Andrey Krivorchuk, Chernovetskyi Investment Group: 90% of Ukrainian startups submitting applications aren't prepared to talk with an investor.

Last year there were initially rumors, followed by an official announcement, that Leonid Chernovetskyi intended to establish an investment company with USD 720 mln. in funds received from the sale of Praveks-Bank to Italian investors. It was initially assumed that the company, operating under the name Chernovetskyi Investment Group, would be investing in twenty different key areas of focus.

Over time, however, the management decided that the Internet and information technology, together with goods and services, would serve as the three main spheres. The upshot of this is that CIG plans to become a profile investor in tech companies.

The editors from AIN.UA spoke to the executive director of CIG, Andrey Krivorchuk, about why Mr. Chernovetskyi has decided to get involved in startups, the company’s selection criteria, the company’s future plans regarding investment projects, as well as the conditions on which CIG is prepared to work with startups.

When did the fund start working?

We are speaking now not about the fund but rather about the Chernovetskyi Investment Group investment company. The creation of the fund, which will work in the sphere of joint investment, will be the second stage of the company’s development.

Chernovetskyi Investment Group is a sizeable project, whose work requires thorough training and a complete formalization of all internal processes. In connection with this, the company began its work de facto long before the company officially announced its establishment.

We started accepting applications from startups last September, and to the present date this process has continued uninterrupted.

Specifically, what can startups do if they wish to submit an application to you?

Detailed information on Chernovetskyi Investment Group’s primary spheres of investment can be found on our website, but briefly, we are ready to consider investment proposals in the following sectors:

• IT;
• The Internet;
• The production of goods and services

Our basic criteria and requirements when reaching a decision are: an experienced team, a proven business model capable of generating income, the presence of original technology, and significant barriers to competitors entering the sector in question.

Thus, we are less interested in separate technologies or ideas on their own; we are interested in projects providing a commercial use for this technology or idea.

We, as the investor, must first of all find an entrepreneur who is not simply a good technician who will come up with a particular technology, but rather one who will act as the businessman himself, or who will provide such a businessman as part of the project team—an individual capable of effectively implementing whatever technology has been developed.

However, as practice shows, one can often find first-class IT specialists within a given team, yet among the team, there are few good managers capable of constructing a working business model.

We are prepared to consider investment proposals at different stages of a project’s implementation: from a startup with a team of "dreamers" to a working, profitable project. However, of course, we prefer those with a working project and proven results, as well as those who can demonstrate a market demand for their product.

What branches of IT and the Internet interest you?

Everything in the IT sector interests us, as we can find both telecoms and software development companies, as well as everything from office programs to the gaming industry. In terms of the Internet, we are interested in both e-commerce and projects with a strong social component.

The exception to this is the development of hardware, which is only of partial interest to us. Within this market, big players have been operating for quite some time, and competing with them would simply turn into a budget war—we don’t see the sense in getting involved in this.

Consideration of an application begins with a presentation. What sort of presentation would you say stands out?

A presentation which isn't embarrassing to show to foreign partners. And such presentations are indeed out there. We recently held a meeting with one startup and I must say, their presentation really struck me: everything was done very professionally, beginning with registration and fonts, the color scheme, the word economy and brevity of the statement, and finishing off with financial results and forecasts displayed in a detailed fashion. After the project team had viewed this presentation, there was not a single additional question which we could say had been left unanswered. We received sufficient information to make an initial decision regarding possible investment. For the investor, that is a clear indicator of the quality of the presentation.

However, it should be noted that 90% of Ukrainian startups submitting applications aren't prepared talk with an investor. The point being that teams study the market insufficiently, and are incapable of formulating competitive advantages. One example which comes to mind: a team came to us with a Skype-type project. Having studied the project presentation, we asked specific questions regarding the competitive advantages, business models, and in which direction they wanted to take the project. In the end, after some reflection they came to the conclusion that they shouldn't be involved in such a project. This means that the questions which we brought up simply hadn’t been considered and talked through by the team.

Seeing potential in an idea, we try to obtain more information from the team, asking further questions. Regarding all other projects, our decision would be a clear refusal.

A meeting with a project team is held only after we have received ample information to confirm that the project may be worthwhile investing in. To do otherwise would be impossible, because we would simply be flooded with meetings, the majority of which would not be productive.

Incidentally, it is worth mentioning that our participation in TechCrunchMoscow 2012 showed us that level of preparation of Russian startups is significantly higher. I think that Ukrainians should spend more time studying the experience of our foreign colleagues and to try to adopt their best practices.

Do you wait for individuals to contact you, or do you actively seek out projects?

We definitely look for new projects. We are convinced that an investment company cannot afford to sit around and wait while a star project slips through their hands—one which could be sold further down the line for hundreds of millions of dollars. That is not the way we operate.

Lengthy correspondences with teams take up time and don’t allow us to assess personal potential face-to-face, nor can we evaluate a project’s potential. When you’re at an event run by business incubators, such as IDCEE or TechCrunch, or InvestorDay, or when you’re attending a startup-crash test, you see the project in demo-mode, and you can speak with the proprietor and take a more accurate assessment of the strengths and weaknesses of the project at hand.

We believe it is crucial to visit key international events in spheres which interest us, as well as to focus actively on working together with European and American business incubators to expand the incoming flow of investment proposals.

How much time is spent evaluating applications and reaching a decision?

We don’t give the staff of analysts at CIG a precise timeframe. On average, it could be up to three days for a given project, but as I’ve said, we take a very individual approach. You know, such an approach has proven itself to be effective.

What sort of projects will you not consider at all?

We are not interested in anything that runs contrary to moral norms. We are also not interested in working with those who merely have “a vision”—they are immediately obvious.

We had one tech project which came to us with seemingly normal calculations, but when the first question was posed regarding the basis of the data on which the market and sales forecasts were carried out, it turned out that the team’s sample had been based on their own village. The data was then scaled up to province, region, then nationally, and on to the Commonwealth of Independent States, Europe and so on. The point being that the calculations for the project weren’t even partially correct.

Working with such people holds no future from the very beginning, and because of this, we try to determine the validity of the investment applicant as soon as possible, and in the event that such validity is not confirmed, we put an end to our dialogue.

Who exactly makes the decision regarding project selection? Does Leonid Chernovetsky participate in the selection personally?

Before reaching Leonid Mikhaylovich's desk, the project goes through various stages of analysis, assessment, consideration and coordination. The project is examined at several levels: first of all by our staff of analysts, and after an expert analysis of the project has been carried out, the director of the company examines it. After the project has been analyzed by an investment committee, it is assessed by the president of the company. The final decision regarding the project is made by Leonid Mikhaylovich.

Who does this investment committee include?

All members of the investment committee will be announced later. The team includes people who have known Leonid Mikhaylovich for a long time, and have proved their competence. Alongside them, the committee includes experts in the field of IT.

Have any applicants been chosen so far? What has been the agreement concerning shares in projects; that is, what sorts of shares in exchange for what kinds of investments?

We have not yet signed any agreements; we are now on the active selection stage, so in this regard it wouldn't be entirely appropriate to announce preliminary conditions. I can say that we are not rushing ourselves in the discussion of that question. The main thing is to have projects which are worthwhile investments. We can always manage to come to an agreement about the form that such collaboration will take.

If we come across a project we are interested in, we invest the sum of money that the team will require. Further injections will be necessary, and we will support the project. However, if the project is not developing as we would like, we will diversify risks and link up with other investors.

Have there been any Ukrainian startups amongst the applicants?

Since its inception, the company has considered dozens of Ukrainian startups. However the ones which were of real interest to us could be counted on one hand. The striking difference between the number of projects considered and those that we actually selected is often explained, as I’ve already mentioned, by the poor quality of the teams’ preparation.

Unfortunately, many Ukrainian startups overestimate their innovation, without suspecting that "round the corner" a similar project has already been working successfully for a few years.

Could you give an example of a project which you were interested in?

I think the time has not yet come when we can announce projects that CIG is actively holding negotiations with regarding possible investment. You will learn more about all of this a bit later. For now I can only say that we are interested in delivery services and aggregator websites and services which help to make peoples’ lives generally easier.

Does your company plan to become a portfolio or a strategic investor?

For our part there will be no aspirations to the full management of a project. If we get rid of the team and install our own manager, the project will most likely die. Startups are dreamers, ready to work in a garage or a cellar, night and day, with some profit or with the prospect of turning a profit in the future. The project is their lives, and their motivation is the successful realization of the project. No matter how high the manager’s motivation in terms of money is, it will never be enough to generate self-sacrificing labor in the project.

What do you offer apart from capital investments in return for a stake in a project? Are there any business incubator plans for startups?

Independent of whether we will possess a majority or minority share in the project, CIG will assist the project team in every way possible, to participate in the formulation of a working strategy for the project, as well as a strategy for its development and promotion within the market. Our staff of mentors already includes top managers of Ukrainian and international companies, but we never stop searching for new mentors.

As for creating a business incubator model within the framework of CIG, I can only say that this topic is now actively being discussed by the company management. We study the market and conduct consultations with Ukrainian business incubators.

Doesn’t it bother you that some incubators have been operating on the market for about a year, and new ones are constantly opening?

The more we learn about their activities, the more we understand that this is a specialized niche. On the other hand, we also understand quite clearly that investment companies are not obliged to get involved in this niche. In Ukraine, business incubators are often set up rather "for the sake of public relations.” We take another path.

What experience do you have as a director?

My experience as director began in one of the larger national banks, which I worked for six years ago as the head of the joint investments department. Later, I was the director of several enterprises, one of which dealt with the production of environmentally friendly foods. Until recently I was working as the assistant director of a large assets management firm, dealing with the organization of financing for well-known construction projects.

Why should startups approach your company, instead of, for example, funds which already have some experience in the Internet sphere?

We intentionally avoid answers such as "Because we the best!" or "Because we have more money than the others!" We live in a time when startup teams (I’m speaking about particularly strong projects) and investors have an almost equal share of rights and interests within the market. We form the supply and demand equally: we choose them and they choose us.

Startups need to rely on the investor’s experience. Our company requires someone at the helm who has established a huge enterprise which was also partially a startup some time ago. Leonid Mikhaylovich has established a bank, an idea of his own making, which subsequently developed into a huge machine and which was then successfully sold to a Western investor. We understand how to do business from scratch to the final result which is of interest to the investor, and such experience and knowledge cannot be overestimated.

Source: AIN.UA