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RBF Ventures fund became the 1st state experiment in startup investment in Belarus. It’s a pilot project and so it’s been decided to do it in partnership with RVC (Russian Venture Company). Three years ago, the parties invested about $ 10 million each in the fund, and set about searching for promising companies. Three have been funded so far with Rocket Data from Belarus being one of them. In the next two years, the fund plans to invest up to $ 7 million in Belarusian startups, and the same amount in Russian ones.
We talk to startups and investors, you get the value.
Andrey Yuranov, a member of the RBF Ventures investment committee, told Startup Jedi which projects can raise fund investments, how founders can distinguish toxic money from safe money, and what an average startup should do to survive the crisis.
Our fund is currently in the middle of the investment period, and we plan to invest up to $ 5–7 million in Belarusian startups in the next 2 years. Despite the general lull, we are increasing investment activity.
I conduct up to 10 interviews with startups weekly. The database of the fund contains about 600 projects from Belarus, and we track a few dozens of them. They are still in a very early stage for us, but we are ready to offer them investments once they achieve certain metrics. We look into the companies in the portfolio of Angels Band, Rocket DAO, TechMinsk and Demium accelerators.
We are currently discussing the terms of the deal with ten projects, preparing for fundraising. Six of them are from Belarus (telemedicine, edtech, healthtech and robotics), another four are Russian (fintech, e-commerce).
Why has the fund invested in just three startups in its deemed mid-life? We do not strive for a certain number of projects or a specific sum of money to invest. Neither do we have a goal to give out this money as soon as possible — this could be done in a year. We have little risk appetite, so we invest only if we are confident in a startup. We are looking for promising teams and companies that can scale in large markets and make money.
This is fully consistent with our two goals:
1. Commercial one. Of course, we want to return money with added profitability and earn.
2. Infrastructure. We are primarily aiming to create the market. If you take any country that has a developed venture capital ecosystem it started with the lever of state capital: this approach has been tested in the United States, Israel, and Singapore.
This is a pilot project of the state, and the way it will further develop the venture ecosystem of Belarus will largely depend on its success. Other potential players of the country’s venture capital market are following our experience closely. Take the Development Bank, for example, which also plans to create its own fund for investments in startups.
Besides, we are independent when it comes to deciding where and how much to invest, there is no pressure from the state in this regard. Our relations with government agencies are generally quite liberal, since we are not trying to do everything perfectly. We are somewhat economic intelligence: to be the first to go the way, see the pain points, propose solutions and further development strategies for the Belarusian venture market.
The fact that we are a state fund, by the way, is somewhat of an advantage for startups. We do not strive to make many “Xs” by all means, so we may be more loyal in evaluating companies and setting deal terms than commercial funds are.
We do not have an industry focus — as the first fund of a kind in the country, we consider all projects. Interestingly, even though I am now looking more into software projects, out of the three startups in our portfolio, two are hardware projects, and we are negotiating to close the deal with another iron company. So far, the fund has turned out to be technological and hardware, but we do not have such a conscious focus.
So far, the only software company in our portfolio is Rocket Data — a Belarusian startup. It is noteworthy that this was the first transaction in Belarus structured under English law. Besides there are two Russian companies — AgroDronGrupp and Cinemood.
We are now refining the terms of investment. Our mandate used to provide the opportunity to finance projects only in Belarus or Russia but we expect to agree on the new criteria for the target companies of the fund and introduce the “Belarusian and Russian corner” concept. This innovation will enable us to finance companies if they are not de-jure in the jurisdictions of Belarus and Russia and are, instead, in Cyprus, Delaware, Luxembourg, or elsewhere. A fundamental condition is that there should be an R&D department of such a startup in Belarus. And most of the funds of our round will be spent to support this department. The founders of such a startup have to be Belarusians.
Here, like for most funds, the main selection criteria for us are the team, the market and the product. The team is the main one here, especially for projects from Belarus. I believe that good founders will save any project: they will change the product, move to another market and eventually achieve success.
We study startups in detail according to the Outside | Impacts scheme, which is an adapted international best practice methodology for evaluating venture capital projects. We chose it because it allows you to comprehensively analyze the current state and potential of a startup, to see all the possible risks in each particular transaction.
We finance companies in two seed stages: the early and late ones. At an early stage, a startup does not yet have revenue, or does not exceed $ 100 thousand per year. In this case, the most we can offer is $ 400 thousand with the mandatory condition of participation in the round of a co-investor with a share of 25% of the round.
If the company’s annual revenue exceeds $ 100 thousand, the potential maximum check rises to $ 2 million. A co-investor is not necessary in this case, but just like any venture fund, we are more comfortable entering into syndicated transactions.
Besides money, we are ready to introduce startups to other funds, to help with fundraising on the next stages. And yet, since the Belarusian Innovation Fund is a state organization, we can help solve various administrative issues: suggest a course of action, share contacts, help with the sale of products in the public sector, and contribute to joining High-Tech park.
A number of Russian development institutions are under the direct sanctions of the EU and the USA, including Rostec, VEB and other companies. If a startup accepts investments from these companies, it will definitely have problems raising the following rounds. Especially if it has to do with government money like EBRD.
The RVC, as a co-founder of RBF Ventures, is not under sanctions. That is, it is absolutely safe to raise our investments in terms of opportunities in the next rounds.
In general, investors’ pragmatism is above politics — this is both my personal opinion, and the conclusion of many participants in the Russian venture capital market. Investors primarily look at the prospect of a business, not at the political tinge of a startup and its first investments. This is confirmed by large investment transactions and international exits of Russian companies.
My advice for a startup that is choosing who to take money from is to look at how comfortable you are with an investor, and whether he can offer ‘smart’ money. What are the competencies of this investor in the company’s development? Does he have some needed social contacts and access to the market? What investment strategy does he follow? What startups are already in the investor’s portfolio? If the money is smart and useful, then its origin is not so important. Personally, I have never come across a case when a European or American venture fund was concerned that a startup had neutral Russian capital. And vice versa — when the business benefits are not obvious, and the arrival of a toxic investor in the company promises operational problems (frequent checks, limitations in decision-making, difficulties on the next rounds), then such money is definitely harmful to a startup, regardless of the fund’s jurisdiction.
On the part of RBF Ventures, we are ready to consider various options for structuring deals that are preferable for a startup. Call options, for example, when we are obliged to sell our share in a startup if there is an offer from an investor in the next round to buy it and Russian capital is uncomfortable for him. We agree on the conditions in advance and reflect them in corporate documents.
It has its own problems, and just like our Belarusian one, is in the making. But I like certain innovations that are happening there. First, RVC’s transition to the creation of funds in the form of investment partnership agreements, where private companies become managers. One share of such a fund is funded by the state acting through RVC, and the other by private capital. An independent investment decision is made by a private management company.
Secondly, the recently announced change in legislation on the possible introduction of a kind of “right to risk” for a venture investor. It will allow you to write off unsuccessful investments without regard to the Accounts Chamber. And in order to exclude the possibility of financial fraud, the experts have already developed a number of criteria enabling to assess whether the transaction was evaluated with a proper degree of elaboration.
As a member of the investment committee of RBF Ventures, I see that most of the projects in Russia are focused only on the Russian market since it is quite large. The logic of such startups is similar: we will try in the local market and, if everything goes well, we will scale up internationally. But this is wrong, because their business processes and strategies for working with consumers on the international market are totally different. In this regard, an average Belarusian startup is in very contrast with a Russian one, and this is a kind of competitive advantage for the region. Almost all Belarusian projects are aimed at the international market, which pleasantly surprises the members of our fund’s investment committee.
Everything is rapidly changing for the worse. Various analysts predict a recession for a period of 4 months to two years. Consumption and production volumes have already decreased sharply, sales have fallen, and logistics has “frozen”. Obviously, there will be no instant market recovery to the pre-crisis state.
This is a serious challenge for startups. Classic bank financing is not available, and the supply of venture capital in the market is reduced. Funds began to be more conservative in their deals, more focused on supporting their portfolio startups than on attracting new ones.
You can’t say how long the crisis will last, and how severe the consequences will be for a particular startup. In each case, investors need to make a choice: A) minimize costs and preserve the team so that it survives the crisis at the expense of project evaluation and growth; B) give a round to support a capable team that may be a success at the post-crisis dispersal of the global economy.
As for new deals, here, as always, a balance of risks and opportunities to earn is applied. In a situation where risks are increasing, profitability should also grow. Hence the investors are naturally increasing requirements for startups and revising the conditions.
We at RBF Ventures see opportunities rather than losses in this crisis. We can agree with projects on transaction conditions that were typical a year ago, because there were much more venture capital offers on the market. Now there are way fewer of them, and our proposal may turn out to be attractive in the new conditions.
The number of transactions in the CIS will continue to decline due to the inertia of the market. Venture funds raise money from their institutional LP (limited partner), and funding lasts for 1–1.5 years. Accordingly, if all processes are slowing down now, then with the restoration of the global economy, new venture funds will not appear automatically. They will begin to form gradually, and will only work after a year or two. So, all this time, startups will experience the lack of funding.
By the way, after the crisis, at least in the USA, where there are almost zero deposit rates, many new LPs will appear. The venture investment segment will be attractive for them in that it gives a return above the market average, and these assets are not volatile.
Even now, in a crisis, there are fast-growing startups. There are few of them, 5–10%, and they are on the rise due to the general growth of their directions. Projects that catch trends will be lined up with investors. “Venture Ball” is now in the fields of telemedicine, online education, robotics, biotechnology, delivery services, services for remote work, productivity tools, home entertainment, games, and optimizing company expenses.
It is important for investors to understand that hype in these markets allows all such startups to grow, regardless of their quality. But when the market rolls back and everything returns to normal consumption, this rapid growth will redistribute between traditional market leaders and new strong teams. Weak projects will go back to their original, “pre-hype” position.
We at the fund are now considering several companies in the field of online education from Belarus and Russia. They have shown a multiple increase in a month. But the main thing that we are looking at is whether they can consolidate their competitive advantages, and how they will look compared to the backdrop of stronger companies when hype falls.
The main task of an average startup that is not growing right now is to survive. You need to develop the worst case scenario and prepare for it. Most likely, you will receive less revenue, you will have to sacrifice development costs. Try to provide the company with as much cash as possible, saving on everything that is not critical to survival, and does not ensure cash proceeds.
A number of actions follow from this: reduction of the staff of sales managers, marketers and juniors, if they do not bring added value. You can consider pivots in order to earn more on something else. But you need to be careful: testing hypotheses will cost money, but, say, one out of ten works out. There is a big risk of being left with a non-working hypothesis and no money in the account, trying to find a new successful business model.
Startups that hope to raise financing in a crisis should try to show investors the most mature offer possible. Now everyone wants to see projects with MVP, tested hypotheses, worked out by Product-Market Fit. And the way the team behaves in a crisis shows investors how fundamentally founders can cope with difficulties.
The statistics of Seed Investments in 2019 in Europe, the USA and Israel show that the volume of transactions and their number are decreasing. One of the conclusions made on this basis is that projects with their own money, revenue and 3F (friends, family, fools — Startup Jedi) can skip the stage of angelic financing and make a product that is immediately interesting to the later stages fund.
We at RBF Ventures have published statistics on about 300 Belarusian startups we talked to. About 90% of them were in the early stages. This led us to a conclusion that Belarus needs a strong accelerator (at least the level of IIDF in Russia) that can build business processes in these startups.
It does not have to be a big international player. Its main task is to bring competencies: to teach numerous early-stage Belarusian startups to build business models, test hypotheses and develop projects on international markets.
Starta Accelerator now does this pretty well (we’ve talked about how to get into this accelerator in this article) all of whose latest batches feature Belarusian startups. But Belarus also needs a similar accelerator. Any institutions that will help Seed startups to move to the next stage will be useful to our market.
For many startups that are in the early stages in Belarus development is turning into “hunger games.” They must scale up a company with a shortage of money, do this on the international market straight away and compete with companies from developed ecosystems. Few people cope with this task. But venture capital funds invest in such startups very willingly, because they were able to grow up in “Spartan” conditions.