Venture Capital in general and in CEE – Key Insights for Businesses that want to boost their growth with fresh funding (Part 1)
In this article, we’ll delve into the fundamentals of venture capital, including an overview of the process, the role of the term sheet, and the typical conditions investors expect.
While venture capital offers opportunities to accelerate expansion, growth, the process of securing VC investment is complex. It requires an understanding of investor expectations, proper planning of strategy and financials; detailed term sheet and investment agreement negotiations.
Venture capital (VC) is an equity-based financing method, typically used by businesses with high growth potential in specific phases of their lifecycle—particularly in early and growth stages.
The financing needs and options for companies vary significantly depending on whether they are in an early- or a more mature growth phase.
Early-stage businesses require different types of funding compared to well-established companies. As businesses mature, other financing sources often take precedence, such as private equity, strategic investors, or stock market listings. Each stage comes with unique challenges, tasks, risk factors, and growth objectives.
In both regional and international practice, venture capital investors (those who you meet are GPs, or general partners) are managing venture capital funds. These funds are financed by institutional investors (e.g. banks, international financial organizations, investment funds, insurers) and high-net-worth individuals – they are the LPs or limited partners.
A CEE regional characteristic is that funds rely heavily on government or EU resources, which influence both the available investment opportunities and the applicable rules.
Venture capital investors primarily target companies (startups) with exceptional talent and growth potential, often at early stages, but with higher risks. They invest in partnership with the founders in exchange for equity (shares, stakes), becoming co-owners of your business, so this is not a loan or grant!
In return for taking higher risks, venture capital investors expect above-average returns. Depending on the fund manager, they typically aim for a return on investment of 3-10-times. For example, if they invest €1 million, they expect to receive €3–5–10 million in return.
Venture capital investors typically invest for a period of 4–5 years, after which they exit the investment by selling their stake. This exit can occur in various ways: they may sell their shares back to the founders or existing owners (more common with state-backed funds), but most often, they sell to a third party, typically a strategic investor (trade sale) or another financial investor, such as private equity funds.
The return on the investment is realized at the time of exit—when the company is sold—so there is no requirement to pay monthly or annual interest or principal. Venture capitalists aim to achieve their return during the exit phase and are, therefore, motivated to drive significant value creation and company growth in the meantime.
The Risk-Reward Dynamic of Venture Capital Funds
Companies that raise venture capital are referred to as portfolio companies, as funds typically manage multiple investments simultaneously, forming a portfolio. As being financial investors, their primary goal—and the expectation of their investors—is to manage the overall portfolio’s returns while mitigating risks at the portfolio level.
Some portfolio companies may only partially achieve the expected return by the end of the investment period, or not at all, while others may exceed expectations, achieving significant growth and a successful exit. These high-performing companies can offset the underperforming or failed investments.
VCs know not every investment will make returns, and some may even result in losses. This risk-reward dynamic explains why
venture capitalists seek such high returns on each deal. While they typically do not involve themselves in daily operations, they actively engage in strategic and major financial decisions affecting the business and its profitability (e.g. loan decisions, large CAPEX items etc.).
Fund managers are inherently interested in supporting the growth of portfolio companies, as their personal return (through so-called carry) is connected to the exit value which depends on how much the company has grown.
Venture Capital and Other Equity Financing Options by Growth Stage
Once the need for capital raise is identified, the most critical step is to clarify the type of investor that fits—which depends on the current growth stage of the business and the goals it seeks to achieve with investment.
Depending on whether your business is in its early stages or a more mature phase, it’s important to approach the most suitable type of investor. Across the CEE region, there are numerous opportunities for companies with innovative business solutions, unfair competitive advantages, and strong market potential to secure fresh capital for growth, expansion, and transitioning to the next stage of maturity.
Matching your expected results and objectives with the right investor pool is a critical step in the capital raising process.
Startup Financing Cycle (Source: RAISE)
Businesses at different maturity stages can access the following primary types of equity financing sources:
Early-stage companies can secure funding from angel investors or seed-stage VCs, typically in the range of EUR 50,000–300,000 in the CEE region. Some seed or late-seed deals nowadays are rather in EUR 1-3 million range.
Growth-stage companies operating in innovative sectors, with developed products that are already on the market, proven market feedback, and significant international revenues, can consider growth capital investments from venture capital funds. These investments range in the CEE from EUR 4–10 million. You’ll see “Series A / B / C” rounds, referring to the first, second etc rounds and possible share class.
Well-established companies, even in traditional industries, that are operating successfully with revenues in the ten. millions of EUR, a strong market position, and generating significant EBITDA, may require external capital to accelerate growth and expansion, acquire other players or competitors, restructure debt, buy out a co-owner, or improve operations. These companies are typically suited for private equity funds or, in specific cases, turnaround funds.
Buyouts are usually executed by strategic investors or private equity funds, though fresh capital in the form of equity injections is also an option, from even EUR 1-5 million, however a typical CEE PE fund will look for deals above 10-20 million.
Venture Capital or Bank Loans?
For more mature businesses with several years of operational history and historical performance data, bank loans can be a viable solution for financing investment plans, provided they can offer sufficient collateral. However, for early-stage companies with limited collateral and seeking financing several times their revenue to support growth, scaling, or international expansion, venture capital may be a more viable option.
Venture capital is a specialized form of financing where bank loans are not really alternatives.
Key Differences Between Venture Capital and Bank Loans
Repayment structure: One of the most significant differences is the repayment method. Bank loans require fixed repayments with interest, typically sourced from the company’s cash flow, regardless of its profitability or success. Venture capital investors, by contrast, realize their return at the end of the 3–5-year investment period during the exit phase. This means no cash is drained from the company for repayment during the investment period.
Ownership approach: Unlike lenders, venture capital investors view themselves as co-owners and business partners, committed to driving the company’s growth. Banks, on the other hand, are not invested in the company’s success and do not participate (nor have the expertise to participate) in its operations.
Added value: Venture capital can provide significant momentum for a company, as investors often contribute more than just capital. They can offer industry knowledge, strategic guidance, and access to networks (known as "smart money") to help the company achieve higher value creation and return on investment.
Types, Key Characteristics, and Volume of Venture Capital and Private Equity Investments
The types, main characteristics, objectives, and volumes of venture capital and private equity investments can be summarized as follows:
Source: HVCA Tőkebevonási Kalauz 2020
What’s next?
How can you identify the potential investors to approach in the first round? How many can you negotiate with parallel? How will you learn about the investors’ backgrounds and preferences before your first meeting? What advantages and synergies can you present to them?
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Pattern #1: B2B niche targets are attractive for vertical software firms
Example to highlight:
Upliift, a London-based investor, focusing on European B2B software firms with revenues between €1-25 million acquired SRC, a Slovenian software development firm with over 200 employees and a presence across several countries in the CEE region.
Pattern explained:
This transaction aligns with a recent trends in the region, where a new class of investors such as Vesta Software Group, Everfield, saas.group, Jonas Software or Constellation (and many more) target cashflow-positive, founder-owned B2B software companies in niche markets. Unlike traditional strategic buyers, these investors prioritize maintaining the independence of acquired companies, fostering growth without full integration.
Pattern #2: Prior partnership with acquirer increases the chances of transaction success
Example to highlight:
The recent acquisition of Polish companies Mediarecovery and SafeSqr by Dutch firm DataExpert, which was rooted in over a decade of increasingly close cooperation between the two entities. DataExpert has employed a similar strategy in the past, collaborating with Swedish Forensic Experts Scandinavia AB before acquiring them in 2018.
Pattern explained:
When acquisitions stem from years of cooperation, buyers gain a deep understanding of the target's strengths, values, and potential revenue impact. This prior collaboration can also benefit the target by justifying a higher purchase price, often supported by proven results.
Pattern #3: Private Equity fuels inorganic growth
Example to highlight:
Software Mind, a Polish software development services provider, backed by Enterprise Investors – one of the largest Private Equity funds in Poland and the CEE region, acquired Gama Software, a software development company based in Romania.
Pattern explained:
The involvement of PE firms is a key driver of M&A activity in CEE. Companies backed by PE often pursue aggressive buy-and-build strategies to scale and expand. As a result, these companies tend to engage in more acquisitions than their non-PE-backed counterparts, as growth is a key expectation from private equity investors.
Pattern #4: Consolidation is the good old strategy for growth
Example to highlight:
Bianor Holding’s acquisition of Prime Holding and Digital Lights in Bulgaria demonstrates a strategic move to consolidate capabilities and strengthen competitive positioning in the industry.
Pattern explained:
Consolidation is a powerful strategy for everyone, in this case, for IT service providers in the CEE region seeking to compete on European and global stages. To effectively challenge larger players in other markets, these companies must increase their size by pooling resources and expertise, allowing for faster scaling. As some CEE firms strive to penetrate these larger markets, size and operational capacity become crucial factors for success.
Pattern #5: Timing can make or break a deal
Example to highlight:
Moj-eRačun, Croatia's leading provider of SaaS business tools, specializes in digitizing administrative tasks with its flagship product that offers e-invoicing and document management solutions. This product seamlessly integrates with over 400 ERP systems, providing a substantial competitive advantage as Croatia prepares for mandatory B2B invoicing set to be implemented in 2025.
Pattern explained:
Timing significantly impacts deal success, especially in markets preparing for regulatory shifts. This upcoming regulation is anticipated to drive demand, adding competitive value. The favourable timing and anticipated revenue growth contributed to a noteworthy valuation in the acquisition by Visma, a Norway-based software provider with an existing track record in the region.
Summary
From niche B2B acquisitions to strategic timing, these insights reveal the diverse approaches shaping tech M&A in the CEE region. Understanding these patterns can be crucial for investors and companies alike, as they navigate the unique dynamics of Central Eastern Europe’s evolving tech landscape.
At Absolvo Consulting, we are actively managing transactions for tech and innovation-driven companies across Central and Eastern Europe. Our daily interactions with strategic buyers and private equity firms give us unique insights into investor priorities, emerging investment trends and market dynamics. This helps us gain a precise understanding of investor needs and focus areas, so we can tailor our deal strategies for our client’s projects to meet these specific requirements.
Private equity firms play a crucial role in funding and supporting the growth of companies across industries, including Information Technology and tech-enabled services. In this article, we will explore the top European private equity firms with the largest dry powder and strong focus on investing in tech companies across Europe.
Here we provide an overview of each firm’s investment strategy, their dry powder, and their successful investments and exits, primarily in the tech sector, based on Pitchbook data available until April 2023. The following firms have the capability to offer strategic support beyond capital that are essential for companies aiming for significant growth.
AlpInvest Partners is a highly experienced global private equity firm with a substantial dry powder of 8.84 billion euros, managing an impressive 59 open fundsand overseeing assets under management exceeding 60 billion euros. Renowned for its track record of over 1,000 successful investments and a dynamic portfolio of 49 companies, AlpInvest has established a sterling reputation for its acumen in recognizing and allocating capital to cutting-edge enterprises across diverse sectors.
AlpInvest has made astute investments in an array of companies, exemplified by its acquisition of Profi Rom Food, a leading European retail chain based in Romania, in February 2017 for 575 million euros through a co-investment, buyout deal. Additionally, AlpInvest has demonstrated its prowess in the telecommunications sector through its strategic investment of 202 million euros in Euskaltel, a Spanish telecommunications company, in October 2012 as part of a co-investment growth deal. Notably, AlpInvest has played a pivotal role in fostering the remarkable growth of Euskaltel during its ownership tenure, culminating in a successful exit in August 2021 for a substantial 2 billion euros, delivering impressive returns to its investors. Apart from Euskaltel and Profi Rom Food, AlpInvest’s investment history boasts a roster of well-known companies, including Cushman & Wakefield and Avaya.
With a legacy of more than 250 successful exits, AlpInvest has firmly established itself as a trusted partner for generating significant returns through strategic investments and value creation. The firm remains steadfast in its commitment to fostering the growth and development of its portfolio companies and has a proven track record of successful collaborations with visionary leaders in the business world.
Bridgepoint Advisers, a leading private equity entity, has a robust collection of 14 investment funds and oversees an astonishing 40 billion euros in managed assets. Acclaimed for its exceptional talent in discerning and investing in revolutionary companies across a wide range of industries, including the field of information technology, the firm boasts a remarkable history of achievements with more than 600 prosperous investments and a dynamic portfolio of 70 active companies. Armed with a substantial reserve of 9.99 billion euros as dry powder, Bridgepoint Advisers is aptly equipped to seize profitable prospects in the dynamic market landscape. The company primarily invests across four verticals, which are advanced industrials, business and financial services, consumer, and healthcare, with technology as a horizontal connected to everything everywhere.
Among its successful investments, Bridgepoint Advisers acquired Dr Gerard, a Polish food company in October 2013 through an LBO. Additionally, in January 2015, the firm made a successful investment in eFront,a renowned software provider of alternative investment management solutions, with a leveraged buyout worth 430 million euros. During its ownership period, Bridgepoint Advisers demonstrated its expertise in the sector by supporting eFront in achieving substantial growth. In May 2019, the firm successfully exited its investment in eFront for 1.16 billion euros, resulting in significant gains for its investors.
Nordic Capital is a distinguished global private equity firm that boasts a dry powder of 14.08 billion euros, managing 5 open funds and holding assets under management worth 25 billion euros. With over 400 total investments and an active portfolio of nearly 50 companies, Nordic Capital has a history of uncovering and placing investments in pioneering, growth-oriented companies across various industries, including information technology. Furthermore, Nordic Capital is dedicated to investing in companies that proactively address global challenges, contribute to building a prosperous society for all, and promote transformative sustainable change.
One of Nordic Capital’s remarkable investments in the IT sector was back in 2012 when it successfully completed a leveraged buyout (LBO) of Itivity Group, a Dutch software and IT services company, valued at 228 million euros. Over the course of nine years, Nordic Capital played a pivotal role in Itivity Group’s growth journey by facilitating the expansion of its product portfolio, customer base, and market position. The result was an outstanding achievement as Itivity Group was eventually sold for a staggering 2.14 billion euros in May 2021, realizing major profits to Nordic Capital’s investors. Besides Itivity Group, the Swedish private equity firm invested in other influential companies, such as Lindorff Group or Bank Norwegian.
Nordic Capital is renowned for its investment approach, which centers on long-term growth and value creation. The firm has established itself as a trusted partner for visionary company leaders who aspire to expand their businesses. Boasting a track record of over 110 successful exits, Nordic Capital has earned a sterling reputation for generating impressive returns for its discerning investors.
Cinven, a prominent global private equity firm with an impressive dry powder of 15.35 billion euros, manages seven open funds and oversees assets under management worth more than 30 billion euros. With a robust performance record of identifying and investing in progressive, expansion-minded companies across various sectors, including information technology, Cinven has established itself as a leader in the industry. One of the firm’s current funds has been named a Real Deals ‘Future 40 ESG Innovator’ which underscores Cinven’s special focus on making positive economic, social, and governance impacts through their investments.
Cinven’s extraordinary expertise in the tech sector is proved by several notable investments. One of these was the leveraged buyout of CPA Global, a leading intellectual property management company based in the United Kingdom, valued at 1.14 billion euros in 2012. Under Cinven’s guidance, CPA Global experienced major growth over the course of five years, showcasing Cinven’s ability to create value. In 2017, Cinven successfully exited CPA Global for 2.69 billion. It is a great example of the company’s rich history, which includes around 170 successful exits. Due to this fact, the company has a strong reputation for garnering considerable profits for its investors.
Intermediate Capital Group (ICG) is a highly regarded private equity firm that specializes in investment management and corporate finance. With a significant dry powder of 22.08 billion euros at its disposal, the firm expertly manages 34 open funds and boasts an active portfolio of 70 companies and a staggering 70 billion euros in assets under management. The London-based firm is committed to fostering a future workforce that prioritizes diversity as a core value. In ICG’s 2020 graduate programme, an impressive 63% of participants were female, while 37% identified as belonging to an ethnic minority group. Additionally, the firm actively supports young individuals from underserved communities through various initiatives and programs.
ICG has an exemplary history of prosperous investments spanning various industries, including the lucrative IT sector. In September 2017, the firm co-invested a substantial 1.53 billion euros in NorwegianVisma Group,a leading provider of cutting-edge business software and cloud services, in a secondary transaction. This investment underscores ICG’s astute acumen in identifying companies with innovative products and services.
Furthermore, ICG has a rich history of successful exits, with over 300 notable exits to its name, including the profitable exit of Poland-based media and communication service provider Aster City Cable in September 2011. This remarkable expertise emphasizes the firm’s commitment to delivering outstanding returns for its esteemed investors. ICG’s noteworthy investment in Visma Group, combined with its extensive experience and a history of lucrative exits, positions it as a compelling option for companies seeking exceptional growth and expansion opportunities.
Renowned for its exceptional reputation and formidable prowess, CVC Capital Partners stands as a distinguished private equity firm with a noteworthy dry powder of 23.55 billion euros dispersed among its seven active funds. The company prides themselves on integrating ESG within their operations and investment processes. With the aim of producing sustainable value for their portfolio companies and investors, the firm had near 1,000 total investments before, and currently manages over 150 thriving organizations that collectively amass a mammoth 137 billion euros in assets under management.
The firm’s unparalleled expertise in the ever-evolving realm of information technology renders it an irresistible choice for visionary leaders in search of investment opportunities. A prime example of CVC Capital Partners’ keen acumen in the IT sector is its strategic investment inAvast Software,a pioneering provider of PC security software based in the Czech Republic, a move made in March 2014. The Luxembourg-based company further proved its commitment to nurturing innovation and fostering growth in the digital industry, by co-investing with Summit Partners in AVG Technologies,a Czech cybersecurity firm, through a public-to-private leveraged buyout (LBO) transaction valued at 1.25 billion euros in September 2016. Both deals showcased the firm’s ability to identify and capitalize on the potential of promising tech companies poised for exponential growth.
Notably, the firm’s track record extends beyond investments, as exemplified by its successful exit from its investment in Formula One in July 2017, a company it had acquired in 2006. This exit marked a triumphant return for CVC Capital Partners and served as a testament to its ability to yield considerable profits for its esteemed investors.
With over 500 total investments and 75 billion euros in assets under management, Permira is a renowned private equity firm recognized worldwide for its specialized knowledge and proficiency in investing in companies. Permira always looks for the opportunity to partner with disruptive technology, tech-enabled and category-creating organizations led by visionary management teams. Boasting a dry powder of 25.06 billion euros and managing 17 open funds further strengthens Permira’s reputation in the IT industry and makes the company a preferred choice for tech firms on the verge of transactions.
In a public-to-private leveraged buyout (LBO) deal worth 5.47 billion euros, Permira co-invested with Canada Pension Plan in Mimecast, a London-based leading company specializing in email security and cyber resilience. This investment demonstrates Permira’s ability to identify innovative tech firms. Besides its notable impressive investment performance, Permira has a strong history of exits, as the company has done more than 160 such transactions successfully. This expertise spotlights the firm’s commitment to generating significant returns for its investors and many well-known past and present portfolio companies, such as McAfee, Zendesk, or Hugo Boss further solidify Permira’s reputation as a premier option for tech companies in search of an investor.
Hg is widely recognized as a distinguished private equity firm with a formidable track record of investing in companies poised for growth. Boasting a substantial war chest of 25.28 billion euros in unallocated capital, the firm adeptly manages a diverse portfolio of 33 open funds. Hg’s dynamic portfolio presently comprises 53 companies, collectively valued at approximately 50 billion euros in assets under management. The London-based private equity firm has a core expertise in funding and supporting businesses operating in the software and technology-enabled sectors, including software-as-a-service (SaaS), cloud computing, cybersecurity, fintech, and healthcare technology.
This deep domain knowledge and experience in the sector is showcased in Hg’s history of transactions. In March 2019, the firm invested in Transporeon,a leading cloud-based logistics platform located in Germany, through a leveraged buyout worth 706 million euros. Hg recently exited its investment in Transporeon for 1.88 billion euros, meaning that the company has now made more than 120 successful exits. Additionally, Hg has made illustrious investments in companies such as The Access Group and Visma Group, both in the IT sector. These achievements exemplify the firm’s ability to identify innovative and growth-oriented companies and provide them with support to realize their potential.
EQT, a premier private equity firm with a global reach, is an excellent choice for tech companies seeking capital to propel their growth. Through 31 open funds the firm has a significant dry powder of 31.42 billion euros, which it uses to fund growth-oriented organizations across various industries. The Stockholm-based company is dedicated to sustainable investment and focuses on making positive environmental, social, and governance (ESG) impacts through their capital deployment. As of now EQT has close to 150 active portfolio companies, amounting to a substantial 114 billion euros in assets under management.
EQT’s investment in foodtech companySNFL Group in March 2022, a co-investment with AM FRESH Group and Paine Schwartz Partners, saw the firm lead a 1.6 billion euros growth round in the Spanish company. Two months later, EQT also made a successful exit from Wolt, a Finnish food delivery startup, after it had acquired the company in 2019. This exit emphasizes EQT’s capacity to enhance the value of its portfolio firms, in addition to its ability to deliver profitable outcomes to its stakeholders. A deep understanding of the IT industry and a proven track record of successful investments and exits means Swedish EQT is a top choice for either a buyout or a growth round.
Ardian, one of the world’s largest private equity firms, presents a compelling choice for companies pursuing growth. With an impressive dry powder of 39.51 billion euros, the company’s investment strategy is to provide flexible capital to organizations in various industries, including IT. The firm had approximately 1,300 total investments in the past and manages 31 open funds currently. Ardian has a diverse active portfolio of around 200 companies, amounting to a staggering 130 billion euros in assets under management.
Ardian’s investments in Taxually,the Hungarian start-up providing tax reporting solutions and Poznan-based Allegro showcase the firm’s interest in the technology sector – Ardian co-invested in the Polish and European e-commerce market leader’s 3.1 billion euros buyout in January 2017, which is one of the largest transactions in the industry in the CEE region. Ardian has also made notable investments in other tech companies such as TDF Group in France or WorldPay in London.
A successful exit from Vivacom in November 2012 highlights Ardian’s ability to create value and generate substantial returns for their investors. Vivacom, a leading Bulgarian telecom operator, was sold for 1.2 billion euros, which was a significant achievement for the French private equity firm. With their knowledge and capabilities, Ardian is equipped to provide business guidance and agile capital to fund the expansion of established companies, offering the necessary support for growth.
And +1, being the most active technology PE investor in the CEE region:
As the most active technology investor in the CEE region, MCI Capital rightfully earns a place on this illustrious list. The prominent Polish private equity firm boasts a distinguished track record of over two decades in unlocking substantial value from IT investments, with a keen focus on the flourishing fintech, e-commerce, and digital media sectors (btw, we also supported our Client in an M&A deal with it). With a robust financial position, including significant dry powder of 51.67 million euros,and managing assets under management (AUM) totalling 576 million euros, MCI Capital is a formidable player in the industry.
Setting them apart is their proactive and hands-on approach with portfolio companies, characterized by strategic and operational support, leveraging their extensive network of industry contacts and resources to drive value creation initiatives. Their commitment to responsible investing is evident in their meticulous integration of sustainability and ethical considerations into their investment decision-making process, aligning with the ever-growing demand for responsible and ethical investment practices in the technology sector.
Noteworthy exits from MCI Capital’s portfolio include prominent companies such as Zettle by PayPal,Lifebrain, and Polish Allegro, underscoring their ability to deliver successful outcomes for their investments. A prime example of their expertise is their 2017 acquisition of Hungary-based Netrisk through a leveraged buyout (LBO) worth 56.5 million euros, followed by a successful partial exit just three years later, yielding a remarkable 55 million euros and retaining an approximate 24% share in the company. The Warsaw-based private equity firm managed another impressive transaction successfully in December 2018, by acquiring Polish tech company IAI SA through a public-to-private LBO. MCI Capital’s extensive experience, hands-on approach, commitment to responsible investing, and robust financial position exemplify their status as a reliable partner for technology entrepreneurs in Central and Eastern Europe (btw, we also made deal with them).
Private equity – active past years, bright future
The private equity market has a promising future, as demonstrated by its remarkable activity in 2021 and 2022. Record-breaking transaction values and volumes, driven by ample dry powder available to firms, highlight the industry’s strength and potential.
PE deal Activity based on Pitchbook data
PE players have been actively utilizing their dry powder to expand their portfolio companies and drive M&A market activity, underscoring their ability to capitalize on investment opportunities. The diversification across sectors, such as healthcare, technology, energy, and real estate, further strengthens the market’s resilience and potential for sustained growth. Overall, the private equity industry is poised for a bright future, with PE firms driving M&A market activity and contributing to the industry’s ongoing success.
The term sheet outlines the specifics, the key terms of the collaboration with a venture capital or private equity investor. First of all, it is a good sign if you got one. It may happen you received an indication of interest or LOI (letter of intent) that summarized the main terms of the offer, then you got a much more detailed term sheet.
Each term sheet is unique to the project stage, company, investor, and investment size. However, it is important to note that a term sheet is not a bank loan agreement or a "take it or leave it" set of conditions! While some terms are standard, many are negotiable—and should be negotiated.
Hundreds of businesses in the region seeking investment face the question of how to strike a good deal with an investor, protect their interests, and lay the groundwork for a successful partnership in the years to come. The process is complex, requiring both parties to reach consensus not only on critical issues like equity ownership or profit distribution but also on many other conditions.
A poorly negotiated agreement can lead to a disadvantageous and demotivating “relationship” for years instead of fruitful collaboration.
Many entrepreneurs lacking the experience in transactions tend to judge whether the term sheet is favourable based on one or two parameters — usually equity ownership and company valuation (the two is connected naturally). If the investor demands a higher equity stake or sets a lower valuation than previously expected, they consider it a bad deal. While this may seem reasonable, the term sheet contains numerous other terms that significantly influence the overall picture and can even tip the scales in a different direction. It’s worth to consider carefully which conditions genuinely provide advantages and are negotiable while avoiding unnecessary delays with terms that cannot be negotiated or won’t provide significant benefits.
In addition to determining equity ownership, there are many other factors companies should focus on—but unfortunately, they often neglect these. Let’s take a closer look at these!
Equity and Valuation – What’s the Right Balance?
It is common for companies seeking venture capital to evaluate potential investors primarily based on the equity stake they expect in return. However, both entrepreneurs and investors sometimes misguided about equity stakes. Investors often demand more equity than what would be “fair,” or even a controlling majority in the company, even though they could achieve their goals using other tools.
This issue is particularly a problem for early-stage companies, where risks are exceptionally high because there may not even be a product-market fit or sufficient market validation. Excessive equity demands can kill the founders' motivation.
What does this mean in practice?
Let’s assume the VC investor requests 40% in the first round, justifying it with reasons like high risk or uncertainty about the numbers. Depending how they forecasted the runway and which phase the company is, a new round of funding may be required. The new investor will look at the current cap table and situation and propose they need 35-40% for their significant contribution (even worse if it’s a down round). This would reduce the founders to owning just 35-40%. Should a new round come, there is not much space for the new investor left. The cap table is broken.
In many cases, an experienced VC will not invest in these cases. Even the product and team is great, if the cap table is broken, they have to pass it.
Imagine if at the end of the day the founders dilute to 10-20%... Will they be as motivated to push hard, working day and night fully committed? A subtle comment: if the first investor has anti-dilution protection, the situation becomes even more dramatic. The second investor will immediately realize that continuing discussions is pointless as the deal won’t work.
The situation is even worse if a not-so experienced investor doesn’t recognize the problem, engages in months-long negotiations, and then makes an offer that leaves the founders with only 10-20%. After months of talks and significant effort, the founders may simply reject the deal.
Good news, that experienced, “top-tier” VC investors know they can’t request more than ~10-25% in a certain round, and nowadays the terms are gravitating towards “standard” deal terms. Still, one has to be cautious.
Private equity deals are bit different as there may be buyouts in the structure or mixed (growth capital and buyout), also the company shall be in a more matured phase, making the equity stake & valuation discussions somewhat easier and more straightforward.
From the perspective of the founders or the company, it’s clearly a mistake to focus solely on valuation while failing to view the term sheet as a comprehensive package.
Even with low equity ownership, an investor may get strong control over the company's operations, significantly limit the autonomy and decision-making rights of the founders or management. Moreover, an excessively high initial valuation might complicate or even block subsequent funding rounds.
So, all in all, you should not let an investor get too many shares in the company as it can block your future rounds. On the other hand, targeting an unrealistic valuation can also backfire when things don’t go as planned and you need additional financing, but in the new environment with the actual metrics, your fair valuation is not as high as it was, so you will face a down round, that will be painful for everyone.
Iván’s role at HVCA will further strengthen the connection between the CEE region’s tech sector and the venture capital industry, fully aligning with HVCA’s mission to elevate professional standards and drive private equity growth across Hungary and Central Eastern Europe.
He thus joins the board alongside long-established investors such as Euroventures and leaders from the most active VC/PE companies, including Lead Ventures and Portfolion, working together to shape the market.
Ivan’s experience in the regional venture capital landscape, paired with his expertise in internationalization, business development, and B2B marketing / sales strategies, will be vital in bridging the gap between tech entrepreneurs and strategic investors, fostering even stronger collaboration and innovation while advancing HVCA’s objectives.
Ivan Gyuracz Nemeth at the 25th HVCA Investment Conference
Below are the most important factors that venture capital investors consider when evaluating an investment opportunity and making decisions. These aspects can also help you determine if your business is ready to raise capital.
• Growth Potential of the Industry and Large Market Size
Venture capital investors typically expect robust growth, which is usually achievable only in thriving industries. Facing many well-capitalized competitors that started earlier can reduce your chances. The industry must have some entry barriers to prevent new competitors from easily replicating your solution. A key factor is whether the market is large enough (TAM – Total Addressable Market). A small market limits the possibility of substantial growth, which will also restrict the exit options.
• Outstanding Growth Potential
You need a growth strategy and a well-founded, bottom-up business plan for the next 4–5 years, convincingly demonstrating to investors that the investment can achieve the expected returns (e.g., 5–10-20-50x). Identifying and analyzing risks and presenting plans to mitigate them are crucial parts of this strategy.
• Proven Market Demand and Business Model, Traction
Depending on the stage and maturity of your business, you must show different levels of “proof.” At a minimum, you need evidence and initial market feedback validating your concept. In concrete terms, you should have initial customers and sales or at least one or two pilot projects to demonstrate that your concept works and customers are willing to pay for it. If you're seeking funding for international expansion, investors will expect knowledge of the target markets, a team member capable of managing this expansion, and ideally some initial results in those markets. Being a market leader makes this process significantly easier.
• Unique Competitive Advantage, USP
A clearly defined USP (unique selling proposition) or competitive advantage is a prerequisite for a successful business and venture capital investment. The competitive advantage must be real and distinguishable—generic claims like “fast,” “efficient,” or “flexible” won’t suffice. A price advantage alone is not valuable. Furthermore, the competitive advantage must be defensible and at least sustainable in the medium term.
• Exceptional, Competent Team with a Credible Track Record
One of the core principles of venture capital is that investors bet on the jockey, not the horse. The management team is scrutinized closely, and attributes like leadership experience, prior professional achievements, and commitment are essential. For early-stage venture capital investments, the quality, composition, and dynamics of the team are often decisive factors. Investors are more likely to invest in an excellent team with an average idea than in an average team with an excellent idea because the team is what drives success.
• Scalability and International Perspective
Due to their high return expectations, venture capital investors rarely believe local CEE companies can achieve the desired growth solely in their domestic market. At least a regional, ideally global model is required. When planning expansion, carefully consider which target countries to enter, why, and how you’ll serve local customers. Other business models allow you to be born global from day one. You should not optimize for the local market, for the local customer needs. A standard Series A investment typically requires a proven, scalable acquisition channel supported by data to demonstrate that a robust system exists. For example, if €1 million is injected into the business, investors should have a clear idea of how many customers and how much revenue this will generate.
• Attractive Exit Opportunity Within ~5 Years
As mentioned earlier, venture capital is inherently exit-oriented, aiming to realize returns within 4–5 years. A business ready for this “marriage” shall have a developed exit strategy (not required in very early stage). You should showcase current M&A transactions in the industry and future potential targets, explaining why your business could become an acquisition target in a few years and identifying potential buyers.
• Soft Parameters
These include all non-quantifiable factors, such as personal impressions, feelings, and “chemistry,” which can influence the investor’s decision and, in extreme cases, even derail a transaction. Remember, venture capital investment ties both parties together for years, so mutual impressions matter. Does the other party arrive punctually for meetings? Do they take long vacations? How do they behave during informal conversations? Even seemingly trivial details—such as how you ask for coffee from the assistant —can impact an investor's perception. It’s surprising how many small things can influence an investor!
How to Prepare Before Approaching VC Investors?
The further a startup progresses on its own (i.e bootstrapping) in the implementation process, the more likely it is to capture the interest of one (or even multiple) investors. It’s rare for an investor to provide hundreds of millions of euros to finence an early-stage project still in the idea phase. This isn’t due to doubts about innovation or growth but rather the risk factors associated with early-stage ventures. Some say: Ideas are nothing, execution is key.
Once a prototype is truly functional, embraced by the market, and has achieved market traction or even a leading position, the risk decreases significantly. At that point, investors are much more willing to provide substantial funding.
It’s critical to assess how to advance your project further before approaching investors. This might include validating realistic market demand and presenting needs as accurately as possible.
For businesses that have been successfully operating for several years, thorough planning of the growth strategy and establishing a clear roadmap can support investment decisions. Every company wants to close its deal as quickly as possible. Investors want to understand what’s the story they’re investing and how they’ll get returns—there will be questions! Be proactive and prepare a business plan based on metrics ad benchmarks, covering market research findings, competitor analysis, core strategy elements, sales and marketing channels, and more.
Before reaching out to investors, you should have:
A detailed investor presentation,
A shorter pitch deck
Competition analysis and summary of market research and trends
TAM estimation
And a business plan - at the very least
What Questions Can You Expect When Approaching Investors?
If you plan to grow further with the involvement of venture capital investors, you’ll need to provide convincing answers to questions like:
What makes your product/solution unique, and how does it stand out from competitors?
What are the most important market trends influencing your success?
What regulatory challenges or risks might you face?
Is your intellectual property protected? If not, should it be, and when?
Which country is best to launch in first, and why?
What market players should you expect there, and what level of demand can you anticipate?
What is the market size (TAM)?
What are the expected customer acquisition costs (CAC), customer lifetime value (CLV), and sales conversion rates?
Would a joint venture, a reseller network or a local office be the better solution for you?
What costs and returns are associated with each option?
How will your gross margin evolve throughout the years?
What makes your offering/solution sticky?
Can you utilize network affects? How?
What costs and returns are associated with each option?
Can the business deliver above-average returns as expected by investors?
Do you have an idea about the investor’s exit? What exit value would satisfy you?
This list is far from exhaustive. However, thorough preparation can significantly enhance the credibility of your project, increasing the likelihood of a successful fundraising process!
How Long Does It Take to Find an Investor?
Each project and investor are unique, making it challenging to estimate the time required to find the right investor. Extreme cases do exist—some companies have secured investors in just a few weeks, while others have taken more than a year. Realistically, for raising venture capital , you should plan for a process lasting 6–12 months.
The more progress you make independently (collecting feedback from the market, implementing plans beyond the concept stage, entering international markets, gathering experience, etc.), the shorter the average investment timeline can be. Involving experts can also streamline and accelerate the process. Several years of expertise and experience like Absolvo’s can significantly reduce the required preparation time.
The details of the specific collaboration are outlined in the investor's offer (indicative offer, LOI, NBO), known as the term sheet. It is unique to each project, company, and investment.
Some parts of the term sheet are standard, but many terms are negotiable - and they should be negotiated well! Whether an investor's offer is advantageous is not solely and primarily determined by the ownership stake requested or the company valuation
- contrary to what many founders or owners might initially believe. The term sheet contains numerous additional conditions that can significantly influence the overall picture, potentially even changing the perception of the offer entirely.
For most businesses, capital raising is not an everyday task, so it's completely natural that interpreting a term sheet, evaluating its conditions, and negotiating them aren't routine activities either.
Experts in capital raising can support businesses also in this area. Up-to-date expertise, knowledge of truly "standard" conditions, experience with investors, and years of professional negotiation, and transaction experience increase the likelihood of achieving a genuinely "good deal". A poorly negotiated agreement can lock both parties into years of disadvantageous and demotivating "co-suffering" instead of a fruitful collaboration.
Just to mention a few topics:
During negotiations, can we expect the investor to waive their drag-along rights? Should we fully accept their veto rights? How should we address an early exit? What can we expect regarding liquidation preferences. Will we even receive cash at the time of exit? Is a right of first refusal key for the founders? What happens if the company needs further financing? Who should be on the board? What are the relevant reserved matters for the board and/or the shareholders meeting?
So, it is beneficial to:
discuss these questions with an experienced advisor and prepare with their guidance.
understand the chosen investor's preferences in advance and prepare strategically.
have an experienced team evaluate the offer provided by the investor.
How Do You Increase Your Chances with International Investors?
It's not enough to be good; you must demonstrate competitive advantage and a unique selling proposition (USP) on an international level.
Your revenue likely doesn’t come solely from the domestic market anymore, proving your ability to succeed in international business development and customer acquisition.
Your team must be capable of building an international company, ideally including foreign team members.
You plan to establish a presence in your target market (e.g., opening an office or even relocating a founder), or even better, this process is already underway.
A common pattern is that founders have lived or worked abroad, attended foreign universities, or participated in non-local accelerator programs - showing that their ability to succeed in a foreign culture and build a successful business won’t be tested using the investor’s money.
When Is Venture Capital Not the Right Fit for You?
If during the planning phase, it becomes evident that the project or company cannot achieve annual growth of at least 30-50% (of course depending on the basis).
If market analysis reveals that your competitive advantage is only temporarily sustainable.
If the market is not large enough (TAM shall be above €500Mn or even 1Bn).
If you're not willing to sell the company after 3-5-7 years.
In these cases, it’s worth reconsidering whether your idea or plan can deliver the return investors expect. As previously mentioned, securing venture capital investment is a lengthy, time-consuming process requiring significant energy.
Additionally, Avoid Seeking Investors if:
You need external funding immediately, as the minimum expected six-month capital raising process length is a "slow solution for you."
If you struggle with the idea of accepting investors as co-owners, feel reluctant to give up equity—even temporarily—or allow them a say in company decisions. Getting VC money inherently means the investor will become a co-owner for a specific period, so you should be onboard with that from the beginning.
You disagree that planning growth, developing strategies, and preparing business calculations are indispensable for securing a partner or funding for your project. These strategy-related questions will undoubtedly be asked.
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