Ukrainian venture funds: Who should startups go to for money

We’ve recently done a review of Ukrainian startup incubators, of which there are seven on the Ukrainian market at the present time. The question now for startups is where to turn to for consulting and assistance with their projects. However, if your company is already large enough to do without angel investments, and you require strong partners who will be able not only to finance further development, but also to aid in the decision-making process, it is time to look at venture funds. Who are they and can you trust them? How to go about attracting their interest? How much money are they prepared to provide you with and what will they require from you? AIN.UA has attempted to answer these questions.

We’ve intentionally focused solely on Ukrainian funds in this survey, so international and Russian funds are not included here. Before beginning to examine such funds directly, we suggest familiarizing yourself with the opinions of experts concerning why Ukrainian startups should apply for funding from within Ukraine. Indeed, there is a wealth of big-name Russian and Western companies ready to fund startups, including Ukrainian ones.

Andrey Krivorchuk, executive director of Chernovetskyi Investment Group:

Any project demands a check of performance capacity and the elimination of critical mistakes and defects at the very start of the project. As it is far easier for our teams to obtain access to Ukrainian investors than to Western ones, the local investor frequently serves as the starting point for a project’s success. Fulfilling the simultaneous role of the minority partner and mentor, the Ukrainian investor helps the team perform a timely optimization of the current business model, and more precisely, to determine a project’s place and future potential in the market. Such partnership at the early stages of the project’s operation facilitates the growth of its investment appeal, and in so doing, increases the chances of carrying out a successful round of follow-up investments in the project.

Alexander Lyadov, managing partner at Dekarta Capital:

At the initial stage of a tech company’s development, it is critical to come up with ideas quickly, to test them and to interpret the results. For a startup, the main difficulty is that strategic information is “sitting" in different heads.

Therefore people who make strategic decisions must be as available as possible, i.e. physically nearby as opposed to twelve hours away. Only in this way will a startup be able to avoid "braking" and circumvent misunderstandings; it will be quick to react and will be able to adapt to the changing market.

Svyatoslav Pogrebna, co-founder, partner at Vostok Ventures:

Today Ukraine is a country full of business opportunities, and not because there are favorable conditions for business here. On the contrary, the risks are high, the competition is lower, and foreign investors are afraid to work here. But we’ve grown up here and we aren't afraid of it.

Evgeny Sysoyev, managing partner at AVentures Capital:

On the one hand, IT and business is very global, and the geographical site of the project shouldn't worry investors too much. On the other hand, investors want to work more closely with the founders of projects and their teams at the early stages.

Interest in Ukrainian IT projects is growing, but competition for projects is still a ways off. Furthermore, global funds are interested in transactions in the region of USD 10 mln. and Russian ones (with some exceptions) from USD 3 mln.- USD 5 mln. In Ukraine, startups with such capitalization number in the dozens. However, leading international and Russian venture funds are ready to co-invest with us in Ukraine, and we’ve already signed a number of such agreements.

Victoria Tigipko, founder and head of TA Venture fund:

TA Venture, as a fund operating at the global level, can help a startup think more broadly from the point of view of international markets. Through a network of contacts we are able to reach out to foreign colleagues and attract further financing.

On the other hand, we know the local market and the particular business conditions better than foreign funds do. Accordingly, we can support a startup—both local and foreign—in its advancement and development in Ukraine.

AVentures Capital

Since 2000, AVentures Capital has been under the direction of established entrepreneur Andrey Kolodyuk and has successfully created and financed more than ten projects. The total turnover of these companies by 2008 exceeded USD 1 billion.

Before the founding of AVentures Capital, Evgeny Sysoyev held the position of vice-president of ICON Private Equity, one of the leading direct investment funds in Russia and Ukraine, and prior to that, Mr. Sysoyev was an investment banker at Concorde Capital. He carried out a number of transactions within the Commonwealth of Independent States at a total of over USD 250 mln. In 2012, on his own initiative a new venture fund under the name of AVentures was established, in which Kolodyuk and Sysoyev are equal partners.

The AVentures Capital venture fund intends to form partnerships with successful IT entrepreneurs. The fund team explicitly avoids interfering in the inner-workings of companies, and in doing so is capable of bringing additional business expertise to the table and assisting in a company’s development. "Andrey and I possess quite different, yet mutually complementary skills and knowledge. Andrey is an established entrepreneur and angel investor, and I am a banker and an investment professional,” explains Sysoyev.

What they invest in

In 2012 AVentures Capital began investing in the IT sector. The goal of the fund is to make 10-15 transactions within 2-2 ½ years to the tune of USD 500,000- USD 3 mln. each in successful and growing IT projects (focusing on the global market and on R&D in Ukraine or Russia) and in Internet projects (focusing on the consumer market of Ukraine and Russia; it is desirable for the project to have regional leader potential). Additionally, AVentures Capital plans on making 5-10 seed deals of USD 100,000- USD 200,000 each. Our strategic spheres include software, cloud, mobile, payments, games, consumer internet, e-commerce, and social media.

"We have set high standards for projects. All of them must be met—the market, team, results, terms of the transaction … Typically only 1% of projects meet these criteria. We are not a classical seed fund—we are not looking for a mere ‘idea’, but rather an IT company which has been established and is already in operation, yet still unprofitable, but is growing and which could grow in worth up to USD 50 mln.- USD 100mln. or more", Sysoyev explains.

How startups are found

At AVentures Capital, they don’t wait for the best startups to come to them; the company actively seeks out projects within its target spheres. "In 2012, we examined over 600 projects (60% coming from Ukraine) and held approximately 300 meetings with entrepreneurs (200 of which were from Ukraine),” Sysoyev claims. “Furthermore, we carefully consider 100% of the applications which we receive from various sources. It’s preferable, of course, if your project has been recommended to us by someone we know personally. In this case, the chances of arranging a meeting with one of our managing directors would be over 90%”.

Chernovetskyi Investment Group

Chernovetskyi Investment Group (CIG) is a personal project of Leonid Chernovetskyi, the former mayor of Kiev. CIG is a new player on the Ukrainian/CIS investment market with an investment potential of USD 750 mln. The company was registered in the final days of 2012, and while it has not yet established a portfolio of investment projects, it is actively working on building up its own pool.

CIG is ready to allocate USD 100,000-USD 20 mln. for a single project. The investment strategy that the company takes is a mixed one and allows for conservative investments in projects with an average level of risk and average profit forecasts, as well as investments in projects with a significant potential for growth and global scaling with a high risk of default.

According to Andrey Krivorchuk, the company doesn't lay claim to control of part of the project. At the same time, CIG doesn't want its participation to be reduced to a sort of passive supervisor of a company’s internal processes. The investment company sees itself as the investor-mentor in the team’s structure, whose work will be aimed at project support and yet won't interfere with the work of the team’s founders.

What they invest in

When selecting startups to invest in, CIG is focused not on a particular technology or idea (separate from the business aspect), but rather on the commercial application of such technologies and ideas. The branches of IT which the company is interested in are: the Internet, telecommunications, e-commerce and software development.

The company is prepared to invest in startups demonstrating a mere potential as well as in profitable projects which can be replicated worldwide. Startups which are fortunate enough to have an experienced and skilled team, a proven and profitable business model, their own original technology and, importantly, significant barriers to competition are more likely to receive startup investment capital.

How they find startups

In order to catch the company’s eye, it would be a good idea to make oneself visible at key international events in above-mentioned IT spheres which are attended by CIG representatives. Generally, the company is keen to consider projects from abroad, and is currently working actively on developing partnerships with European and American business incubators.

According to Krivorchuk, since the initial launch of the company’s official website in January, 2013, CIG has received more than one hundred investment offers from startup teams from Ukraine, Russia and other CIS countries. However, how many of these projects "were given the green light" and indeed, whether there have been such cases, has not been announced.

Dekarta Capital

Dekarta Capital, an asset management company operating in the field of direct and venture investments, was formed in December, 2008. The company holds USD 100 mln. in capital, and the volume of investment into any given project depends on the stage of its development. At the early stages of a project, Dekarta Capital is prepared to invest USD 1 mln.- USD 3 mln., and at the growth stage USD 2 mln.- USD 15 mln.. The fund’s portfolio projects are concentrated in Ukraine, Russia and Latvia.

The fund is not in a hurry to disclose all of its business dealings and officially discusses only one Ukrainian IT company in its portfolio—ExpoPromoGroup. The fund promises to announce its investment in one tech company in the near future.

In 2011, ExpoPromoGroup received USD 1 mln. from Dekarta Capital. Subsequent investments, the amounts of which have not yet been disclosed, have also been granted. The funding was sufficient for expansion, and created the basis for several self-sufficient "daughter companies" —Expopromoter.com, TicketForEvent.com and HotelsForEvent.com.

What they invest in

The fund primarily considers projects with a business model which has already been proven on the market. The project must demonstrate steady sales in line with forecasted profits. It is certainly better for the market to be global, the entrepreneur skilled, and the team motivated. Alexander Lyadov offers the website Expopromoter.com as an example for applicants. However, exceptions are possible, he assures us: "For example, despite a lack of steady sales, the market can be so substantial and the competitive advantage so blatant that the fund may become interested though project is not currently turning a profit".

How startups are found

After the first two years of working on building the brand and developing brand awareness, the fund is barely engaged in any independent search for startups; they are found by themselves. To attract the attention of Dekarta Capital, it is of course possible to send an e-mail. However, it would be much more effective to get a middle-man behind you. “There are not so many funds in operation, so it’s better to study websites and internet commentary beforehand and to find a mutual acquaintance whose opinion is valued by a representative of fund,” notes Alexander Lyadov. “This could be an entrepreneur from a fund’s portfolio company, a lawyer acquaintance or an investment middle-man".

TA Venture

The fund, founded by Victoria Tigipko, began investing in startups at the end of 2010. It currently maintains a capital of USD 50 mln. and is ready to invest up to USD 300,000 in projects at the seed stage of development, and at the early stage (A) up to USD 1 mln. Upon leaving a project, the fund may sell its share to a strategic investor or sell it at an IPO. TA Venture has not exited any projects to date.

The fund’s expertise extends beyond just venture financing. TA Venture can independently assemble a team to incubate a startup from scratch, using business models which have been successfully implemented in Western markets. In Ukraine, three such projects have already been implemented:

1. TOPMALL, an online store selling original goods from internationally recognized brands
2. Hotel Scan, a search service which provides availability of accommodation for tourists
3. Tripscan, a service for travel planning and booking-related services for the B2C and B2B sectors

TA Venture put up several million dollars to finance each of these startups. The company believes that each of these projects have justified the fund’s hopes. Today the majority of them show quite high rates of growth—the most successful companies are growing at approximately 100% annually.

The fund does not interfere with the work of projects in which it invests (although in Ukraine there have not been any such projects to date). Only startups which TA Venture incubates from scratch are under strict control.

As an official partner of the IDCEE: Internet Technologies and Innovations international conference, TA Venture plays an important role in the development of a venture ecosystem. In 2013, approximately 200 startups and 300 investors with USD 30 billion of investment capital plan to participate.

What they invest in

The fund invests in innovative Internet projects within the sphere of web 2.0 (a new generation of websites which have become dynamic and interactive, with an emphasis on web communities and a more open exchange of information), with a focus on the end user. Sectors: e-commerce, online tourism, online financial services, and mobile applications. An extensive geographical reach: CIS, Western Europe, the USA and emerging markets with a high potential for internet development. For example, TA Venture has two investments in Brazil and one in India.

Additionally, the fund is interested in the creation of joint ventures with successful Western Internet companies entering the markets of the CIS. "In doing so, we bring business models which have proven effective in the West to our market. One example of such a successful joint venture is our portfolio company Bravoavia,” says Victoria Tigipko.

How they find startups

TA Venture considers not only incoming applications, but also seeks out candidates among the participants of IDCEE and other conferences, as well as from incubators’ completed projects. If the startup first starts "courting", without having a product prototype, it is better to avoid approaching the fund. Without a working prototype, TA Venture is prepared to invest only in an established entrepreneur who has completed multiple successful projects. The company also advises obtaining the support of authorized representatives of companies which the fund has already invested in, colleagues from other venture funds, and incubators.

Vostok Ventures

Vostok Ventures is in constant search of new potentially successful projects and teams. The fund is ready to invest in Ukrainian companies at the seed and early (A) stages of development. In the first case a team can count on USD 20,000- USD 300,000, and in the second, from USD 300,000 on. If you only have an idea, but it is unique, the company can help to create the concept of a product as well as a working prototype, and to think out a strategy for monetization and expansion within the market.

The company’s current portfolio includes several Internet and gaming startups. The company’s projects are already showing positive results: the first mobile game Cyto from Room 8 was included in the top five paid apps in the Apple App Store in many countries; it has been well-received by critics and has earned Apple’s Editor’s Choice in 41 countries. Additionally, the company is pleased with the initial results of the Vostok Games studio, which is working on the development of the computer game Survarium. "The project is already at the developmental stage, and without factoring in marketing costs, has attracted a sizeable audience (approximately 600,000 players, of which a third are loyal). Here we have staked ourselves on the team’s experience, as they are capable of producing a game as first-rate as S.T.A.L.K.E.R,” says Svyatoslav Pogrebna.

What they invest in

Vostok Ventures’s strategy is to invest "smart” money in the development of IT products which will be of interest to both the CIS market and the global market as a whole. Priority sectors: mobile applications, gaming, e-commerce, and cloud services.

How they find startups

The fund itself seeks out startups as well as young teams. According to Pogrebna, many startups apply to Vostok Ventures directly. In addition to that, the company actively participates in exhibitions, conferences and other events which bring together people within the startup field.

Source: AIN.UA