In 2014, Karl Rosander and Måns Ulvestam founded the podcast platform Acast. The idea was to transform the audio-on-demand market just as Spotify had transformed music. 

“There wasn’t a functioning platform for audio on demand and whilst radio listening was on the downhill, we realised that the advertising market had to go somewhere,” Ulvestam says.

By year-end 2018, the podcast platform had 125 million active monthly listeners and had raised around €60m in total.

“There are probably few companies that have met with as many VC [venture capital] firms as we have,” says Ulvestam. “Since we started we have met with hundreds, in the US, the UK, Germany, France and Sweden; although many are good, the majority is not.”

Ulvestam and Rosander have been around for a while and were already working with tech leading up to the dot com crash in 2000.

“It was the same thing happening then as now. In 1999, it was all about hiring as much staff as possible: according to the VC firms, that was where the value was. The last few years it has been about growing the number of users, downloads, and retention etc. But if you are giving it away for free, how do you know anyone will pay for it later on?,” says Ulvestam.

“The investor banged both his fists on the table and shouted that he was out.”

The “pyramid games”

The founders call it the “pyramid games” of the VC firms, where the value of the company has to increase between rounds to increase the value of the existing investors’ shares. And they will use whatever means possible.

“It could be to increase monthly active users, increase activation costs – anything so that the next VC company would pay more. That was something that we reacted to and we turned down the investors who thought this was the way to do it,” Ulvestam says.

“This was extremely common a couple of years ago, but just as in 2001, the investors have now rightly started to focus more on revenue and paying customers.”

“There is generally too much capital available to VC companies due to the low interest rates.”

Rosander remembers other investors that they turned down during the due diligence period leading up to an investment round in 2016.

“The due diligence had been extensive and when we, at last, ended up negotiating the terms of the investment, this investor banged both his fists on the table and shouted that he was out. But he wasn’t really out, he had just watched too many episodes of Dragons’ Den and thought this was the way it was done. We turned him down,” Rosander says.

“If you are giving it away for free, how do you know anyone will pay for it later on?”

The worst experience of Ulvestam and Rosander was when an investor at a large tech fund wanted to dilute the company for his own benefit.

“We were in the due diligence process when we received a call and term sheet from the potential investor. What he suggested was that we would ridiculously dilute all the shares of the existing owners’ but give us [the two founders] and himself a much better deal,” Ulvestam says.

“We just hung up and never spoke again,” says Rosander, jumping in.

From founders to investors

In 2017, Ulvestam and Rosander stepped down from their operational roles at Acast to let other people take over to make the company ready for an initial public offering. Last year, they also left the board but have kept their shares in the company.

Apart from having become angel investors, they also help VC companies with the due diligence process and startups with the relationship with the VC firms.

“There is generally too much capital available to VC companies due to the low interest rates. Some use the theory of spray and pray, and hope that at least some of the startups will do well. As an entrepreneur, you don’t want to be one that fails since all of a sudden there will be no more capital available for you. That is why sales are so important, not to get caught by the claws of malicious or ignorant investors,” Ulvestam says.

The Acast founders' tips for entrepreneurs

Do your due diligence on the investors – have lunch with startups which have already received funding from the investor and ask around.

Decrease the number of board seats for investors; make space for those with valuable knowledge.

Focus on paying customers; when you have money coming in, the investors will have less power over you.

Focus on your business; any time spent with your investors is time not spent on your business.

Try to limit the number of clauses in the term sheets.

Always make sure you can force conversion if you’re doing a convertible note.

Try to avoid preference shares at all cost. You might like the higher valuation you get now, but it will bite you in the ass later.

Finally, don’t believe the golden rule: the man with all the gold does not make all the rules.