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$160 million under management and 10x return on investment: the backstage of Flint Capital venture capital fund

$160 million under management and 10x return on investment: the backstage of Flint Capital venture capital fund

18 Nov 2020

For most startups, a venture fund is a company that their path to success depends on. At the same time, the fund is also a business that works for results, expects profitability and looks for reliable partners.

Startup Jedi asked Dmitry Smirnov, Managing Partner of one of the most significant players in the region's market, Flint Capital, how the venture capital fund sees the startup market. You will learn about the evolution of the fund's development and what it should become in a couple of years, what trends there are in the venture capital sector now and in what direction it is developing, how startups are selected for investment and — the cherry on top — advice to startups on how and when to raise investments.

Startup Jedi

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The fund

Flint Capital is an international venture capital fund that invests in Early stage startups from such market segments as enterprise software, fintech, health tech, artificial intelligence, automation, mobile applications and marketplaces. It was established in 2013. The fund’s offices are located in the USA, Israel and Belarus.

The Flint Capital team collected and invested in the Flint Capital I fund, now the formation of the Flint Capital II fund is nearing completion, and the launch of Flint Capital III is scheduled for the second half of 2021. The total amount the fund manages is $160 million.

Its total portfolio includes 45 companies and 2 unicorns, 6 more companies are expected to become unicorns in the coming years. We had 12 exits in Flint Capital I fund, the fund demonstrated Net IRR exceeding 20% ​​for all 30 portfolio companies. Flint Capital II made 13 investments and one exit.

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Getting started in venture and motivation

How did you get into the venture business?

— I came to the venture business from the telecommunications industry, where I worked for Mobile TeleSystems with super-professionals Mikhail Susov and Mikhail Khanov.

Victor Remsha, owner of the FINAM Investment Holding, became my guide to venture. For some time we talked about the mobile market, he invited me to work in his holding, where I started implementing mobile services. Once Victor asked if I knew anything about investments. I honestly said no, and he transferred me to the investment department. He needed a fresh look at the investment portfolio and investment strategies. Alexey Basov was the head of the department. I think it was their joint decision.

Meeting Alexei is another important stage in my career. Victor has a very good instinct for promising projects, he never unnecessarily bureaucratized any process in the company, although FINAM was a fairly large holding. Alexey always made decisions very carefully and professionally, he was calm, did not give in to emotions and communicated with everyone on equal terms.

I was very lucky with the people I met along the way, I learned a lot from each of them: Victor Remsha and Alexey Basov made my immersion into a new profession as effective as possible.

I myself only had to catch up with the theory — the whole table was piled high with books about investments — and to actively participate in all transactions from day one, which is the best way for rapid professional growth.

— What is your motivation to work in this field?

— I believe that the motivation for venture business managers is constantly gaining new knowledge in the field of high technologies, communication with a large number of smart and talented people — both entrepreneurs and investors, the opportunity to travel to different countries, the thrill from successful “exits” from portfolio companies …

For example, we invested $ 4 million in a company not so long ago, and 2 months later we received a term sheet from an American corporation for the takeover of the company with an estimate of our share of almost $ 8 million. This adds energy, positive emotions, and motivation.

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Flint Capital venture fund

The evolution of the fund: partners, profitability, first achievements

— How did Flint Capital start, what were the first deals and the first years of work?

I started Flint Capital with my ex-colleague from the FINAM Investment Holding Oleg Seydak. We have invested in 5 companies in Russia. To a large extent, we were attracted by fintech and SaaS solutions in the Enterprise segment, we entered the late Seed and round A stages. The companies that we invested in then are still successfully developing, their capitalization has grown, new investors have come. But we knew that the Russian market was very limited. As a result, we have shifted our focus to companies targeting global markets.

So we ended up in Israel — a country where they love to create high-tech products, a country with many professional and talented founders and a developing venture ecosystem. We studied it thoroughly: we didn’t sit in one place, didn’t wait for those who were refused by local funds to come to us, but we ourselves went everywhere and asked to visit leading funds, entrepreneurs and development institutions.

In the first year, we made 10 very successful deals. Local experts Roman Gold, Gadi Isaev and Levi Rise helped us in this. Thanks to them, we invested in one company at an estimate of $96 million — and at the end of last year, this company held a round at an estimate of $1.75 billion, meaning our share has grown significantly.

Subsequently, Levi Rise came to our fund as a Partner. We continued to invest in Israel, thanks to our expertise, we keep getting the best deals, and the quality of input projects has grown exponentially.

During this period, a new Partner joined the fund — Sergey Gribov, who lives in Boston, but spent almost half of his time before the pandemic in Israel. Sergei helped to systematize the work in the Israeli direction and further improve the quality of the pipeline. A little later Lena Gantvarg and Adi Levanon who already have experience working with Early stage companies joined us.

After a year in Israel, we moved on and started actively looking at deals in Europe and the United States. A new Partner, Andrey Gershfeld, joined us to work on the European and American markets. He was the Managing Partner of the ABRT-Mangrove venture fund before joining us. Flint Capital team that was already strong enough has become unrealistically powerful with his arrival.

First of all, in new markets, we began to work with Russian-speaking founders. We share a common mentality and have become a kind of liaison for them with the leading and most reputable global investment funds.

However, we have a pleasant exception — we invested in a California company with American founders MatchCo and sold it to Japanese cosmetics giant Shiseido.

Flint Capital venture fund

— How has Flint Capital changed in terms of approaches to the choice of startups, positioning, trends, if we compare its work now and in the first 1–2 years after its creation in 2013?

It’s pretty rare, but Flint Capital’s strategy still undergoes changes as we follow global trends. Recently, as a result of the pandemic, IT solutions in the field of remote work, online education, mental and physical health, online entertainment, and cybersecurity have become more relevant. This is the priority of our foundation now.

Now we see that Flint Capital 2013 and 2020 are very different from each other. In 2020, we have even better deals, an even stronger team, an even more efficient structure, an even clearer focus on growing trends and even more professional work with companies. And also more proof and confidence in the success of our investors.

— What events would you name as major milestones in the history of the fund? How effective were Flint Capital I and Flint Capital II funds?

The main milestones I would name are the expansion of the fund’s geography and the arrival of new Partners: first Russia, then Israel, the USA and Europe.

By the way, we recently made our first deal in the UK, which is a large, liquid and self-sufficient market. After the second wave of coronavirus, we will definitely spend more time there for a deeper dive.

With the arrival of each new Partner, our Investment Committee became smarter. Each of the Partners has a set of useful knowledge and skills for making decisions. Thanks to them and a fairly wide network, a high-quality pipeline of projects is being formed.

Flint Capital I, launched in 2013, with a volume of $ 93M, has proven to be a very successful fund, demonstrating Net IRR over 20% across all 30 portfolio companies, with 12 exits, including the sale of CyberX to Microsoft.

But the biggest exits in this fund are still ahead. I hope we will provide our investors with at least 3X return on investment.

As for the Flint Capital II fund, it was launched in 2018, made 13 investments with 1 exit (sale of LOOM Systems to the American corporation “Service Now”). The second major exit of the Flint Capital II fund happened just a few days ago: the Voca.ai startup was sold to Snapchat.

We will stop signing new investors for this fund in December this year. Therefore, I appeal to those investors who want to become part of the new great success of Flint Capital: welcome to our second fund! There is little time left — the next fund, Flint Capital III, will be launched in autumn 2021.

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Flint Capital venture fund

Plans

— What will the Flint Capital III volume be? Will there be any difference in the positioning of this fund?

— Taking into account how the first and second funds will be reissued, delighting our investors with regular exits (most of our investors are set for long-term relationships and have already voiced their desire to reinvest profitability in new funds) I think that the funds for a new structure (or structures) will amount to $ 250–300 million.

We will decide whether it will be one general fund or several funds for certain market niches in the first half of 2021. We will take a more proactive approach in the second half of 2021.

The main difference from the first and second fund may be the creation of several funds focused on specific areas. But it is too early to talk about this. We will make all strategic decisions on the third fund later, now it is important to focus on continuing the success of the first two funds.

— Where do you see Flint Capital in the next 3 years? 5 years?

— When we launched Flint Capital, we set ourselves the goal of entering the top 50 global funds in terms of recognition and effectiveness. I am sure this will happen in 3–5 years. The main thing is not to stop there.

Now we have 15 investors in the second fund with entrepreneurs who built billion-dollar companies in the United States from scratch among them. I expect to have 5 times more investors by 2025.

There are only two unicorns in our portfolio so far, by 2025 I expect at least eight of them. At the same time, we still intend to remain the most efficient business in terms of organizational structure and budget.

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Flint Capital venture fund

Trends in venture

Has the COVID-19 pandemic affected the venture capital market?

— I’d rather say the pandemic confirmed that the venture business is sufficiently resilient to the global crisis. While some of the companies began to feel a little worse, others grew rapidly.

In general, our portfolio continued to grow in quality despite the pandemic and lockdowns. We didn’t expect super-ambitious performance from Webinar.ru or XRHealth, but the crisis led to a boom in online communications and telemedicine. And we were able to profitably sell our shares in Sum&Substance, a remote authentication and identity verification company, and CyberX with Internet of Things Security solutions, to Metaquotes and Microsoft respectively.

The relevance of projects in the field of Healthcare, CyberSecurity, Online Education and Entertainment has grown significantly. All these areas remain in the sphere of interests of our second fund.

— How will venture funds change in the coming years?

— The current reality is that the investment focus of funds is shifting to later stages. Early funding is becoming more difficult to raise. We need more business model validation, converging unit economics, and quality metrics for business growth.

— Will the ecosystem approach work in the creation and development of funds, co-investment with angel networks, tokenization of venture capital?

— I do not believe in the ecosystem approach when creating funds in the near future. Many are now building such business models, but I do not expect to see significant efficiency gains in seeking partnerships and synergies in the marketplace.

Venture capital tokenization is a separate promising topic. So is a special stock exchange for the secondary sale of shares of non-public companies. These two areas will bring major positive changes in venture in the future.

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Flint Capital venture fund

Startups

— Flint Capital’s portfolio includes dozens of projects. Which ones do you remember?

— To date, we have already invested in 45 companies in two funds.

All companies are our “children’, I would not single out someone. When we invested in them, the founders had fiery eyes, everyone wanted to achieve great success, to please not only themselves, but also the investors. It’s just that someone succeeded, and someone did not. It happens, this is life. Only those who do nothing make no mistakes

There are companies that “took off” rapidly, there are those who were bought by the largest American corporations, there are those who were really bad, but they were able to change the product, reorient it to another market — and this became the key to success. And there are those who tried, but could not do anything.

We all have very good, professional relations. This is important since just because someone has had bad luck, it doesn’t mean that the next project will be the same. On the contrary, very often failed projects are the key to future victories.

Which startup will you immediately offer cooperation to?

— The startup that is in the focus of our fund, has made a product demanded by the market and has sensible founders. Very often we get all sorts of applications, without being asked what we invest in. And this information is widely available.

— Are there ideal startups from your point of view? If yes, please describe the perfect startup for Flint Capital.

— I don’t like the word “perfect”. In my opinion, nothing is perfect. There is no guarantee that even a startup close to ideal will make money. You can also make money not in a perfect startup, it just depends on how lucky you are.

Our main task is to systematically and progressively build an investment-attractive business, which will definitely not be brought to the ideal, but, most likely, will be sold to another American corporation. This is exactly what we love and what we do best.

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Flint Capital venture fund

Geography of presence

Flint Capital offices are located on three continents: what is the function of each of them?

— We are headquartered in Boston, where most of the employees who deal with transactions work, another office is located in Tel Aviv, and the Back Office is in Minsk.

This structure looks very logical: we are looking for companies in Israel and Europe and relocate them to the United States — this provides an almost seamless transfer of companies.

The Minsk Back Office is economically justified. Anna Pozdnyakova and Alina Voitukhovich work there in the legal direction. Ekaterina Smirnova, the CFO of the group is also in Europe. Without the dedicated work of the Back Office staff, there would be no overall success for the foundation.

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Cooperation with accelerators and the search for investment projects

— What incubators and accelerators does the foundation cooperate with? Where do you mainly recruit startups for your portfolio?

— We know the management of several incubators and accelerators in different countries, but we do not have regular cooperation with anyone. It makes sense to look at projects like 500 Startups or Y Combinator, but only before the Demo Day. At this event itself, there is already a lot of excitement and “inflated” estimates.

We have companies from both of these accelerators in our portfolio, but we do not receive the main flow of projects from there. We use our network actively. 90% of the fund’s portfolio are companies that entrepreneurs and other funds recommend us to pay attention to.

Besides, two of our investment directors are actively searching the market and finding deals through their contacts. We discuss new interesting opportunities at pipeline review meetings and meetings of Partners, and if we find any of them capable of becoming a big story and bring us at least 10x on invested capital, we study them in more detail and submit them to the Investment Committee that includes the Fund’s Partners and an independent Director.

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Flint Capital venture fund

Interacting with teams

— How much time does it usually take to get to know each other, communicate with a project, and make a decision on investment?

— It depends. We can write out a check within a week, or it can take us several months. Since we have a narrower focus of interests in the second fund, in some market niches we know what is missing and what will grow rapidly — and we make deals very quickly. The delay is usually associated with obtaining a large amount of information on the market niche and the founders of the company. When Fund Partners do not have their own expertise, we turn to external experts and those who have worked with this team for help.

— How does the fund cooperate with the startups that it invested in?

— We are quite active in working with the companies we’ve invested in. In most investment rounds, we are in the lead, so we get a seat on the Board of Directors that meet at least 4 times a year. Besides, we regularly communicate by phone, email, sometimes there are chats in messengers, and there the intensity of communication is even higher.

We have learned from our mistakes. When we let the company float freely in the first fund, it didn’t end very well. You must always “keep your eyes on the ball”, then the success will be of better quality, and the difficulties are not so painful, because we try to find ways out of any situation.

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Tips for startups

— Top 5 Tips for a Startup to Follow to Attract Investors to a Project and Use Money Most Rationally?

  1. — There is no need to rush to attract investors, try to go as far as possible on your own, then the share you have to part with in the company for investment will be less. At the same time, do not miss the moment when investors are vital. As a rule, additional resources are needed to quickly scale and improve the product in accordance with the chosen business model.

  2. Do not inflate the staff, try to attract better people to the company. Take quality, not quantity — quantity will add a lot of hassle afterwards.

  3. Motivate people at the start with an idea and small options, let them feel their involvement and empathize with everything that happens in the company together with you. Someone who focuses on salaries and not on building a big business like a small shareholder is not your type of person, do not hire them.

  4. Choose the right platform and IT solution for your IT product if you work in the mass segment. Don’t “reinvent the wheel”. Showing off in this matter can then get along with serious costs for unique specialists. The reality is that you can repeat anything pretty quickly. The uniqueness now can be in the number of users or customers, marketing, team and something else, but not in IT technologies.

  5. Build professional relationships with investors. From the moment they joined the company, this is their company too. Organize a quality work environment with them, determine where they are strong and can help in advance. Don’t ignore them. Try to make sure the Board of Directors of the company becomes more intelligent and useful for the company with each investment round.

18 Nov 2020

 

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