In a recent article for AIN.UA, our Investment Manager Elena Mazhuha discussed the COVID-19 crisis, the Flyer One Ventures' approach to choosing companies to invest in, and shared why startups from Eastern Europe find it difficult to attract Western capital.
As per UVCA and Deloitte study, investments in Ukrainian startups for the first time exceeded $ 0.5 billion in 2019 — this is 1.5 times higher than in 2018. One more outcome of last year was the birth of a new unicorn in Ukraine — Grammarly, which was valued at more than $ 1 billion after the latest investment round. Although American capital holds a large share of the investments attracted by Ukrainians, the number of deals with Ukrainian investors is increasing too.
Flyer One Ventures mission
There is a common problem in the markets of Ukraine, Belarus, Latvia, and Lithuania: startups at the Pre-seed and Seed stages very often do not receive sufficient funding to scale. It is difficult for companies to attract investments from the USA and Western Europe if they do not have sales in these markets, and especially if the founders do not live there.
"This demand can be met by the local VCs. We aim to help startups grow to the point where they can raise money from Western investors. To do so, founders need to increase sales, enter new markets, expand the team, and, if necessary, relocate." — explains Elena.
When we launched Flyer One Ventures , initially we did not limit the industry's profit pool we were looking at. Over time, we started to focus on areas where we had the most expertise and experience — Digital Health, Online Education, Mobile Apps, Artificial Intelligence & Machine Learning, and Advertising Tech.
According to the results of 2019 and the first half of 2020, Genesis Investments was recognized as the Most Active Investor in Ukrainian Startups Among Venture Capital Funds (Ukraine Innovation Awards 2020). During this period, we closed deals with Liki24, Mate Academy, and Elision. But the most significant event was a half-million investment in the Belarusian startup VOCHI, while the usual investment amount for us is $ 300,000-400,000.
There are other reasons for establishing an investment fund. Genesis is interested in attracting the best talents from the labor market. But most often, people who started their own businesses remain self-employed in a long term. Investing in startups allows us to stay connected and share experiences with such industry specialists.
What VC's look at now
A successful startup is a mix of ideas, experience, a talented team, and networking. To attract investors, a startup needs to meet several criteria:
Talented founders and team. Investment Analysts look at founders' social networks and collect feedback from their former colleagues, business partners, co-founders. Founders should have a proven ability to handle their own business and possess unique skills and knowledge.
An international market with an estimate of over $ 10 billion. If a startup takes at least 1% of the market within 10 years, it will get a revenue of $ 100 million a year. It may not become a unicorn, but its valuation will range from $ 300 million to $ 1 billion.
Sales and positive feedback from users. Ideas themselves cost nothing — the product should solve the real customer's problems. If there is nobody to sell the technology to, then nobody needs it.
The company's chances of becoming profitable in the next two years. The crisis may last longer than we expected, and the money will not be as accessible as, for example, in 2019. Therefore, those startups that can quickly start earning, will be more attractive to investors.
Industries to keep an eye on
Digital Health. A huge number of people do not have access to fast and high-quality medicine globally. This applies to both developing and developed countries. According to Deloitte data, global health spending by 2023 will grow at an aggregate annual rate of 5%. At the same time, the industry remains underfunded and not efficient enough. Such challenges as an aging population and global pandemic accelerate the innovative healthcare development. Therefore, it is reasonable to bet on telemedicine, drug delivery, and apps for tracking health status.
Online Education. The traditional education system is far behind modern market realities. This also applies to western universities. If a person is not going to work in the field of investment banking, consulting, rocket science, medicine, or American politics, perhaps she should not spend five or six years of her life studying at university. The COVID-19 pandemic has also shown the importance of distance education. According to modern trends, gamification, cross-platform training, and other new technologies will be integrated into the educational process in the future.
Mobile applications. Some investors are reluctant to invest in applications, considering it as an easy industry. But in fact, building a good application with a multi-million audience is challenging. Many founders do not know how to launch the application and reach the millionth revenue per month in a year, but Flyer One Ventures does. In addition, it is one of the few areas that still grow during the quarantine.
According to Sensor Tower data, in the first half of 2020, consumer spending on mobile applications exceeded $ 50 billion and increased by almost 24%, compared to the same period last year. According to analysts, user spending on applications will increase over the next five years and despite the crisis can reach $ 170 billion by the 2024.
Gaming, streaming, and conservative industries, such as logistics, banking, or construction, will also grow, driven by pervasive digitization.
Crisis or opportunity
As per the Startup Genome study, the crisis caused by the COVID-19 pandemic hit startups around the world. Founders faced two problems: reducing consumer demand and a potential shortage of capital in the near future. As a result, a large number of employees had to be fired. Also, according to the study, venture capital funds reduced funding.
''The crisis has not affected Flyer One Ventures. At first, we were going to reduce the number of investments, but now we do not see any prerequisites for this. Any crisis is also an opportunity. Therefore, we will continue to invest in promising projects and plan to announce about five deals by the end of the year." — assumes Elena Mazhuha.
The importance of investment for the IT market
From a global perspective, investing activity stimulates market development and starts the multiplication process. If more and more startups will appear and receive the necessary financing, the Ukrainian IT market will be able to get closer to European, such as Estonian one, in 15 years. This promises an increase in R&D, new vacancies, and improvement specialists' level. As the market becomes more competitive, the profit of a single fund, of course, will decrease. But one, who becomes a pioneer in this business and obtains a good reputation, will enjoy the best deals in the future.