At Begin Capital we always feet that "Humour" is our third VC partner. But sometimes it gets out of control...

That is how we came up with a question: "and what if some iconic characters were a VC..." Few hours later...

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Episode 1: What if Don Vito Corleone was a VC...

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During the pitching session

Startup: We are raising $10m in exchange for 5% equity
Godfather: I understand. You found paradise in America, had a good trade, made a good living. The police protected you; and there were courts of law. And you didn't need a friend of me. But uh, now you come to me and you say -- "Don Corleone give me investments." -- But you don't ask with respect. You don't offer friendship. You don't even think to call me Godfather. Instead, you come into my house on the day my daughter is to be married, and you uh ask me to invest in your fucking startup...

Startup: We have a limited number of competitors, but they are strong. The good thing we know their weaknesses!
Godfather: Revenge is a dish best served cold. You talk about vengeance. Is vengeance going to bring us sufficient return? Or huge IRR?

Startup: We don’t think GDPR will be a huge risk for us, but we’ll be careful
Godfather: Goddamn FBI don't respect nothin'.

Startup: We have a lot of offers from Tier-1 investors, including Sequoia, why should we accept your proposal?
Godfather: I'm gonna make you an offer you can't refuse. Either your brains -- or your signature -- would be on the contract.

Startup: We plan to raise $25 on Series B..
Godfather: I bet Russian Czars never paid that much for a horse.

Godfather: Who are your investors?
Startup: Our board consists of five: Sequoia, Accel, Intel, Andreessen Horowitz and Begin.
Godfather: I want you to arrange a meeting with the heads of the five families.

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Being a Board Member:

Godfather: I have a sentimental weakness for my portfolio startups and I spoil them, as you can see. They talk when they should listen.

Startup: Our travel business is broken. Due to COVID-19 we are running out of cash and our sales are damaged..
Godfather: Only don't tell me that you're innocent. Because it insults my intelligence and it makes me very angry.

Startup: We believe ICO is a good opportunity for us!
Godfather: A man in my position can't afford to look ridiculous. Now you get the hell out of here.

Startup: We haven’t seen our Head of Marketing for 2 weeks..
Godfather: I am sorry. What happened to your manager was business. I have much respect for your team. But your employee, his thinking is old-fashioned. You must understand why I had to do that. Now let's work through where we go from here.

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Building a new venture fund is super interesting, deeply inspiring, and… far from easy. I know many young teams, who are raising their first fund and debating about the right fundraising strategy. At Begin Capital, we are always happy to share our own fundraising experience, but it is important to be objective and make comprehensive research. 

With this in mind I decided to analyze other VC funds, that were in the same position. Pulling historical data from Dealroom, I ended up with 186 first time VC funds that were launched in 2015-2020 worldwide. The dataset that I’ve got was not perfect: Dealroom’s coverage outside of North America and Europe is poor and also many smaller funds are missing. However, it was good enough to answer some of my questions and hopefully might be useful for other daring first time fund managers.

Top 10 countries by new funds AUM

With no surprise, US is still an undisputed leader in the VC world. US first time VC funds are almost twice larger compared to European ones ($80M median fund size in US vs. $42m in Europe). And only in US it is possible to raise the first fund with $1.3Bn committed capital – link.

But the following question was much more interesting for me: “Shall a new VC fund have a specific investment focus?”. It is clear that the majority of VC funds have at least some focus or limitations in their investment thesis. But usually these limitations are quite broad, like for example:

• Geographical focus on a large economic zone (e.g. Europe or US)
• Widespread business model focus (e.g. Software or SaaS)
• Investment stage focus (e.g. Seed or Growth stage)
• Combination of 3-8 focus industries
  

These limitations allow venture funds to stay away from deals, where they have no experience at all. But such a broad focus leaves no chance to build deep expertise in the sector or monitor 100% of all good companies. That’s why I was curious to see whether new VC funds choose to have more specific focus or not. With the help of my team I’ve analyzed 186 websites of new VC funds and sorted them in 4 buckets:

• Funds that have geographic focus: one country or small geographic area (e.g. Nordic) or, in case of US, just a few states
• Funds that focus on a particular industry or business model (like Fintech or Hardware)
• Funds that have both geo and industry focus
• Funds that do not have a specific focus
  

Here is what I’ve got:

Several interesting observations:

• The majority of funds prefer to have either industry or geographical focus. Combining both is rare and more typical for smaller funds
• More than a third of new VC funds start with a broad focus. And it is common for both small and large funds
• The most common industry focuses are: Biotech, Life science, Fintech, Blockchain, Deeptech and Healthtech
• The geographic focus is usually driven by institutional LPs
  

Surprisingly, the share of new VC funds without any specific focus is relatively small, while the absolute majority of mature, well known VC funds have a very broad mandate. This would either mean, that (a) building strong expertise in one area is becoming more popular among venture funds in the last 5 years OR (b) fund managers tend to expand their focus later when they raise second or third funds OR (c) first time VCs are bounded by the focus of their major LPs.

At Begin Capital we see clear advantages in both approaches. Having a specific focus area allows to:

• Build deep expertise and be able to run much more educated diligence process
• Add more value to portfolio companies and share unique industry knowledge with them
• Drive higher collaboration among portfolio companies
  

And at the same time a broader focus has its own benefits:

• More diversified portfolio with less industry or country-specific risks
• Cross-geo and cross-industry experience helps to have a better understanding of market trends and opportunities landscape
• No need to say “no” to exceptional founders from other industries/geographies 
  

With all that in mind, we decided to take the “best of both worlds”. Our first fund is industry agnostic and we invest across all Europe (we still try to avoid topics where we have zero knowledge). And in parallel we are building a second micro fund that will be only investing in teams with exceptional AI products. For our AI fund we gathered a team of best-in-class AI scientists and industry leaders that will help us to define the next generation of AI companies. (More news to follow!)

Conclusion

There is clearly no “magic bullet” and no single strategy that will ensure a successful fund return. The startup/VC ecosystem is also constantly evolving. Tech giants such as Amazon, Salesforce, or Apple leave less space for “easy wins” and push startups in niche areas that

In September Pitchbook published an insightful research on the role of angel investments in the startup ecosystem. It is quite clear from the research that not only business angels are essential for early stage financing, but they also make a positive contribution to the long-term startup success. The probability to raise follow-on rounds appears to be materially higher for companies whose first investment came from angels.

Probability of raising a follow-on round or reaching M&A/IPO

Such a significant difference is impressive but might be not intuitively obvious. I have two hypotheses somehow explaining this fact:

• At early stages a syndicate of strong business angels could be more helpful. Angels usually have a strong professional background and can help startup with necessary first customer introductions. Even more than that, sometimes angels play such an active role in operational processes that they are hardly different from co-founders
• Startups that decide to skip business angel round and raise more funding from VCs at the start, usually end up with higher post money valuation. This puts more pressure on a startup’s performance and leaves less flexibility to make pivots. 

While the role of business angels is important and well known, surprisingly, I haven’t observed an active collaboration between angels and VCs. Business angels actively collaborate with each other: form angel networks and syndicates, network together through events and web chats, actively share deals. In a similar way, VC funds build relationships with other funds. However, interactions between two worlds are limited and, in some cases, are not even friendly. I can see several fundamental reasons for that:

• VCs and angels target different type of companies. While everybody wants to invest in future unicorns, these “beasts” are extremely rare. Vast majority of M&A deals are happening at below $50m valuation. Such exits could still guarantee a strong ROI for an angel investor. That’s why angels are always happy to consider companies, that might operate on a small or very competitive market, but at the same time have strong IP or can reach profitability with low capital requirements. VC funds usually have significant AUMs and they need to deploy this capital within a short timeframe. This means, that VC fund has to invest a significantly larger check per company (maybe through several follow-on rounds). And so, VC funds will usually pass on very strong companies that have limited short-term growth potential.

• VCs and angels hold different classes of shares. In most of the cases angels are the least protected type of shareholder. They don’t have protective mechanisms granted by preferred shares (like VCs have) and they don’t have operational control over the company (like founders have). This usually does not matter much, if a startup is growing fast and target high value M&A. But in other cases, interests of shareholders might not be 100% aligned and angels are usually the ones to sacrifice their interests.
• Angels have limited capital resources. During the first few years an operational support provided by early investors is extremely important for a startup. However, at later stages a startup could already have a strong team, advisory board and prominent customers. At this stage startups don’t need a lot of operational support, but still need capital to fuel growth or close cash gaps. Larger funds in a captable can guarantee an easier access to capital, which could be crucial in many cases. That’s why VC funds always prefer to see other VC fund as a co-investor rather than a syndicate of angels.
• Angels are sometimes perceived as amateurs. Sadly, you can still meet some VCs that do not consider angels to be investment professionals and don’t see significant value-add from co-investing with angels.

With that in mind, I can see things changing in a positive way. The distinction between a large angel syndicate and a small VC fund is becoming less sharp and this opens more room for collaboration. Even larger VC funds recognize the value of business angels and try to use angels to scout new deals. In Europe such scout partnership programs were recently launched by Atomico, Backed.vc, Blossom Capital and Ada Ventures.

At Begin Capital we aim to build open trustworthy relationships with angel investors. Before founding Begin Capital my partner Alex was an active business angel, so we understand both sides. Internally we formulated few basic principles of such relationships:

• To share co-investment opportunities with strong angel investors and share allocation in the follow-on rounds (without any fees or SPV structures)
• To be transparent and fair-minded with all shareholders throughout the lifetime of a company
• To offer at least some extra liquidity for minority shareholders

Conclusion

The reality of “startup world” is often more complicated than it seems, and misalignment between shareholders is quite normal. However, both VCs and angels are in company-building business with long time horizon. And building a trustworthy relationship is absolutely essential to succeed in a long term.

I’m always happy to further discuss this topic and share experience with business angels. Feel free to drop me a line to ruslan@begincl.com 

Just over a year ago, the first season of the new show called ‘Begin Capital’ began. Over the last 12 months, we have achieved the following results:

We closed 6 deals:

• Zadaa (https://zadaa.co/en/) – a marketplace for second-hand clothes. The company operates in Germany, Finland and Denmark. Zadaa’s main competitive advantage - logistics solution that reduces the cost of logistics by 50-70%. Begin Capital became the lead investor with a €1.5M cheque.
• WOOM (https://woomfertility.com) – WOOM is a data driven app and b2b SaaS solution designed to empower women by maximizing their chances of getting pregnant, either naturally or through medical treatment. Every month, 80,000 women interact with WOOM and thousands of pregnancies are achieved together with WOOM. Begin Capital became a co-investor with a €1M cheque.
• Mercaux (https://www.mercaux.com) – Mercuax is a B2B SaaS startup that helps retailers deliver superior omnichannel customer experiences by bringing the best of digital and physical retail together. On average Mercaux customers experience a sales uplift of 8% and 5x ROI. Begin Capital became a co-investor in the project with a $500k ticket.
• Bulbshare (https://bulbshare.com/en/) – A collaborative tech platform that brings brands and organisations closer to their customers than ever before - building online communities that enable conversations, collaboration and co-creation. Begin Capital became a co-investor in the project with a $300k cheque.
• Samokat (https://samokat.ru) – a food delivery service, with orders delivered in 15 minutes. Begin Capital became a co-investor in the project with a $200,000 ticket.
• Live Jam – a live-streaming shopping platform that connects vendors/retailers with end customers, through streams on which items are sold live. Begin Capital became a co-investor in the project with a $150k ticket.

And made one exit:

Samokat (press release). Within 12 months, the company has achieved outstanding results. Over 150 dark stores have been opened, the company’s revenues rose to $12m a month (30x YoY), and the company makes more than 1.5 million deliveries a week.‍

Parameters of the deals:

• Biggest deal: €1.5M
• Smallest deal: €150,000 
• Quickest deal: 2 weeks
• Longest deal: 6 months

Markets (in Europe):

• Total number of business trips – 23 (21 within Europe)
• Most underrated market – Madrid. A large number of high-quality projects with strong prospects for international growth, convenient access to LATAM. And at the same time, the entry cost (valuation) is 2-3 times lower than in the US or the UK. The following markets are also underrated by investors: Bilbao, Tallinn, Moscow and Helsinki
• The country offering the best state support in terms of financing is Finland. Finland has some remarkable and very user-friendly programs designed to support startups (loans, grants) and funds. The best state support from the point of view of ease of interaction (help with connections, knowledge, legal/tax issues) is in the UK and the Netherlands

• The most useful conferences are: Slush, SaaStock in Dublin (the most ‘sincere’ one is Emerge)
• The best tech-teams in terms of the price-quality ratio are: Minsk, Moscow, Kiev
• The countries in which senior executives at major companies are most eager to make contact (commercial contracts with innovation companies, advisory role, recruitment) are: Finland, Israel, Spain
• The countries that have a lot of good projects but relatively few funds are: the Netherlands, Spain

The pipeline:

• Number of applications for investment per year – 3892 projects 
• 80% of targeted projects in the following stages: Seed, Late Seed, Series A 
• 65% b2c / 33% b2b / 2% b2g 
• More than 500 projects described themselves as “Uber for...”
• Around 130 projects were subjected to in-depth analysis, as target ones for the fund 
• We discussed 15 projects in the investment committee, 6 ended with deals, 3 failed to pass DD, 1 project selected other investors
• If the founders’ forecasts come true☺, then in 2025-2027 approximately 2000 projects will make an IPO. Roughly the same number will be bought by one of Facebook, Amazon and Apple
• 20 founders asked us to sign an NDA before showing us the project, 1 asked for a sector-specific non-compete agreement, and 1 found the time to propose 14 projects over the course of the year
• The most efficient channel for pipeline generation is people that we trust: managers of other funds, early investors, industry experts 
• The least efficient channel is conferences, events, demo-days. Each event gives us 100-300 projects for the Pipeline, but the quality of the projects is very low

The impact of COVID-19 (which we have felt):

• The founders of projects are awfully tired and suffer from burnout very quickly. The world is going through some very tough conditions of uncertainty. This uncertainty is putting terrible pressure even on those founders who have survived the pandemic largely unscathed. A lot of people are getting poorer, losing their sources of income, and suffer from nervous exhaustion. All this is very noticeable. As regards the companies in our portfolio, we have found ourselves having more conversations with founders about life, family, and mental wellbeing. It seems that what matters in 2020, as never before, is to select people with a similar mentality. And be willing to come to people’s aid even outside of the context of professional activity.
• Many of the founders have been straining every sinew and tried hard to reduce burn and raise internal round from their existing investors, in order to postpone the external rounds as far as possible - Seed, Series A, Series B. This is particularly true for companies from the hardest-hit sectors.
• Valuations have fallen, but not dramatically. Many projects have put off the target round, but proposing bridges based on attractive valuations. Regrettably, a lot of technological projects (particularly in the hardest-hit sectors) will not survive the crisis and will exit the market. It will be difficult to secure investment before the end of 2020.
• A new term has been coined: EBITDAC = earnings before interest, taxation, depreciation, amortization and coronavirus

Sources of pride and joy:

• We have never broken a promise. Our reputation is very important to us, so if we’ve made a promise, we’ll keep it. Specifically, we’ve closed out all the deals that we agreed on with company founders, irrespective of all force-majeure circumstances, including COVID
• Advisory board. We have managed to put together a strong team of advisors, whose main task is to say ‘no’ to the management board. This is really helping us to make decisions that have been carefully thought through
• More than 200 investors (primarily business angels) from a range of different countries have said they would like to co-invest with us and regularly ask us to send them projects. Given that we always go in with co-investors, we have been happy to show them new opportunities. If you are interested to co-invest with us please send us an email and we will share our pipeline with you on a monthly basis.

Sources of shame and regret:

• We understand how much it can hurt when you write to an investor and don’t hear back from them. Unfortunately, we aren’t able to respond to every project with a specific and useful rejection letter and offer help. But we try our absolute hardest to do so.
• On a few occasions, we were unduly forthright when expressing our opinions, and it may be that we ruined people’s motivation to continue working on their project

Plan for the New Year:

5-6 new deals and 1-2 follow-ons.

Although the world has changed, we are willing to enter new deals, but only cautiously and when the valuations are reasonable. But we still not interested in: speculative deals, crypto-projects, projects with revenues that are a long way over the horizon and projects with little prospect of becoming profitable.