their entry into the international markets" (read publication from here). Vigo seeks to connect innovative business ideas that have international potential with internationally experienced business professional and private and public growth finance (TEM, 2012). According to TEM’s study, it has been “…designed to provide contributions to the Finnish entrepreneurship ecosystem:
  • Accelerate growth and internationalization of new firm
  • Help high-potential new firms attract equity funding, both from Finland and abroad
  • Strengthen high-growth capability (both managerial and governance) in Finland
  • Strengthen the links between the Finnish high-growth venturing community and its foreign equivalents
  • Create a network of business accelerators in Finland to address growth bottlenecks in the post-incubator phase”
Thus, the programme has many objectives but what is unclear is whether it actually promotes more the interests of the accelerators or those of the entrepreneur. In many cases, start-ups are in need of funding and, naturally, in such case they may have to content with even very strict provisions from venture capital investors to ensure the ability to continue their business as there are limited funding possibilities available. Should Vigo be any different? To my view it should, because accelerators are working as instruments in public financing and what I consider problematic is that public funding seems to praise venture capital activity and fund formation while the core focus should be on the growth and internationalization of new firms. And if these companies are successful, they will certainly attract venture capital investments.

In several cases where we have been involved with Vigo accelerators, the term sheet proposals received by the entrepreneurs have systematically failed to reflect the public-funding rationale behind the program.When a promising, in our opinion at least, start-up commented on an accelerator's term sheet, the feedback was, "we know it [that our proposal is completely unreasonable] but we’ll give to you access to public funding". I wanted to give six real-life points that at least should be recognized and considered by entrepreneurs:

First, if the entrepreneur has not done "everything possible" to secure the subsequent funding, the accelerator will get additional X % ownership of the entrepreneur's company – we will all know what to think about this kind of requirement;

Second, the entrepreneur must commit to a monthly management fee that varies from one to several hundreds of thousands of euros depending on the contract term (How much services from different top-level experts from different sectors could one buy with this amount of money as opposed to support from one VC? Just a thought and personally I am pleased to see that restrictions are recommended...);

Third, in addition to the management fee (and ignoring that it is already very significant), there have been cases of free-of-charge "sweat equity", typically 10% or higher or in tranches;

Fourth, anti-dilution protection has systematically been full ratchet (e.g., an investor who pays €2 per share for a 10% stake would get more shares (or conversion rate would be adjusted) in order to maintain that stake if a subsequent round of financing were to pass at 1€ per share and, as a result, the early round investor's price is actually reduced to the price of the new issuance).

Fifth, existing owners are required to work in the company if they wish to retain their share ownership;

Sixth, owners give accelerators normal reps and warranties without limitations or up to the investment amount.

I do not say that all Vigo accelerators have the same principles, but I call for discussion on whether the personal role of the accelerators in these companies should significantly be more restricted or controlled, as otherwise there seems to be conflicting interests between their personal benefits on the one hand and the interests of the entrepreneurs on the other. If we want to support the Finnish venture capital industry, then there should, in my opinion, be a direct public support mechanism available and not one that facilitates the venture capital industry at the expense of the entrepreneurs. As one solution, I would also continue to support an idea that we introduce a mandatory standard agreement model for accelerator-entrepreneur relationships that would equally take into account the interests of both sides.


  1. Hi, Taneli Tikka here. I have been a member of the Vigo steering group since 2009. I'm also a serial entrepreneur with a line of startups, companies and exits behind me. In stances and issue of entrepreneurs vs the bureaucracy I naturally tend to lean towards the free market view; and generally oppose too much government intervention and "one-rule-fits-all" kind of regulation.

    Your blog post here is a fair critique of the Accelerator's term sheet. However it also mixes apples between oranges and does an invalid comparison between the two.

    Term sheets used by some accelerators have pretty much nothing to do with the Vigo programme. The steering group sets the rules for this programme, so I should know, right?

    Some basics;

    Vigo is an ongoing program that any company can join in as an accelerator if they fullfill the certification criteria. I'm also a member of the separate selection committee that determines this; qualifies the applicants and sees if they fullfill the criteria. Once a company passes the certification and is granted a Vigo-status (the newest accelerator is EastWind, just recently certified). Then they can call themselves a Vigo Accelerator and they have to adhere to the jointly agreed rules of the programme.

    If a startup company does a deal with a Vigo accelerator this does not mean automatic money from Tekes, Finnvera, or any public institution. All the public institutions are required by regulation to make their own independent decisions. Vigo accelerators cannot make any decisions that would obligate Tekes or other public institutions. Being in the program doesn't guarantee "free public money".

    Also if a startup works with a Vigo accelerator they don't have to even apply for any public funding at all - it is entirely optional.

    Paying management fee to the accelerator is optional. Taking in funding from the accelerator is optional. Applying for public funding is optional. Even signing a term sheet at all is entirely optional.... get the picture? None of these things are in the programme rules or dictated by the programme.

    The Vigo Programme is a market-driven programme that aims to give birth and "harden" great accelerators that can succeed in the competitive marketplace and do it by fair market terms.

    If a Vigo accelerator gives a startup a horrible term sheet; then they are pushing their luck and the truth of it is that they are just about lose in the market competition - in other words: do not work with them. Tell them to sod off.

    Also if they request you pay them 9K€ management fee; make a counter proposal about paying zero. Negotiate for your own sake and don't just accept a proposal without even trying to expose it to some healthy competition.

    All of the terms you go through in your blog post there can be negotiated on. The program rules don't even require a term sheet at all - let alone a specific kind of term sheet. So you are as free to negotiate the terms as you would be in the open market in general.

    As a general advice to startups: start by proposing that you pay zero € management fee, give out 2% of the company, expect the accelerator to work their asses off for your startup and then negotiate it from there. They are professionals in this - so should you be; grow a pair of steel balls, get in the ring and negotiate! And don't bitch and whine about your own failures and being a weak negotiator. If you think you got a bad deal; you deserve it.

    If you can't work out a satisfactory deal with the Vigo's; then don't. Go for other sources of funding and possibly apply for Tekes projects directly outside of Vigo etc.

    Simultaneously you should know that some of the Vigo accelerators really are very good and can really truly help your startup out. Their work is valuable and naturally they should be compensated for it. Negotiate & agree on an acceptable level of compensation and then direct your energies towards succeeding out there in the high competition world!

    1. Hi, Jan Lindberg here. First of all, thank you for your time and contributions Taneli and Mika – it’s nice to see interesting contributions to this topic!

      We seem to agree with Taneli that these terms sheets should definitely be negotiated and the purpose of my original writing was naturally to raise awareness of that. Moreover, the idea was also to list some legal clauses which should be carefully considered before enteruing into a deal, and to my understanding, there we seem to agree as well that at least these points are relevent.

      Mika also pointed out, there are not that many funding possibilities available and while Taneli’s instructions for negotiations are very welcome and hopefully followed by several entrepreneurs, those instructions are exactly what I, Mika and most likely all other lawyers having experience on terms sheets and investment agreements give to entrepreneurs in these cases – sometimes we walk away, but in some cases we are forced to accept – fact of life for us “serial negotiators” (this is not to say that we would like to win every battle and negotiate hard for our targets)!

      Vigo accelerators do not have official connection with the public funding decisions as Taneli says and if they would, there would be an agency problem. In real life, these terms sheets and public funding are, however, connected. Not perhaps always, but at least in all cases I have seen which I gather is relatively representative number. Now the real question is that does this program currently distribute public funds in the optimal way or could we improve it even more?

      There we seem to disagree with Taneli, but this is surely not a criticism towards those several very talented and hardworking individuals working as accelerators!

      This issue is also discussed in the middle report. It states that the program “...has already learned” and it should further be develop, so I think it can be quite generally acknowledged that it is not yet optimal. Why it was not carefully considered before 100M€ of public funds were allocated is a big question mark for me and how it should be developed further is even more difficult question.

      I think this evaluation should start from the question how this 100M€ has been allocated between entrepreneurs and accelerators, and then start to evaluate received public benefits. Just focusing on one issue that might be inefficient, the situation often is that often with one or two year long consulting commitment (management fees) you start to face with diminishing marginal utility (if the alternative could be, e.g., to use management fees for specific targeted projects from each top expert of its field). Also there are alternative ways to use the funds and in particular, e.g., in cleantech sector there would definitely a need to work out some funding for demo facilities, so many options available.

      VC industry plays an important role in the development of new success-stories, and Mika’s solution to have more Vigo’s is just perfect! While waiting for that to happen I believe that taking into account the leverage given by public funding and experience of the accelerators, this accelerator-entrepreneur-relationship could be more regulated. After all, this would not do any harm as it would only protect the true value-adding component in our equation – the entrepreneur!

  2. Mika Lehtimäki here - a "serial" attorney from Helsinki/Oxford .

    Good point there Jan - and a solid argument by Taneli as well. I tend to incline towards Jan's view on the term sheets. Let me outline my view briefly.

    I'm afraid Taneli's argument on optionality of the funding itself is somewhat misled. The lack of VC funding in Finland (yes, I know that - the last year I've assisted a huge number of growth companies in their capital structuring) is imminent. Vigo gives admittedly a clear advantage for accelerator-approved companies in funding that cannot be matched on the purely private side. Let's take the cleantech side. We all know that there are only a handful of Finnish VC's investing in that field. I know pretty much on what terms you can get funding from these (and the foreign ones as well) - fairly reasonable.

    Now, with Vigo you can negotiate all transactions but, I think, Taneli you should bear in mind that we are not talking about whether the RIGHT to negotiate exists but whether in fact your negotiating position is TOLERABLE. With Vigo this is hardly the case for the companies. Take the money or wither away like a stray in the summer breeze - or file for bankruptcy due to liquidity crisis - not really an option, is it. Most cases have actually been based on the rhetoric or superiority due to the fact that the State pays the other half.

    Well how about the incentives of a Vigo investor post-investment? Do they reflect the initial (intended) objectives of the program as mentioned by Jan? Well - maybe. Interestingly, at no point is the value of the entrepreneur mentioned in the list, why so?

    A Vigo firm is a commercial enterprise that will make its money on the exit, industry mergers etc. Use of public funds (which is does use) means public responsibility - if a program does not reflect that, we are talking about undue benefit to an investor subsidized by the state. I hope the constitutional rights hold here.

    In my opinion Vigo accelerators are very helpful and especially good for companies facing the "valley of death" of financing. However, the practice has showed that the commercial terms actually required do not reflect free-operating market terms. The lack of private funding should not lead to a situation where some private investors have undue advantage over others - this tilts the feasible financing structure for years to come.

    My answer: increase the number of Vigo accelerators! This creates competition, thus leading to more favorable terms and real chance for Vigo to prove its value.

    Mika J. Lehtimäki
    Attorneys-at-Law TRUST.