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Entrepreneurial spirit: how iTech Capital works and what projects they invest in

Entrepreneurial spirit: how iTech Capital works and what projects they invest in

30 Dec 2020

This family of funds invests in tech companies that have proven businesses, have a successful business model, and are ready to scale. Based on the belief that a business that grows at the expense of its own funds and at the expense of funds it raised is able to take off, the managers of iTech Capital help portfolio companies to discover a new market, and help their investors to receive high returns on investments. Gleb Davidyuk, Managing Partner of the iTech Capital group of funds, shares how the fund works, why it does not limit itself to certain industries, how it “hunts” for projects and how it selects them.

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About the fund

iTech Capital is a management company of a group of investment funds, founded in 2010. ITech Capital manages 3 funds, has 12 portfolio companies, 5 successful exits, over 75 private investors, and over 25 years of private equity experience. The portfolio includes companies such as Aviasales, Tradingview, Bitfury, Amulex, RealWeb and other major players in the technology market, projects that have already proven their worth. ITech offices are located in Moscow, Riga and Cyprus.

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 “We invest in those with whom we can speak the same language”

— How did you choose the focus for the funds?

— We chose the focus 10 years ago and we adhere to it to this day — these are investments in companies of later stages with Russian-speaking founders: yes, it is important for us to speak the same language with partners. When it comes to structuring a deal, doing business on a daily basis, and the rules of the game, it’s easier for me to come to an agreement in Russian, because mentally we understand each other well.

We have three funds. The first and second funds are our locomotive. We do not limit ourselves to any one sector, but historically it turned out that we have a little more expertise than others in some sectors, like travel, performance marketing, blockchain, fintech, big data, sportstech.

A third fund is dedicated to sports, we call it the Global Sport Opportunities Fund. It is our attempt to invest early in the sports technology segment. We invest in the sports technology sector, not necessarily in companies with Russian-speaking founders. A lot of interesting things are happening in this area today and it would be foolish to miss this opportunity.

Sport-tech segment includes many fast-growing areas of traditional sports (data analysis, content delivery, clothing and devices, smart stadiums, fan engagement, sports nutrition, event management, sports media, sports applications, gambling, sports tourism) and eSports. The volume of the traditional sports market in 2019 was $ 550 billion, the volume of the esports market was $ 1.1 billion. The largest sport-tech subsegment is gambling ($ 160), and the fastest growing is esports. From 2010 to 2018, the number of transactions in the esports market increased from 6 to 63, i.e. 10 times, and the amount of capital raised from $ 52 million to $ 2,740 million [Startup Jedi].

Considering the anchor partners in this fund — the famous Russian footballers Alexey and Vasily Berezutsky, the Honored Coach of Russia — Leonid Slutsky — we, by and large, can combine our technological expertise with the professional sports expertise of our sports partners.

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 iTech Capital fund

Travel portfolio company is growing even during the pandemic

— What projects are you proud of?

— I am proud of all our companies, it is difficult to say which one is bigger. Each of the portfolio companies has its own history, its ups and downs.

Of course, there are leading companies. One of the highlights is Tradingview, a social network for traders. The growth rates of this company are impressive by all criteria and overtake many analogues, which there are very few in the world. I think that in the near future a wide audience will learn about the success story of this project, since an investment in this company will multiply the money of all our first fund investors.

Another company from our portfolio is Aviasales, where we invested almost 5 years ago and with which we’ve been through a lot. Today Aviasales is the largest travel metasearch in emerging markets, even during the pandemic, the company still shows growth thanks to the strongest team of managers who live this business with us.

We have a pool of companies related to the advertising industry, with businesses in the performance marketing sector. These are Realweb, iConText, PromoPult. Each of these projects is a leader in its own segment, and together they are leaders in Eastern Europe in this sector. There is a young company Roistat in the second fund. It’s a service which evaluates the effectiveness of advertising in terms of sales channels. The guys from Novgorod raised the round in 2019, and today they are the leader of the Russian market of end-to-end analytics with ambitious plans for global expansion.

There is also a blockchain story, it is presented by the company BitFury. It’s a sort of Intel in cryptocurrencies, here is the production of equipment, software projects, our own chips, and mining as such. The company is one of the pioneers of the cryptoindustry, whose success we the world’s news feeds will be sharing.

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“Many people write books about this, and we have released software”

— Besides portfolio companies, you also have your own products, for example, software for managing and monitoring direct investments AIRR. What prompted to develop and launch it on the market?.

— AIRR is our product that has grown within us and entered the market in the winter of 2020 (you can read a detailed analysis of its functionality in our review article about software for venture funds). We have released software that allows top managers and beneficiaries of investment companies to not worry about pipeline innovations, portfolio company reporting, workflow, communications, reporting and KYC procedures. Many colleagues write books on this topic, and we have released software that automates and heals the typical pain points of the investment process.

In recent years, the topic of direct and venture capital investments has become very popular. However, by the fifth year of active investment activity, and even more so by the 10th year, you have accumulated a lot of all kinds of problems that need to be solved either in the old fashioned way in an Excel spreadsheet and on Google Drive. Or through a technology solution such as AIRR. For us, this is another way to declare ourselves, to create something useful for the industry.

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 iTech Capital fund

“If a company enters our portfolio, it is guaranteed to get access to all the fund’s resources.”

— How does iTech Capital differ from other funds?

— The Fund never participates in auctions for deals, we try not to outbid the offers made by our competitors. This is our position. Business valuation is always based on a number of indicators and metrics, including the most important one — internal comfort.

ITech has a very entrepreneurial approach, I myself am an entrepreneur with 25 years of experience in the industry. This is long and this is a lot. Going personally through the many difficulties with your companies in terms of participating in their businesses is a valuable experience that can help many entrepreneurs in their work.

Traditionally, we have no more than 20 companies in our portfolio. You only have 24 hours in a day, and if you are one of 50 companies in the portfolio, you should not expect that the manager will deal with you, they simply won’t have enough time. In our case, everything is different: if a company enters our portfolio, the resources that the fund possesses are guaranteed to become available to it.

We have an excellent base of partner investors. Today there are 75 of them, and their number is growing. This is a serious resource that allows, on the one hand, to get a knowledge base and experience, because each of the investors in our fund is an accomplished, successful entrepreneur. For example, on our initiative, Edna (MFMS) began to develop a direction related to the scoring of bank clients, which later formed into a separate business. At Aviasales, we have fully taken care of issues related to corporate finance and capital raising. We help Promopult to maintain financial accounting and control. Each project has the room to work.

On the other hand, there is a huge database of business contacts who are directly interested in your success. We are clearly different in this, perhaps we are one of the most retail funds on the market in terms of the number of investors.

We do not have government money, we do not work with the sanctions list, and from the point of view of KYC we treat those who have given part of their capital to us for management very carefully. That is why the decisions we make are always based solely on market expectations and have no underlying political agenda.

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“The tech sector benefits from COVID for the most part”

— How has the COVID19 pandemic affected your work? How did this manifest itself?

— If we talk about the state of the portfolio, I сan’t complain. In the technological world, by and large, COVID19 has not become something extraordinary. Many companies worked remotely even before the pandemic. But the demand for online services has grown. From a business perspective, the virus has certainly hit many economies. However, the tech sector benefits from COVID for the most part. Against the background of the worldwide plague, a feast is taking place here.

Personally, of course, I do not have enough human communication. I do not believe that the technologies of the 21st century that are available to us today can replace it. Sooner or later, the pandemic will end and the world, in theory, should return to its former tracks. Will it become the same as it was? It won’t, everyone understands this perfectly, but we will definitely appreciate such simple human values ​​as communication, travel and entertainment.

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 iTech Capital fund

When selecting a company for a portfolio, there are no secondary factors

— How do you feel about the approach when, while choosing a new company for a portfolio, the focus is on the team and founders, and other factors are considered secondary?

— I would not say that there are secondary factors. A team and team spirit is certainly good, it is an integral part of the business, but there must also be a product or service demanded by the market. There must be a clear concept of the business rules of the game.

We always look at a combination of factors, including the place of a potential project in the current portfolio. Does it complement it? Is synergy possible? Will it be a hindrance to other portfolio companies? We also take into account our desire as managers to spend our own time on a project, because the most important, valuable and limited resource is time, and it must be spent wisely.

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4 ways to find a company for investment

— How and where do you look for projects?

— I would not say that we have a special, unique recipe. There are several ways to find a portfolio project. The first is “fishing”. As a rule, we receive applications via e-mail or through the fund’s website, where there is a special form for investment seekers.

The second way is “hunting”. It involves a conscious search for interesting stories in a particular industry. This is a systematic work at the team level, we “dig” one sector or another from time to time in order to search for interesting stories in it.

The third approach is recommendations. This is probably the most interesting source of new projects, because in addition to strategic compatibility, it also has a psychological component, when someone from our close circle recommends a project.

Fourth, we have a whole block in the AIRR product called AIRR Leads, which helps to fill the funnel of new projects using certain filtering algorithms and access to global and local databases.

On average, we look at several thousand projects a year and invest in a few. We do not strive for quantity, I value quality.

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 iTech Capital fund

It takes a long time to prepare for a deal — just like a marathon

— Which company would you immediately say that you are ready to invest in?

The one that will provide proven growth metrics, a positive unit economy, and will prove the ability to produce and sell a product which has a competitive advantage. This company also needs to have a comfortable founding team able to quickly and honestly negotiate the business and its future. We are always ready to agree on all other points.

— How long does it take to make an investment decision after meeting the team?

— We would like to make 3–5 transactions per year, with a ratio of 3000–5000 viewed projects during this period. At the same time, unfortunately, the transactions themselves take a long time: it takes a lot of time to structure the transaction and agree on the terms. On average, transactions take from 2 to 6 months. In this sense, we are certainly not a conveyor belt.

Our portfolio should contain no more than 15–20 companies that we are ready to spend our time for. You enter the project not for a month or two, not for a year, but for 3–5, and, possibly, 10 years. You have to understand that this will be a fairly long period of “marathon run”. It is better to prepare for a marathon.

— What determines the duration of your cooperation with the project?

— How much time you spend with a company, as a rule, depends on two things: your desire to part with this company as soon as possible by selling it on the market, and your desire to capitalize as much as possible on the income from the sale of this business.

There are situations when the saying “Don’t refuse a gift, don’t accept a blow” works quite clearly. You understand that the moment has come when you need to sell the company. At the same time, there are situations when you see a certain prospect for the future of your portfolio company and prefer not to rush the sale, realizing that the increase in capitalization per unit of time is so high that it repeatedly covers the cost of money in time and your labor costs.

— How do you work with the team after including it in the portfolio?

— It happens in different ways and depends on the degree of involvement in the project, the share in it, the desire of the founders to use our resources. I almost always try to help portfolio companies and answer all their requests. In daily work, I spend 60–70% of time communicating with portfolio companies. It is important for me to understand how we can be useful to the project in both good and difficult times.

As a fund, we also present companies with a certain set of information requirements for reporting and monitoring what is happening within their business. Turnover, Gross / Net Profit, EBITDA, COGS, ARPPU, Churn rate. The set of metrics depends on the business of a particular portfolio company, in our case, thanks to the AIRR platform, this communication is largely automated, so we do not deal with unnecessary bureaucracy.

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 iTech Capital fund

Business advice: bet on the provability of the business model

— What advice can you give to companies that are now looking for investors: how to behave, what to prioritize in order to raise capital?

— You need to focus not on raising capital, but on ensuring that a product or service has at least two characteristics. Think about how the business grows at least from your own funds. Because if it is able to grow at its own expense, then at the expense of the funds raised it can skyrocket.

Rely on historical metrics and the provability of your business model. It is not difficult to raise capital, there is a lot of it on the market: there are many business angels, family offices, accelerators, incubators, government programs, grants, foundations, and other players. There are more and more of them every year.

I see no problem in creating a list of email addresses to write to.

The problem is to put so much meaning in these two paragraphs of your letter — the representative of the investment fund may simply not have enough time to read the longer text — that the recipient, who has very little time, can get interested and press the reply button.

30 Dec 2020

 

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