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The culture of communication, ecosystem and trends: how the SmartGateVC fund works

The culture of communication, ecosystem and trends: how the SmartGateVC fund works

25 Nov 2020

It is paradoxical, yet true: as much as it is sometimes difficult for startups to find a fund ready to invest in them, it is just as difficult for a fund to find suitable startups for cooperation. SmartGateVC, an American fund with Armenian roots, has formed an entire ecosystem to solve this problem: with incubators, an acceleration program, coworking spaces, conferences and the community.

Startup Jedi

We talk to startups and investors, you get the value.

The Managing Partner of the Fund Ambartsum Kahketsyan tells about what the fund and its ecosystem are, how startups are selected and what kind of communication culture develops there.
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About the fund

SmartGateVC is a venture capital fund headquartered in Silicon Valley. The fund was founded by a team of entrepreneurs with Armenian roots. It focuses on early-stage startups in AI, IoT, robotics, emerging computational biotechnology, quantum computing and blockchain.

The fund is interested in startups from Armenia and Eastern Europe, whose product is focused on the US market. 6 out of 20 portfolio projects of the fund have closed Seed-rounds, with minimum Seed of $3 million.

SmartGateVC fund
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— Tell us about the fund: how was it created, how many startups are in your portfolio, what projects do you invest in?

— We started raising investments in the fund in 2017, and in January 2018 we started investing the first money. The first fund amounted to just over $3 million; since January 2018, we have made more than 20 investments. We invest in startups at an early stage: that is, for almost all startups we invest in, we are either one of the first investors or the lead investor.

On average, we invest about $ 100,000 in a project: round-size is generally from several hundred thousand to half a million dollars.

Interestingly enough, the fund has no investors from Armenia, Russia and the Eastern Europe. Almost all of the fund’s investors come from the United States. These are the people who are also co-investing with us. Thus, if a startup raises $300.000, of which $100.000 is invested by the fund, then the remaining $200.000 is, as a rule, the money from investors with American background, who close the round together with us.

As for the industries we invest in, there are none that we would unequivocally say we do not invest in. But if a startup is not a high-tech company, it will not be able to get investments from us. It should be noted that we invest in projects aimed only at the US market.

Out of 20+ projects we have invested in, 5–6 have raised quite serious Seed-rounds: the minimum Seed was $3 million. This is a sign that the company has a strong product, and this helps to raise funds for its development.

The first fund is still active and at least 5 investments are still to be made — most likely within the next 6 months.

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SmartGateVC

What is Hero House

SmartGateVC has three founders — and they are all ethnic Armenians with different backgrounds. Despite SmartGateVC being an American foundation, we started sourcing our first startups in Armenia, and thanks to the Armenian network also beyond its borders, in countries where many Armenians live. Also, thanks to access to the Armenian network, we are good at helping b2b companies in marketing, sales and fundraising.

In order for SmartGateVC to develop, we founded Hero House from the very beginning of its work. This is a kind of boutique innovation hub where different activities take place. Its goal is to provide a good pipeline for the fund, so that, before making an investment decision on our part, we have the opportunity to work with dozens of companies, and then select those which we are ready to invest in.

We’ve recently founded another Hero House in Los Angeles: there are many different companies, including media giants that we introduce to our startups.

There is also an idea to found another Hero House in Eastern Europe, and we are now choosing a country. The situation is changing rapidly, as soon as we understand which country is more suitable taking into account several factors, we will decide to open the third Hero House.

— What specific initiatives are SmartGate VC and Hero House implementing to develop the startup ecosystem?

— Among our key projects are Armenia Startup Academy, a 12-week pre-acceleration program for startups in Armenia.

Besides, we, as a fund, have good expertise in deeptech, in understanding the so-called deep technologies: products and product developments that have a complex technological component behind them. This is one of the important factors that, in our opinion, helps to successfully work with technology companies from our region and Eastern Europe and position them, help them correctly.

Besides, AI Incubator works in Yerevan as a Hero House unit, which helps to create scalable business solutions based on artificial intelligence.

— Can we already talk about the provisional results of the Hero House initiatives?

— Hero House gives сertainresults that we are very pleased with: they are a good pipeline that the fund receives and good startups that the fund invests in and that are developing successfully. The results of several projects prove the success of Hero House.

The first project I’d like to mention is the Hero House AI Incubator. It is an incubator for working with technology companies. Companies that need high-level AI specialists turn here and the incubator provides them with such specialists. As a result of this collaboration, startups that are quite successful in their own right, but work without an AI component, get very advanced technology. And we invest in some of these companies: we have definitely invested in at least 2–3 projects from the incubator, and this is 10–15% of the total number of startups that the fund has invested in.

Another project that we are doing together with the Institute of Informatics and Automation Problems of the National Academy of Sciences of Armenia is the annual Science and Technology Convergence Conference. In total, we organized 2 conferences and the third one was supposed to be held this year, but it was canceled due to the coronavirus and the military situation in the country.

This conference is an attempt on our part to connect the industry (companies that produce a product with a scientific component) with science (various institutes, researchers, other scientific structures) outside Armenia. This is another platform for communication between scientists in the field of computer science (quantum computers, machine learning, deep learning, physics) from Armenia with colleagues from abroad and with companies that work with science-intensive technologies.

For two days, people talk about what they have been doing for the last year, get acquainted with each other’s works. There is an exchange of ideas that everyone benefits from: the industry gets access to fresh scientific developments, the scientific world gets more contacts with the industry, hence, the results become very applicable and close to real life.

Thanks to the conference organized last year, a startup was born to model new types of proteins that will be used in specific pharmacological directions. And, of course, we invested in it.

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SmartGateVC

Up to 15 startups from Eastern Europe will be able to go through the acceleration program in Los Angeles from February 2021

— Tell us about the acceleration program launched by the fund for startups from the CIS.

— It’s been 3 years since the launch of our startup program in Armenia. Since then, we have been able to work with more than 70 projects, many of which have been able to raise multimillion-dollar investments. We will implement our experience in the Hero House in California.

Starting February 1, 2021, a startup program for 10–15 startups from Eastern Europe and California will start working at Hero House in Los Angeles. The program will be free: we will not take any money or interest from the project. It does not have a definite focus on the business model: thanks to our network we successfully work with both b2c and b2b companies, especially those with the SaaS business model.

We are implementing the program in partnership with successful tech companies that are willing to share their experience with Hero House startups. These are mostly unicorn or near-unicorn companies with different business models. These are exactly the people we will invite as mentors — both speakers and those who will work weekly with projects in tracking format. Mentors for each project will be selected individually.

The main focus for participating companies is marketing (we will help to correctly position ourselves in our category in the American market and generate relevant leads), sales (how to properly conduct the process from the moment of receiving leads to converting into customers), customer success (which, if properly worked out, allows to save all converted clients). The fourth component will be dedicated to fundraising. As a fund, we already have experience in how to raise money, how to talk with American investors, we know what etiquette there is, what is important and what is not in the United States — and we are ready to share this with startups participating in the program.

It is important to add that we are interested in companies that have the ability to sell in Southern California and are interested in selling in Southern California starting February-March 2021.

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SmartGateVC

Each post-Soviet country has its own startup trends

— Speaking of trends: you cooperate with startups from Armenia, Eastern Europe … Where are the trends moving?

— I won’t surprise you if I say that the strength of startups from this part of the world is their good technological base, which, together with competent business development, gives excellent results.

As for the trends, each Eastern European country has its own ones. For example, if we talk about Minsk, Belarus, there is good experience in developing companies in the b2c format. The explanation for this is the developed gaming industry and the actively developing b2c marketing component. Startups have access to very high-level professionals in their city and in the country. This determines the strength of Minsk as a local ecosystem.

In Armenia, for example, the b2b direction is developing among startups thanks to competent work with the diaspora, when business relations between all parties are built on a win-win basis.

If we talk about other countries in the region, then, in our opinion, countries such as Poland, Serbia, Russia, Ukraine, and the Balkans are also very interesting. Each state has its own flavor.

But in general, now it is difficult to talk about solid trends due to the unformed culture of building technology companies (at least a decade is needed) and the unstable situation in the entire region: any trend can change dramatically due to external factors, both for the better and for the worse.

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Under the influence of COVID-19, investors reflect on the profitability of startups

— How has the pandemic affected the venture capital market?

— On average, early-stage company valuations fell 30%. The second important point is that investors began to pay attention to the category of profitability, forgotten since 2013.

Now we recommend that our startups that are going to raise investments in the American market, have a separate slide in the presentation that describes the unit economy in terms of profitability. Investors want to see at least a profitable strategy.

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SmartGateVC

Key factors in the selection of projects for the fund

— Fund approaches to startups: what do you consider when deciding whether to invest?

— There are 3 factors that impact a decision to invest: the team, IP (intellectual property) technology and the founders’ vision of the market.

The fundamental factor in making an investment decision for us is the team. At the same time, there are super-teams that we do not invest in until we understand the IP part of the technology, at least the IP strategy, which will become one of the fundamental factors of the company’s success. If we do not see this, the chance that we will invest in a startup is reduced. At the same time, working, communicating with the teams, we help them with the definition of this very IP component of the product.

The third factor is the market. We want to understand what the founders think about the market. This does not mean that we necessarily want to know if the team understands the market in the smallest detail. They may not understand it, and that’s okay. However, the categories they think about the market, about its dynamics, about their potential market, about what product they are building — this is what influences the decision to invest.

— How long does it take to decide whether to invest in a particular project?

— How much it takes us to make a decision depends on whether we know the founders, have collaborated or met with them before. If we are personally familiar with the founders, then it can take about a week to make a decision with all communication.

If we are completely unfamiliar with the team, then the feedback about the team and founders from people from our network plays an important role. This work can take several weeks. It all depends on the intensity of the communication. On average, it takes up to 1–2 months to make a decision. Sometimes, of course, we can make a decision even after six months of communication with a startup — if we have questions and need to look at the team’s work, study the market.

Usually, in such cases, we continue to actively work together with the team, founders and see how the problem that worries us is solved — and only then we make a decision about investing.


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SmartGateVC

Startup culture is when you want to work with a specific team on a specific product for a specific market

— What startup do you look for? When do you make a decision to cooperate almost immediately?

— We look at several criteria. As I mentioned above, they include team, market, and IP. I can add the leadership qualities of the founders. We ask ourselves if this is the person we ourselves would like to work for? If I did not do what I am doing today, would I like to work for this person as their subordinate, follow the idea, the mission that they have that is the basis of the startup? Work in the culture they have created and the product they create, in the market they are targeting?

If the answer is no, for me it is a red flag: either I do not believe and do not understand the market, or the leadership qualities of the founders have not yet reached the proper level.

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SmartGateVC

Why you need to embrace failure

— What advice would you give to startups that apply to a fund for investment? How should you present your project so that the investor is interested in it?

— Perhaps I will answer a little uncanonically: you have to be yourself. We don’t like false stories. It is ok to have your past failures and talking about them is also ok. You need to love your failures, not hide from them — they are important to us as investors. In the conversation, we welcome and, on our part, create communication not from the position of an investor-founder, but simply like two people with their expertise and understanding of the market and the problems that a startup has. All companies have problems, but projects develop thanks to working on solving them.

Here’s an example from my experience: one of the founders started pitching his idea during the first meeting- in a classic way, with all the right turns and pauses. After 10 minutes, when we finished watching the presentation, I gave feedback and asked: “Stop pitching and selling and let’s talk like people who are in the same team: tell us about your three most pressing problems and let’s think together how we will solve them”. After that, the tone and culture of communication changed. Instead of playing the role of investor and entrepreneur (I have money — and I want money), we have directed our attention and resources to solving real problems that the success of the startup depends on.

This is the culture that the found works with and which allows us to enjoy our work. It seems to me that this is also mutual on the part of startups. We like to efface the boundaries and create something nice and big together.

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25 Nov 2020

 

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