We talk to startups and investors, you get the value.
Venture is a relatively new industry that is, however, also changing. Investor Katya Kohen told us how she reformed the industry together with a partner using the example of 13 Ventures, where she is a managing partner. She also shared insights on how startups are selected for investment, what trends there are in US startups and what changes the pandemic has brought to the relationship between investors and projects. Read on and draw conclusions!
We talk to startups and investors, you get the value.
Katya Kohen (Dorozhkina) is an entrepreneur, business angel, partner of 13 Ventures (New York). She’s the master of Science in World Economics, PhD, Graduate of the Venture Capital Program at Berkeley Business School, California. She has led marketing and business development in international financial and IT companies for over 10 years.
In 2015–2019 she worked at Starta Capital as Managing Partner, Founder and Head of Starta Accelerator in New York. She has built a systematic work on startup hunting and adaptation of Eastern European entrepreneurs in New York. She supervised selection and acceleration of more than 100 startups. In 2017, she merged Starta initiatives into Starta Ventures venture group.
— I joined the venture capital community about five years ago as a specialist who could help tech startups enter the US market. By that time, I had experience managing marketing in financial companies on Wall Street, I started my own small business and sold it in 2015, formed the first venture links in America …
On the recommendation of friends, we began cooperation with the founder of Starta Capital — the early stage venture fund. He was looking for how to boost the fund’s portfolio startups founded by entrepreneurs from Russia, Belarus, Ukraine and other Eastern European countries.
We discussed the options and decided to build the Starta Accelerator (we wrote about Starta Accelerator earlier) in New York, the largest business center in the world, where the headquarters of all major corporations are located. Business life was in full swing here, and even then we realized that New York would soon become a real competitor to the Valley as a point of attraction for the startup community and venture capital.
At Starta Accelerator, we helped founders from Eastern Europe quickly adapt to the cultural and business “codes” of American society, test hypotheses in the local market, look for product-market and founder-investor fit, make first sales, find advisers from their industry, strengthen marketing etc.
We created the accelerator program from scratch, it was constantly developing and improving, and a community of startup founders and investors was formed around Starta. During this time, two new funds were created, and we decided to combine all assets under a common brand, Starta Ventures.
— More than 100 startups have passed through the accelerator during almost four years of my work as its leader. I also built systematic work on international startup hunting at Starta Ventures from scratch. The geography has expanded: teams from the Baltics, Western Europe, USA, Latin America have appeared. And most importantly, we made the first exits for the accelerator (exit refers to the exit of early investors from a startup through an m & a deal or an IPO).
Now the group has five full and partial exits. In particular, two American ones: were acquired American technology company ServiceNow acquired FriendlyData — a startup from Belarus, and Occipital bought Russian GeoCV, known for its developments in the field of spatial computing.
It’s pretty interesting that the capitalization of ServiceNow at the time of the deal with FriendlyData in October 2018 was about $ 30 billion, and it has risen above $ 90 billion since then! The only way a team from Belarus could enter into cooperation and then a deal with such a serious player is by moving to New York and starting active work in the American market. I am proud of these guys and all the graduates of our accelerator, which we created from scratch.
— I met my partner in the 13 Ventures venture group Diego Berrio while I was working at Starta Ventures in New York and we found a lot in common when it comes to our views on the venture capital industry.
First, we were both interested in consumer tech. I have often caught myself thinking at various futuristic technology exhibitions that it would be nice if technology improved human life already here and now. I want to help startups and see the result of improving the quality of life thanks to their products and services.
Diego has worked extensively in the consumer sector in the past and was inspired by the idea of transforming the industry with new business approaches and new technologies.
The wave of next-generation consumer startups has seriously changed the landscape of the industry in just a few years. Startups such as Warby Parker, Glossier, Away, Harry’s, Dollar Shave Club, Casper and many other D2C (direct-to-consumer) and consumer tech companies are not only growing rapidly in value, often reaching unicorn status, but are also becoming engines of innovation in classic large consumer corporations like Unilever, P&G, PepsiCo and others. The “old guard” is changing its approach, following a generation of young startups, and ultimately the consumer wins.
Secondly, Diego Berrio and I agreed that the classic venture needs reforms. The market is looking for new, more efficient approaches to solving problems of both investors and startups. New forms of financing for young companies and new investment platforms are emerging.
We decided to supplement the classic fund with a venture lending direction with an automated assessment of startups based on their performance and a consulting block for startups.
Growth-stage companies that have already confirmed their product hypotheses and are constantly increasing revenues should be able to choose whether to attract investors for equity capital or finance leveraged scaling by paying off debt from their proceeds.
We help startup founders to retain their stake in the project, to obtain funding without capital dilution. In the United States, this area is gaining momentum and is known as RBF (revenue based financing) or RBI (revenue based investing). Startups with founders from Eastern Europe can also take advantage of this opportunity if they are incorporated in the United States.
- At 13 Ventures, we focus, as I already mentioned, on startups in the consumer tech industry, and also invest as a fund or provide venture loans to SaaS services and mobile projects.
The stage we are interested in is pre-A. The company should have revenue, sales should grow at a good pace. That is, these are not the earliest stages, but projects with product-market fit, a strong team, effective customer acquisition channels and a positive unit economy. Raising revenue-linked funding helps teams increase sales significantly and reach a stronger VC round.
— We use the entire traditional range of approaches to project and team analysis; a separate advantage is provided by an automated system for assessing business indicators based on neural networks. Startups provide their reporting data, analytics by sales channel, and so on. SaaS and mobile projects can prove their effectiveness by opening access to personal accounts in ad networks and app stores.
— A huge part of my experience in venture — working at Starta Ventures — was associated with working with early stage startups, seed and pre-seed. At this stage, startups have almost no metrics to analyze the project, and it is the personality and background of the startup founders that play a major role in investor decision making.
Of course, intuition plays a role, but there are also quite clearly formulated qualities. The most important rule is that the founder must be open and able to listen to advice and apply it in business.
Being confident is good, but self-confidence is another story, it can ruin a startup. Founders who are confident that they know everything will not be able to adapt their idea and turn it into a competitive breakthrough product, will not hear the user, will not withstand market volatility and ups and downs of growth.
On the other hand, sometimes you need to listen to all the advice, but do it your own way. It is a fine line. The main thing is to be able to consider all options, not to be closed to alternative points of view and experience.
Another essential quality is striving for a goal and resilience in the face of obstacles, of which there will be many on the way of the founders. Not giving up, not falling into despondency and a state of helplessness. Being able to seek and correctly ask for help and advice, but at the same time relying on yourself and your team to solve problems and achieve goals. If the founder is a real fighter, investors will appreciate it. All these qualities are important for later stage founders as well — the path to high capitalization levels is long and difficult.
— I’ve talked about this a little in the previous block. I can also add a quality that is necessary for cooperation with investors, which is the responsibility of the founder for their results and a focus on winning — growing the project without giving it up when occasion offers.
You can spot the deficit of such responsibility through personal communication and on the recommendations of people that the founder has previously worked with or conducted a joint business, as well as from investors, if their funds were previously raised to other projects of this founder.
Insight: how to communicate with investors
— At different stages of project development, different sources of funding are suitable for startups. Business angels, accelerators, venture funds, syndicates, syndication platforms, venture lending and RBF — there are many options and new ones are constantly appearing.
Study the investor profile and contact those who specialize in your industries or technology areas, at your stages;
Think about what additional benefit your startup will receive in addition to investments — networking, expert support relevant to your profile, and so on;
Be careful — there are categories of investors that can negatively affect the project and, over time, threaten it with closure.
— The markets themselves are fundamentally different, first of all, in their scale and volume of capital. Capital surplus, as we can see, is not a definite advantage for the market — for many years in the United States, we have seen an increase in the ratings of startups, which is not confirmed by real business indicators.
Every year, the average volume of transactions in the rounds of the middle and late stages grew. You can even talk about a kind of bubble. At the same time, startups of the early stages did not have enough money, it was only the race for the favorites. As a result, several mature startups, which raised a lot of venture capital, lost dramatically in capitalization after the IPO or even before going on to it. And many billion-dollar tech companies, backed by venture capitalists, are still losing money year after year. However, the opportunities for startups in the US are much greater, and if your product or idea has global potential, it is better to test it in foreign markets from the very beginning.
Among the hottest trends in venture capital in the United States, I would mention venture lending and RBF, which we deal with at 13 Ventures. In this regard, I will also mention the service of our partners — the fintech platform Braavo Capital, which specializes in financing mobile projects, gaming and lifestyle / health. RBF has not come to Russia yet, while there are already many players on the American market and the volumes are growing rapidly. Another big story that will develop is the democratization of investment in startups, attempts to bring investors with small checks to the market, for example, through the AngelList platform. I do not see effective solutions of this type in Russia, but the direction itself, to some extent, has begun to be implemented through business angel clubs. Angels and aspiring investors are syndicated, which allows them to join more startups with less money, diversifying their portfolio.
— This is a topic for a separate article. In short, temporarily, for about a year and a half, the “investor market” replaced the “start-up market”, that is, the investor now dictates the rules again. It was important for startups to cut costs timely to extend their resilience in times of uncertainty. Then it was necessary to be sensitive to changes — someone had to make a pivot, others needed to optimize services, change customer service, pricing, etc.
The pandemic has dramatically intensified many trends, such as the transition to remote work and online education, the migration of business processes to cloud services, and so on. Startups in the hottest fields that have managed to take advantage of the situation have shown good results and now they are in the focus of investors.
On the part of our foundation, I would like to note that b2c startups benefit from the crisis, since from the very beginning they operate in a digital environment and are sensitive to the needs of buyers and clients, and build long-term loyal relationships. The game industry is another beneficiary during the period of quarantine restrictions and global remote. The well-known thesis that a crisis is a time of opportunity is absolutely true for those who are determined to look for new ideas, study the needs of people and business, and implement their projects, despite any difficulties.