Heidi Roizen (Threshold Ventures): On average our investment period is somewhere around 6-7 years. It’s longer than the average marriage in the United States. Take your VCs very carefully
26 Oct, 2020
Gonzalo Tradacete is Managing Partner & Chief Investment Officer of Faraday Venture Partners, a private investor network interested in participating in the best startups in Spain and accross the world. Before he founded FVP he worked in the mergers and acquisitions department of KPMG, Financial Analyst at Ecofin Ltd., as a technology consultant for alternative investment funds, and as auditor in PricewaterhouseCoopers Investment Funds Ltd.
How you decided to enter the venture investors World?
Here, in Spain, the VC industry that didn’t exist 10 years ago, when we were born. We thought that it would be very important to attract private capitals to young companies – not just to young entrepreneurs, but to people, who want to innovate and can do it, those with new ideas. There was a big crisis at that time in Spain. And there were just a few VC investors. Many people wanted to do their first investments in established companies, but we thought that we wanted to be agents for changes and could provide those who wanted to approach those industries assurance they needed.
And do you like where you are now in terms of your current business situation? Or, maybe, you would like to try something new to apply you knowledge and ideas to?
I’m very excited about our perspectives, because we are becoming an international company, we opened offices in Germany in last November and Portugal this January. Also we communicate more globally, because we are private investors club, similar to a pledge fund. We invest in companies, but our members decide, whether they want to invest or not and in which company. We are able to enter at a small level in various countries, but then I want to unite all the countries to create bigger tickets and follow them around and be present. And we are really very excited. We will open a Benelux (Brussels) office in summer, and will probably create an all-new club in 2021.
How you select ideas to support? What are your criteria? And what industries you’re interested in? Geography?
We use a mix of quantitative and qualitative analytical approaches. We look for business metrics, say, revenue, recurrancy, margins, capacity to capture claims from different sources, but also we are interested in commercial due diligence – we talk to clients of the company, we talk to those with relationships with founders to make sure of their alignment and motivations, that are not compromising with the company. We don’t mind what sector those entrepreneurs are in, as long as they do it with a lot of love and care of what they do and have high perspective and scalability of particular business. We are looking for profit on our investment.
But you said you did not support consultancy and restaurant business?
We do exclude service companies because of scalability approach. For example, we invested into travel agency lately, because normally it was forbidden to invest into those kinds of companies. But every 3 to 6 months there it is an opening there – huge travel agency, various travel provisions approach, innovative – and we can invest in that particular service company. But we wouldn’t invest in some small asset type company. If you manage a forest of gum trees, we wouldn’t invest. If you are selling cryptocurrencies and their value is the value of your company, we wouldn’t be investing. Any singular asset – we won’t be investing. Otherwise we look at everything. We don’t like companies that require a lot of capitals for expenditures, big fixed asset acquisitions. But we had already invested in, say, service.
What a startup should have to propose to catch your attention?
Normally we enter at first commercial sales. We cannot enter without 6 months of sales. When we see that the first version of a product has got its clients, the main functionality is in place, that there are possibilities to improve both the product and sales, we enter. From such a company we ask metrics, growth on margin of recurrency. We love very happy clients. Maybe, not a lot of clients, but if we’d already talked to them and they were happy about their choice, we would really like it. Otherwise we are sectoral agnostic. Including, say, space exploration, which is very fashionable right now.
Investors like to work with teams. But have you ever support a one-person startup?
We didn’t see a correlation in our experience. Yet, if something bad happens and you’re alone, well, you’re alone and emotional imbalance is heavier, when you cannot share it with your co-founders. Still we had seen cofounders battling each other, and it also kills a company. So, there is no pattern.
What is your due diligence procedure and how long does the process take?
At the first formal stage we ask for papers: legal documents, constitution and so forth. But there is the part to checking clients – we call them, ask questions. Mostly we do B2B, so it is CC. If it is B2C, we do some mystery shopping. Also we try to contact previous investors, if they exist, or the previous companies, if it’s not the first they had founded. Or just people who may know founders professionally. The time really depends on a company. We can do it in a week, if a company is well organised and open, or a month or so, if that company takes its time.
When you invest into a startup or company, how big is a check you usually sign?
The lowest is 150,000 euro to 200,000 euro, because it’s too difficult for us to invest. Another stop is 350,000 ruto, it’s the first entry ticket, yet we’d done 700,000 as the first entry ticket. A median would be 300,000 euro.
How many startup projects do you review per year?
We receive 1000-1500 applications a year and actually review around 100 companies. Applications come from various sources. The best come from natural co-investors – the VC funds we know and have contacts with. The second source is old clients – private investors or business allies. We are also members of every possible investors’ network, accelerator, incubator, we participate in every startup advising program. The fourth channel that provides service for free is those organising startup challenges, summits with entrepreneurs, like Fintech, BBVA Challenge, Google for Entrepreneurs and so on..
How long does it take for you to cover the whole way from a deck presentation to contract signing and check issuance?
It mostly depends on a startup itself – and other co-investors, if there are any. If we take a situation when we know the company, know the project, know another VC going to co-invest, because we already co-invested with him, the whole process from the introduction through due diligence, analysis, shareholding agreement negotiations and check issuance, it all takes time. There was a very simple situation, because the founder (a girl, by the way) was the only owner of the company at the moment, the company was really well organised, and we had made 4 co-investments with the other VC company and knew them very well. It was an exception and it took less then a month. If a company is slow in sending information, if a shareholder agreement had to be negotiated with 5-7 parties from different countries, it may take us up to 9 months. It all depends.
What qualities you are looking for in teams?
Honesty. First of all, brutal honesty. The problem is you don’t know, is someone totally honest with you until you pick up a lie. Also, motivation and does a person believe in what he or she do. Not “I will get rich in one day” type of belief, but in the product or service his or her company provides. It should be the first, if not the only, motivation for us. People have to have a lot of knowledge – not in technology, but in management of companies because you need to know how to scale, if you suppose to grow. Resilience – you will have a lot of blows from investors, competitors, employees, from everywhere, and you need to cope with harmful situations and quickly recover, not getting drown. It’s also hard to evaluate at early stage companies. These are the four most important things we are looking for in entrepreneurs.
And what are your red flags? What can you turn from investment or make you stop the cooperation with a company, if you’d already invested?
A lie. If during a due diligence process we discover a lie, we can stop the process even if that company shows otherwise good metrics and a lot of growth. Poor ethics of a founder, especially when he or she tries to change already made agreements or rules during the game. It makes long-term relationships absolutely impossible. I don’t want an entrepreneur to be a good person, but rules cannot be changed, the conflicts have to be coped with, etc.
Have you ever rejected a cooperation proposal and then regret it?
Yes. Anti-portfolio. Not the thing we like. We had an opportunity to invest in La Nevera Roja, and if we did it, we would have 10 times return on our investment at the moment of exit. But the thing that made the exit possible was not present at the moment of our analysis. There was a big corporate investor, an acquirer, and it wasn’t a part of the picture at the time. Later we recheck all information we had, but realised that couldn’t predict such an exit. [Note: Food delivery startup La Nevera Roja has been acquired by Foodpanda for €80 million. Terms of the deal were not disclosed – BS]. I would say, it went to our anti-portfolio.
What was the most unusual startup you ever supported?
We prefer to invest in usual startups.
What books, movies, blogs, events can you suggest to startup founders?
In books I would recommend Lean Analytics by Alistair Croll and Benjamin Yoskovitz, because many had read The Lean Startup by Eric Ries, yet Lean Analytics gives you good understanding of what you need to measure, when and what to compare against, how to improve your metrics, what metrics are important, etc. For many companies at early stage it is a very good book. For scaling up companies it is The Tipping Point: How Little Things Can Make a Big Difference by Malcolm Gladwell that may help you to surpass that 15-20 employees stage. If you have no experience in managing medium-sized organisations, this book will be very useful.
Can you name three most breakthrough startups in the history?
Microsoft. It changed the way we work now, it changed completely the professional world, established standards, like, say, use of Excel. As a startup Microsoft received more then 100 “no” from VC funds in the Silicon Valley till they found a VC investor, actually, an angel in 1981. It was one of the biggest breakthrough innovation startups in the history. Also I would name Google and Facebook. Google changed the way we seek and share information, while Facebook discovers the potentials of social networks. These three made huge advance, I believe and made huge impact on the world.