Jörg Rheinboldt (APX): We don’t look at industries, we look at the market horizontally. We invest in everything that’s digital as long as we understand it.
27 Nov, 2020
Cristian Dascalu is Partner at GapMinder VC fund. He actively investing & accelerating startups in Eastern Europe, digital innovation & tech startups expert. As an entrepreneur, Cristian co-founded a series of businesses and major projects aimed at the development of the tech startups and digital innovation areas such as GapMinder VC, ClujHUB, Techcelerator, Digital Transformers, TechFest, TEDxCluj, NASA Space Apps Challenge Romania and others. Starting in 2012 he launched ClujHUB, the second co-working space in Romania, being a key contributor to the regional startup community. With a Master in Economics (specialization Management & Marketing) and strong capabilities in sales, management and business development. Cristian is a creative thinker, strategist and passionate developer of communities in the innovation and digitalization areas.
I have a business background, started in Cluj with the hub and coworking space to several startup communities. And this started to get into the acceleration part helping startups grow. In 2017, the opportunity of raising the VC fund, the GapMinder VC arrived. We connected two accelerators (one in Cluj and one in Bucharest) with a strong investment and finance team. By this we onboard altogether into the first VC fund made in Romania. It became possible with the support of a European commission, being backed by a European investment fund and of course, private investors together with us, which invested into the fund. We ran an accelerator for three years, before making a fund in 2017. We are working on acceleration for six years in total at this moment.
Our investment strategy is solely focused on high-tech companies. Of course, we look very carefully at the team and startup. In terms of vertical, we are looking very much at the digital transformation and B2B high-tech companies, cybersecurity, e-health, everything that is related to artificial intelligence, machine learning and FinTechs. We look at big problems, which are challenging or important to society. We are looking for companies coming from these spaces. Also, we are keeping attention to advanced analytics and data-driven solutions.
We started some interactions with the gaming industry by considering a deal that looks very good. Also, we started to go a bit more into e-commerce or infrastructure for e-commerce like delivery automation or the fulfillment part. In terms of the industry that inspires me personally, I can say that I’m interested in SpaceTech, but I’m not properly equipped with the professional skills to invest in that space. I like aerospace, but it is more a hobby and our fund is not investing in it because this industry doesn’t match our investment thesis.
We think that this space has a good engineering background. At this moment with GapMinder we invest mainly in Romania and in the companies that have Romanian founders. They might have other registration, but the company should be based in Romania. Also, we are very interested in diaspora. As for the acceleration program, we are looking more towards the region. So, in general, we are focused mostly on Romania but our visionary view is very much addressed to the regional perspective.
We invest in the pre-revenue stage and early traction startups and this forms the vast majority of our portfolio companies, but we also invest in companies that are showing good traction of a few tens of thousands of MRR. As I said before, we look very much at the team and the product perspective, which should be as high-tech, as possible. We are focused not necessarily on the revenue companies, but also on startups that have a good proposal, are strong enough and might have some traction. We’ve been lucky to have companies that expanded fast. But we trying to work with the smartest and prominent teams. That is our first motivation.
We don’t invest in idea stage companies. At least they need to demonstrate an MVP. It would be good to have a validated idea and some user feedback to it. It’s not necessary to have a solution. But to get our interest you should come with a problem that is big enough and well-validated data. A running MVP is not necessary, but if it exists that would help a lot. A pilot is important, but the most important part for us is when the team has identified and ready to demonstrate a problem that is big enough and is already validated.
I don’t think we’ve got so many unusual startups. There are two ways of investing approach in the VC fund. One, we invest in companies that are coming through our acceleration process, which is the national program in Romania. In this way, we interact with 30-40 companies and later invested in them. Another part comes directly through the seed compartment, where we invest around €500K.
I could say that we had investments, where we’ve been surprised by the awesome performance of the founders. We don’t invest in unusual things. It’s a bit hard for us to assume risks or things in which we don’t believe. We evaluate a lot of the deals, the perspectives of the industry and the ticket size of a team.
One of our portfolio companies seems to be interesting, though it is still not met on the market. As you know, personal data in the EU are regulated by GDPR data protection rules. We invested in Data Against Data, which is a company that protects your data, providing you as a data holder visibility and the freedom to talk with the companies which own your data, so you could ask them different things.
Also, we invested in a typing biometrics company. That is a very cool startup – typingDNA. This company is profitable and it has a great team. They make authentication of a person by typing. Their process can be very well used by E-learning platforms for personal identification during exams. Gradient Ventures is a co-investor in that deal and we are very proud of that. Now we are able to arrive in that space and it is possible thanks to the fantastic team, which makes a really great job.
The company should be complete from a business perspective. We prefer to see all business roles covered: technology, marketing and sales part. Also, it’s very interesting if a company has attracted a business angel next to them with money or at least with advice, which shows commitment, and can point to the fact that he’s willing to invest alongside us. Also, it would be great if they passed through an acceleration program, international or regional. If we talk about the acceleration it’s required to have the complete team, validated problem and commitment to developing a solution rather than just raising more money from the seed compartment. Also, we are expecting traction around €200-300K, some emails from users or clients, letters of intent and things like that.
There shouldn’t be necessarily a registered company when we approach a startup, but to sign a contract a company should be set up and have a legal entity.
We are not passionate about hardware because it’s development might be complicated, especially in Eastern Europe. Also, we are not so much into B2C solutions. We are more into B2B software solutions.
Speaking about a startup team, we expect the majority of business roles to be covered. If something is missing we could make a plan on how to fix it. We investigate company ethics because it should be an ethical and trustworthy team. Usually, we investing after recommendations, that came from other funds or angel investors, because we do a lot of co-investments. We use our network a lot in order to find good deals and make due diligence.
We don’t like to support solo entrepreneurs. We believe in the team very much and to count on our support there should be an existing team. It is one of our main key points. A self-man startup is too risky for us.
Also, we find family teams very challenging and prefer not to be in such a case. It is not totally unacceptable, like solo entrepreneurs, but we prefer rather to omit such situations. We are trying to reduce risks for failure that’s why I don’t think we get to into any agreement with the family business. Of course, solo entrepreneurs or family teams can mitigate and demonstrate something super, because they are still looking for completing their team and they don’t find that role. We could help them to find that role or try to find a different solution, but it should be a common vision that these things are not necessarily helping in the complex process of starting a company in the tech environment.
Our investments could vary from a couple of hundreds of euro up to one million with a sweet spot, which we take, around €500K.
We start with a minimum of 5% of the company and go into around 10-15% if there’s room for that. We have a good understanding of the financial part and we agree on that.
In all the companies in which we invest, we have a strong commitment to helping the companies to get to the next investment around investment rounds. And in many times, that means we need to do follow on investments. And we do this with the majority of the companies. Of course, the investment amount and the percentages vary. We are committed investor and next to our support and the hard work of the partners, we commit to doing the follow-up rounds as much as possible.
Our fund was started in 2017 and is relatively young. Despite that, we have some winners in our portfolio as we consider them. But we choose to continue and to do the follow on investments and stay with these companies for now. So, we don’t have any exit yet. Speaking about multiplication level, we only have a general answer, but it is very pragmatic and related to the industry. Since there is a big risk involved in the VC, we try to de-risk it as much as possible for our support and the involvement of the partners.
Following the industry trends, we expect to have 20X, but the ideology is that you’re going to have some losers and some winners. So, winners will need to compensate for the losses and that’s why you look at 10-20X return. And because of that average multiplication level would be 2-3X or 4-5X on the fund. It’s a complex situation and our target investment multiplication is 10-20X from every deal. And we try to minimize the number of bad deals.
In general, we move pretty fast. We start some very good partnerships, in order to make it very fast and a startup could have the money in less than a month from when we agree on the terms. We could say that it varies. Usually, it’s two weeks for evaluation, when we want to see if that opportunity thrills us and if it matches our thesis. Then it took us the other three-four weeks in order to agree on papers, legal details and to make the transaction. So, in general, it could take between two-three to four-six weeks.
If we will look at the whole history of our fund in the last, two years and something and if we have around 40 companies signed, it’s around 15 deals per year. Sometimes we had a bit more investments, and that’s why the annual investment rate is between 10 and 20 deals. Since we have our own acceleration program, we received around 1500-1600 applications in two years, which is around 800 per year.
Typically, it’s a mix. We have strong PR coverage, that generates a decent amount of leads, but we are based a lot on our referral network, from which we get deals for co-investment or just recommendations. That’s why we have a great relationship with business angels because we work very well together. Sometimes we recommend them deals or they recommend us interesting startups Also, we work with local crowdfunding platform in Romania, business angels’ clubs and different VC funds, that have Romanian origin. Solely, most deals are coming from the network recommendations and the inbound. And I would say that cold calls have s concrete chance. If the project is great, it doesn’t matter from where it comes. Knock and the door will be opened to you.
In Romania, we try to be very supportive withing the overall startup community and to be entrepreneur-friendly. It’s our mission and we look very much to support the competitions. We come with investment tickets at these conferences, but it should be a quality opportunity with people that are doing this for a long time and we see clearly that they support the startup ecosystem. It is a good direction from which we receive applications and they are very good.
We recommend the founder to participate in our great conference here in Romania, called How to Web., We have great engineers in Romania and tech conferences are also important. There are several of them here: Techsylvania, iTeam, IT Conference, Code Camp and DevTalks. We also have conferences on artificial intelligence. We collaborated with many of them and we will continue to do that and support them. We think that these conferences are very important and that’s why we recommend founders to go there, learn something new or attend workshops sessions.
Constant communication is very important. Building a company is very challenging and it’s vital to have clear communication and to have the ability to discuss and find business solutions quickly. Allocating money to things that are not necessary and do not deliver business results is another thing that we try to avoid with our portfolio companies. That’s why we ask to keep clear communication and pay attention to the teams because we need to be very responsible for the resources we allocate and they need to be looking at the ROI of their expenses and to be effective with allocated recourses. This is something which we look at constantly in the companies’ KPIs and we ask them to be proactive regarding this at the start of a collaboration. Due diligence is also very important and we look at potential threats or risks, which could appear from the team members, their advisors, from where they fundraise before, or their past actions in the previous companies and the relationship with their previous investors. It is very important to have this clarity, good ethics and professionalism from the teams and company owners with which we talk. These are the main things. And of course, it is important to respect all regulations, which are in place and to be careful with limits where they could do different things. Compliance is a big aspect for us and we look very much that the company is respected and the budget allocation to be done wisely, timely and proactively.
Definitely, the commercial part is a big issue, where they need to be brave enough in order to go as fast as possible into the market and test their assumptions. That’s their prototype, they need to see the reaction and there is naturally a perspective from the majority of the founders not to go too boldly or too fast into the market. So, we try to support them to go faster.
Another challenge might be the assessment of the proper market in which we should go. We have to choose one or another country where we will make the next rollout. The next thing is similar and it’s the way how they would go into those new countries. How they will launch is a critical thing. We will support and advise them on those topics as carefully as possible. The last and most important thing is from whom and how are they manage to bring venue rounds of investment.
Not yet. We are a young fund and keep trying to be careful with situations like this.
Actually, it has changed a little bit. We keep checking if companies have enough cash and try to support them with resources to pass over the situation. It was the first thing that we did. Of course, we discussed the run rate and what is the strategy there. In terms of the requests, we don’t really saw a decline. The situation is similar to the last year. Actually, we even saw a quality increase in our deals pipeline. Teams are better prepared and during the last year, we received better proposals from the Romanian ecosystem.
Well, COVID-19 is definitely an opportunity for the VC industry. At least for some of them. Another part of them is being affected, then they need to reposition.
I think there are many of them, I am a heavy user of digital platforms and I see a lot of companies playing on this field. For example, all the products that have been acquired by Google. So, I consider Google is one of the most dynamic big companies in terms of innovation and offering products to the world.
I am also very impressed with what Elon Musk is doing with all of his projects. Speaking about our region, UiPath is a huge and successful company coming out of Romania and getting ready to be listed on the stock exchange. There are several other companies and many others are suffering during these times. They need to adapt to reality awfully. Also, the pandemic situation will disappear and they will remain with other challenges. Anyway, it would be easier without COVID-19.
I could point to Elon Musk and Bill Gates. The first one maybe because of the destructuring of things and then reconstruction of them. And Bill Gates, because of the companies which he managed. He built a large organization like Microsoft, that keeps to reinvent itself continuously.
I am feeling happy and I think that it is the right choice for me and my career. I did a lot of interesting and positive things for the last three years and it continues to evolve from this setup of venture capital investment and working with scaling startups, internationalizing them and helping to digitally transform the world.
I am more into documentaries, I like YouTube short sessions, interviews and also, partially news. In Romania, we have a very interesting company, called Deepstash, which gives snippets of information in a very inspiring, friendly and short way.
I would recommend Startup School from Y Combinator and The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers by Ben Horowitz. These two things are essential for startup founders.
My advice would be to focus a lot on testing and validation before doing other actions. That will save a ton of time in the future. I’m not referring now necessarily to our time, which definitely is important, but don’t do things before they are tested enough and the problem is validated. It doesn’t necessarily mean that you need to find a solution, but validate the problem well enough before investing more time into the business.
There are many nice places in Europe. It could be Greece or Spain. Also, I like San Francisco, Los Angeles, Sydney and other big cities in Australia. It’s not easy for me to pick up only one place. I love to travel and discover new amazing places.