We talk to startups and investors, you get the value.
Genesis Investments is a young venture fund from Ukraine; it was founded at the end of 2018 by Genesis IT company. The fund invests in startups which deal with online education, AI/ML, Digital Health, Mobile Apps, Advertising Tech. Projects can receive investments that vary from $100k to $2 million. Startup Jedi has spoken with the Genesis Investments team and found out how the startups are selected, what the investor pays attention to and why 99% of startups are turned down. In addition, it’s your chance to read a unique step-by-step instruction on how to raise money for the project!
We talk to startups and investors, you get the value.
- What differs Genesis Investments from other venture funds in Ukraine?
- In Genesis Investments there is much more smart money than in any other Ukrainian venture fund, as it is a corporate venture fund of Genesis company. We have access to the experience of 15+ projects that have already succeeded in their industries or are ready to share their insightful product expertise with startups. Besides, Vitaliy Laptenok, the general partner of the fund, is also a co-founder of Better.me, which regularly appears in App Store tops.
- What sums do you invest? What is the percent you ask in return?
- We invest from $100k to $1 million in startups at the Seed stage, and from $1 million to $2 million in startups in Series A rounds, and we get a minority share in return. The annual budget of the fund is $10 million, including follow-up investments in the portfolio companies.
- How do you search for startups?
- Usually, good startups come to us through networks and references. In addition, we find interesting projects through accelerators and startup events. Most of all we communicate with the projects from Startup Wise Guys, and we also looked at the projects that competed in the Pitch Competition at EMERGE and followed TechChill in Riga. However, the network remains our most important channel.
- What do you pay attention to while making a decision on whether to cooperate with a specific project?
- A really large puzzle must pile up in order to make a decision in favour of investing. Two factors are critical — team and market size.
Team. It is important that the founders must possess strong skills in the operational industry. There should be a balance of soft skills, selling skills and strategic thinking in the team. A great plus if one of the co-founders or somebody in the team has previous experience of creating a successful business. The ability to build up and manage the team, delegate tasks and hire the right people will be of great importance in any startup.
Market size. A few crucial things about the market: it shouldn’t be less than $10 billion, it can’t be in stagnation and it must grow. The most attractive market for our fund is not tied to the location, it is a global one which is divided among players without hardline monopoly.
- How many projects are there in your portfolio?
- We’ve selected 8 projects in our portfolio since the foundation in 2018, those are Basenji Apps, Mate Academy, Liki24, IntellectoKids, Elision, VOCHI, RedTrack and another deal, which we are planning to announce this Autumn. Besides, there are 3 more investments, which were made by Genesis, before the venture fund was created.
- What were the expectations towards them when you were making investment decisions?
- Every investor expects business development, rapid growth and scaling from a startup. Depending on the specifics of different startups, investors form specific hypotheses about achieving predicted revenue indicators and about entering other markets.
Our 11 portfolio companies have had different cases, but none of them has disappointed us. Some companies far exceeded expectations: for the year they managed to achieve such annual indicators of revenue that no one expected and did not foresee.
It also happened that the result turned out to be less than the forecasted one, but the lag wasn’t critical. In many cases, everything isn’t working out as predicted either by financial performance, by product or by market. Often, hypotheses are not confirmed during tests on real users and the founders discard them and invent others.
The only thing that fully met our expectations was the personal qualities of the founders. We were absolutely right about our founders: in the process of cooperative work, they were constantly proving their uniqueness, ability to learn quickly and ability to build a competitive business.
- Please, describe your work mechanism: from the moment of meeting the startups to the investment process?
- The mechanism of work is as follows:
At the first stage, we are checking pitches, product’s demo and pages in the social networks. If the startup is of our interest, we set an online meeting, call them and rapport.
Then we ask for metrics of performance and financial activity, analyse all the documentation (due diligence).
We send the list of additional questions, which arose after the analysis, and set another call-meeting for further discussions.
We also try to use the product, if there is such a possibility. For example, we download an app for video editing, test the functionalities, evaluate the design and exclusive features. If it is a startup with a product, which we cannot test ourselves, we just ask for client’s contacts, contact them and gather feedback. Usually, 5–7 feedback responses are enough to understand how good the product is.
If we have acquaintances, who know the founders, we also ask for feedback on startup’s founders. After that, we can set another call or meeting to acquaint with the team.
Then we prepare an investment memorandum — a document which summarizes all data about the startup and reveals its investing potential. The preparation takes up to three days, depending on the data set. In the memo, we present analysis results and investment recommendations along with a document to the investment committee. If everything goes smooth and the General Partner of the fund approves the deal, the team prepares an offer for the founder.
- How much time does it take to conduct a deal with a startup: starting with the first meeting to signing all the documents?
- In 2–3 weeks after the first call, we can conduct due diligence, agree on a deal with the investment committee and prepare an offer for the founders. At the same time arranging the deal itself and the paperwork takes much longer due to legal processes. Sometimes you need to open bank accounts, register a company, conduct legal due diligence. Therefore, the time of closing a deal varies greatly from company to company, the average is 1.5–3 months.
Sometimes there are such cases that a company comes to us, we are just starting the analysis and it’s already clear that the startup is very promising: the founder is great, the market is growing rapidly and we like their product. Then the decision on the part of investors can take much less time. Sometimes, it’s vice-versa, we do due diligence and understand that the project is interesting, but we do not fully understand how the company will develop. In such cases, we observe for some time, communicate with the founders and ask for updates, and after a few months, we can invest.
- How many startups ask you for investments a year?
- This number depends on what you imply in “ask for investments” — a complete communication or a pitch by the email. if not to count the cold emails and irrelevant appeals, more than 750 startups have come to us in the last year-and-a-half. Under “irrelevant” we mean projects out of our investment focus. For example, we invest in AI/ML startups and mobile apps, so it is obvious that we won’t even start negotiating about windmills on solar power.
- How many do you refuse and what are the reasons?
- We refuse the majority of companies — we only have 8 investments on 750 appeals, so this means that 99% of startups got a refusal. The reasons may vary, for instance, there is no “chemistry” between the founders. If we don’t match in how we see the world, business and the startup itself, it will be hard to help the team. Neither we nor them won’t take each other seriously, so there is no rhyme nor reason to make a positive decision. Another reason is about the small market and not favourable market conditions. For example, there is not a single successful case in the industry among similar projects, or vice-versa, some Google or Apple owns 90% of the market and doesn’t allow new players to enter.
Also, we can refuse companies if in the negotiating process we understand that their needs don’t correspond to the means that we can provide, so we won’t be that one value-add investor, that they want. And we refuse to invest if in the due diligence process we receive bad feedback, find criminal records or other factors, which can be of a threat to our safety and reputation.
- Advising startups: when you should attract an investor?
- When the founders clearly understand how much money the startup needs, what goals they will be able to achieve after attracting investments and why they will succeed. The investor needs a precise request and understanding of the specified goals of the founders. A hypothesis must be formed.
- Is it true, that the longer a startup works by using its own funds, the more interesting it will be to the investor in the future?
- For the investor, startup attractiveness is formed and influenced by a combination of factors. In this case, it is important not only how long the startup has worked with its own funds, but also how effective it was. If a company has grown by tens of millions of revenue over several years only on its own funds, then yes, this will get investors’ interest. If a startup has been developing for its own money for 5 years and during this time hasn’t reached normal revenue, it is more likely to alert investors.
- What fundraising mistakes are the most common?
- Usually, founders just cannot give investors sufficient information, they don’t understand what investment volume they need and why they need it, and in addition, they don’t know their market. If the founder says that there are no competitors, and the first Google request gives out three similar projects, then this team has extremely low chances in the future.
Another mistake is about abstractiveness and prolixity. Investors like specifics and hard numbers, which allow them to make a fast and memorable conclusion.
- Please, describe your picture-perfect startup which will definitely receive your investments?
- This is a project that has all the puzzle components: a large fast-growing market, an awesome product, satisfied clients and a team, which you want to know better, take some rounds in the bar and build a startup. Here people need to have a mix of personal qualities and more business-oriented conditions. Perfect case, if the project will need a helping hand with digital marketing, PR and hiring — then we can use our competitive advantages to the maximum effect.
By the way, we don’t have a “picture-perfect” industry, all this is subjective and dynamic. But at the same time, we usually do not cooperate with industries, where we lack experience and expertise: for example, hardware or deep tech startups.
- How did the trends change in recent years?
- Every industry has its trends but among general changes, there is a global transition to online, mobile-first and life digitalisation. The market forces to move in this direction, even those industries that have hardly been touched by digitalization yet.
Another shift is taking place in the ML and Big Data projects industry, as data processing and capabilities are getting faster and better every day.
The modern world is accelerating rapidly: now any industry, especially technological, is moving fast and changing every day. Over the past six months, people have learned that they don’t have to travel to negotiate or meet to make deals. Due to this, the world of investments will soon become even faster.
Conversely, the rapid development of everything around can lead to even greater growth of online education, because society will need a constant opportunity to receive even more new information and relevant knowledge.
- Do you influence the startup’s workflow, after you invested in it?
- All operational decisions are made by the founders. We don’t interfere with the basic operations, but if we are asked to advise on the presented hypothesis, we can advise whether it is worth testing it or just to throw it back, taking the experience of previous projects.
For our part, we help with advice, comments, contacts, personal help. We can influence the following stages of fundraising: we deal with financial documents, help to negotiate, communicate and protect financial forecasts in front of potential investors. We don’t have total control — we often don’t even know exactly how many people our portfolio companies have in the team, as they are growing and expanding rapidly.
- In addition to money, you provide mentoring and infrastructure to startups. How does it work in the real-life? If possible, use some examples of specific startups.
- We use inner resources to help companies. In order to fill startup vacancies with the best candidates, at Genesis Investments, we have a recruiting team with over 4 years of hiring experience for startups.
“We’ve hired more than 1000 employees for 20+ startups, 98% of hired employees have successfully passed the probation, and 90% of them have been working in the company for more than 1,5 years. The startup culture is not for everyone, but we manage to find the right candidates who are as enthusiastic about the idea as the founders,” — notes Elena Krivova, the Head of Talent Acquisition in Genesis Investment.
Genesis internal projects’ teams help with digital marketing: from setting up ads accounts to helping with creatives and traffic optimization. A team of leading lawyers with experience in structuring large investment transactions is working to resolve all legal issues that startups face in their workflow. We help startups with financial reporting and building financial models if they don’t have a financier in their team.
“In Genesis, there are many successful teams with mobile apps, thus, the company has a mass expertise, which it shares with the portfolio companies. Thanks to such knowledge exchange, we didn’t spend much time and resources on testing non-working hypotheses, and their cooperation with Google, Facebook and Snapchat gives small companies access to huge opportunities,” — Dmitry Miskevich, CEO and founder of Basenji Apps, one of the companies Genesis Investments. shares his cooperation experience.
Search. You don’t need to want to find an investor, you must act. And “action” is something more than mailing out your pitch to five investors and passively wait for the answer. This is puzzling, as some founders want to attract financing but they don’t understand that it is a long and difficult process.
Prepare basic materials. In order to start communication, you need a 10-slide presentation, a financial model with forecasts for two years ahead and a historical P&L, which shows how the startup earned and spent money.
Make the list of investors. It is advisable to collect at least 30 funds that invest in projects in your industry and write to them by mail, on social networks, and leave applications on websites.
“Nowadays, the practice of obligatory intro for finding the right contacts is gradually dying out. Many investors communicate on social networks on work topics and they don’t mind being sent a pitch even there, so I advise everyone to write — both warm contacts and cold ones,” — notes Elena Mazhuga, investment manager at Genesis Investments.
Understand your team and know how to tell the investor about it. Quite often, failures arise precisely because of misunderstandings. Investors won’t be interested in your product if they need 20 calls from you to explain the essence of your business.
Stay open. Answer all questions from the investor’s representatives and don’t be afraid that an investor who has spent many years building a fund and a reputation will steal your idea.