Paolo Pio (Joyance Partners): We have infrastructure and algorithms to scrap the web for interesting projects.
28 Feb, 2020
Igor Shoifot founded and co-founded several successful startups, such as Fotki.com, a top 500 internet Website in mid-2000, was CEO of Microsoft WebTV’s largest entertainment portal, Epsylon Games (over 70 games), founded and sold vInternship, and founded profitable startups in digital video, VoIP and software development. His articles and interviews were published in The Wall Street Journal, Forbes, Venture Beat, and many other publications. He is partner at TMT Investments venture capital company, where he’s an investor in over twenty successful startups, such as ScentBird, Backblaze, Wrike, ShareThis, Sixa, Vinebox, etc. Igor is the chairman of the largest internet incubator in Ukraine, Happy Farm, and an investor in numerous startups with combined valuation of over a billion dollars. He taught at New York University, UC Berkeley, UCSF, and lectured at Stanford and other leading schools in several countries. Igor writes for Forbes, Ukraine and for San Francisco Examiner, and has an MBA from Boston University and a PhD from The Russian Academy of Sciences.
I began as an entrepreneur. I created several startups, most of which weren’t very successful, but three were. I was a SEO of a gaming company called Epsilon Games. We created more than 70 games back in 90th. I was also a cofounder of a pretty large photo sharing company Fotki.com, it had about 20 mln. users in the early 2000th. I also created and sold vInternship.com – it was one of the largest portals for students looking for internships.
For 11 years I work in UC Berkley. And I started investing as an angel investor. When 10 years ago my good friends started venture Investment company, they were looking for partners in Silicon Valley, so they invited me to join. Since then we made over 15 (?) investments. I also launched the Happy Farm accelerator with a partner in Kyiv – I was Chairman, and she was CEO. We funded over 40 mostly Ukrainian, but not only, startups at very early stages – pre-product, or even ideas. Also I invested in a bunch of companies myself. So, overall I was an investor, board member, shareholder in over a hundred startups. I am a partner in TMT Investment, we had 14 profitable exits in over 50 investments, so it’s a very successful VC fund with several unicorns. For more then 24 years I live in the US – in Boston, Washington DC, and New York, and for the last 11 years I live in SF.
Yes. TNT has quite an impressive portfolio with several quickly grooving companies. We continue to look for companies to invest in. Our criteria is to invest in companies with, at least, 1m dollar annual revenue, so, if you know about such a company, please, tell me. But yes, I’m happy and really enjoying meeting entrepreneurs and listening their pitches, and also helping them to grow with much more than just investments.
We’re in almost all industries. We do not invest in HR, hardware, travel, specific content things. Not into local business. We don’t invest in things we don’t understand – science, medicine, pharmaceutical, alternative energy, etc. But pretty much everything in hi-tech, that is growing fast, we’d like to look into. Our strategic focus is companies have proving that they know how to scale revenue. We are agnostic where company is, but we prefer it to be directed on US clients for the simple reason: it increases the chance for an exit. But we made some investments in Europe and Latin America, Middle East, considering those companies will be great acquisition targets. But we are really driven by possibility to sell the company, because venture capitalist gets money only at exits.
Like I said, when company sale revenue is 1m dollar or more. It doesn’t matter, what is the stage – seed, A, post-A, etc. It is a starting point, so usually we invest in, say, 10-15-20m dollar revenue companies and up to 100m. We don’t, usually, look at companies at much later stages.
There are lots of incredible ideas and incredible entrepreneurs, but we have just a limited time and limited resources, so our strategy is to support companies at later stage. At early stage they should look for angel investors and accelerators.
Yes. Actually, it makes no difference, if it’s a one person, or two, or a team. If you look at successful startups, quite a few of them were led by just one founder, a super-brilliant person. Jeff Bezos could be one example. Others had brilliant teams of several people; Google can be an example. I don’t see a correlation here. Most times it’s a couple of people, sometimes 3-4; we have a company with 5 co-founders in our portfolio.
The company should already be at the stage of growing revenue. We want to see a clear history of fast growth. It is pretty early for a company founded at the begging of a year to show significant growth at the end of the same year, for sure. We are very focus oriented. I’m not saying, that it is the only venture strategy that works, but it is our strategy. You need to be at some level of revenue, you need to be focused on scaling your revenue, and you need to be in real business. It’s nothing wrong with the dreams; there are amazing startups building incredible technologies with no revenue on a dream, building business with tremendous burn rate, it’s just not the companies we’re looking to.
Up to 5 million dollars. It really depends on the stage. Sometimes company makes significant revenue, shows incredible growth, so this is time to invest several millions. Sometimes company may pass our minimum revenue level, still it is an early stage. Also we’re quite open to participate with other investors, so we don’t necessary need to take the whole round ourselves. So we invest the amount corresponding to the situation. At early stage it can be 300K, at late – 3m.
Sometimes startup may not have a ready profit, still the company can make growing revenue from other assets. At what stage of readiness of a product can satisfy you as an investor?
It is very hard to tell what is a ready product, especially with startups, where everything is constantly changes: you create something, you see new opportunities, develop features, change business model. I’m not sure that anybody can define “a ready project” in a way others wouldn’t be able to argue. As we look for profitable companies, we assume that their customer is ready to pay for the product. A company created a barely working product is unlikely to make a million dollar revenue.
It’s rather standard; numerous fellow venture capitalists I know do the same. We send an extensive list of questions about legal, financial (? – 13:02), etc, etc. We get answers, do some diligence ourselves, look at the product. Also we ask an attorney to check things. Usually in several days we come back to the company and ask additional questions. I’d say that fast 3-5 days is rather unusual, typically it takes 7-10 days. and very atypical will be several weeks; usually it because a startup takes a long time to answer our questions.
We estimate that we’re looked at 12,000 over 10 years, so it is about 1000+ per year – 3 per day.
It’s hard to tell, because different projects need different people, but more or less it’s 9 people. Not all of us see all incoming startups: we discuss with each other only the cases we really like. So, one day I may see one or two startups and never discuss those with my partners. I write back something like, “Thank you, but…I like a product, but don’t like the market,” or “great product, but I don’t like the growth,” or “I think you have too many competitors,” etc. So, I see several hundred per year, but it’s hard to say, how many per day.
My favorite ones come from my portfolio companies, from CEOs, because people at this level don’t waste their and my time and don’t want to ruin their reputation by sending bad stuff. The second best comes from friends; I have a huge network of friends and acquaintances, who work in the same industry. The third one is other venture capitalists. Unlike what outside people, who watch Silicon Valley show, may think, VCs love to share and it’s very rare when VCs compete for a deal. In Eastern Europe it is very often, in Silicon Valley at stage С or D, which we never even consider, that could be a case. But at seed, A or post-A, it’s quite rare. I go to lots of pitching events, dozens a year. Sometime you meet good proposals there. We look into a lot of research in specific segments we like. Lately, for example I’m looking into AI and non-standard education. There are major sources. Minor are somebody you barely know, or walk-in pitches, but those are very rare. My colleagues and I read a lot of tech data, articles, reports, so sometimes, when I really like a company, I can make a cold call or email a founder, saying “I just read a great article about you, I see that you’re grooving, would you be interested in cooperation.”
The shortest was about 2 weeks, the longest – 2 months or more, but this was very unusual, because we were waiting for others. Right now we have a record-breaking deal – almost 3 months; we are waiting for other VCs to put money, so it will take even more. But, as I said, it’s a record-breaking and really crazy case.
No. It’s not a purchase of a laptop or even a car, it’s more like buying a big house, you need to think rather carefully. It doesn’t work like that. You need to analyze a lot of things.
Focus on business. Running business by numbers. Being very focused on growth. Being much more skewed on numbers, growth and revenues, than on product or service. There are exceptions, of cause, but in our experience the companies focused on product fail more often, than those profit-driven. We are in startup, not in oil or real estate, our products cannot be geniously defined from step 1. Startup starts with an idea, engages, gets customers feedback, product, service, business model, pricing, distribution channels, etc. change, so the more business you have, the more accurate feedback you get. And if you’re focused on a product, the higher chances are that you miss customers’ needs.
It’s a good example of fantastic team, where one person (Wozniak) is heads down and another person is heads up (Jobs), constantly looking for something new. But you cannot look only on winners, it’s a survivorship bias, you need to see losers. And if you look at both – not only successful startups, whose stories you read in papers, – but if you look and analyze the numbers of thousands startups, you will find the correlation. All the companies, that, like Steve Jobs, are looking into possibilities to grow and get revenue, eventually build great products, the products their customers love. Apple has a tremendous range of products. First was Apple computers which was very good, yet grew to certain extent. Then it was a major breakthrough – Mac. It was such a big breakthrough, because they were focused on a customer, not a product. They even created it in secrecy, in a separate building. And the reason of this success was that they got so much feedback from their customers and their wants and needs. The best products come from listening to the customers, but the best feedback from the customers comes when you have customers. If you don’t have them, if you just fantasize about what they need, you will most definitely lose. Yet I think that the best teams are those who have both The Woz and Steve Jobs.
One of the biggest red flags is when I see that I’m being misled, that an entrepreneur is lying or playing poker. It’s fine to play some poker – it’s not chess we’re playing. But if I see some extra effort not to answer certain questions. And The Most Important Question is the question about business. Also, and, I guess, most VCs will agree, when you see a presentation with slide after slide talking about market, its feed, size, growth, and customers, but only after a dozen slides you see what product is, what is a business and how it develops, it’s a horrible red flag. I never saw a company pitched me, I saw their deck, when I said “no,” and it was successful, and I saw their presentation and said, “Wow, interesting, half of the presentation analyzes the market.” The talk about business is we have such the revenue, growth is this and that, customer acquisition cost is this much, this is how we acquire customers – this is a talk of somebody who runs business. the talk of somebody who runs fantasies is “Oh, our product is so unique, we’re geniuses, you have a rare chance to become a billionaire” – you see this old car salesman talk right away. I mean, I definitely met companies, that may have succeeded after I met them, we talked and they kept eluding my direct questions, but even if you give me a 10m dollars, if I name one, – I wouldn’t! Firstly, I don’t want to offend people. Secondly, I deeply respect entrepreneurs, even if their approaches differ from mine. I just don’t think we should work with them. But it’s quite a usual situation, when people are nice, idea is brilliant, product is incredible – and they talk about everything, but the business. Nothing good will come out of it. There are exceptions, but not many.
I thought about investing my own money, but VCs don’t look at Kikstarter, it’s just too early for us to enter. As I said, I thought twice about investing my own money, talk to the companies – and decided not to invest.
I have several books I’m completely in love with. One of these books, I think everybody should read, is
The Silicon Boys: And Their Valley of Dreams by David A Kaplan. It is a very good-written and quite forgotten book about 1990th. It gives a couple dozens of stories how companies like Yahoo or American Online started – absolutely brilliant, one of the best books ever written about the mind of an entrepreneur. Another is also long-forgotten Hard Drive: Bill Gates and the Making of the Microsoft Empire by James Wallace and Jim Erickson, and this is the most comprehensive history of Bill Gates and Microsoft. It’s as accurate as scientific research, even boring sometimes, but really honest, extremely useful and showing Gates neither as a devil, nor an angel. The next one is The Difference Between God And Larry Ellison*: *God Doesn’t Think He’s Larry Ellison by Mike Wilson, one of the NYT bestsellers. Great book about Oracle and its founder, incredibly funny, and very well written. One of the recent is The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers by Ben Horowitz, cofounder of VC firm Andreessen Horowitz. And also I would recommend very hard to hind book High Stakes, No Prisoners : A Winner’s Tale of Greed and Glory in the Internet Wars by Charles Ferguson, whom I had honor to meet. He was a founder of Vermeer Technologies, later bought by Microsoft and turned into FrontPage. Talking about movies: I have an anti-recommendation. There is nothing worse than Silicon Valley series, it is completely silly and related to reality no more than Ninja Turtles.
About trade shows: focus on those related to your subject matter. You will meet knowledgeable people there, you may meet there people who love your product. Don’t go to general conferences, they are for big companies and much more a show than anything else.As long as I’m a VC, I recommend avc.com by Fred Wilson, who is one of the most successful VCs on the East Coast, the co-founder of New York based Union Square Ventures. He may be an asshole, but he is a very smart asshole. I may disagree with him, but it’s always worth reading.
Another site is YC, where you can find lots of open discussion, lots of growth hacking, business models, everything – it is so smart, so much stuff, absolutely priceless. I don’t have much time now, but when I have, I go there.
I would say three among the best of the bests. My favorite by far is Tesla (and I don’t own it!). Tesla – not just Musk, but the whole team – is absolutely brilliant and created an industry that didn’t exist and now is really huge and growing like crazy. Google would be my other example. I could be created only in Silicon Valley, nowhere else. A couple of students, who have absolutely no idea about business, never had a job, never wrote a business plan – just came with a great algorithm. There were hundreds, maybe even thousands of as brilliant people creating those algorithms – or better. But those two were in the right place, found right mentors, who introduced them to the right and powerful angels and VCs. And the third one, probably, Facebook. They, unlike Musk, didn’t invent anything, just, in a way, copied Friendster. But the brilliance is not in creating one more social network, but in creating the social network, the place where people connect to each other. The thing is that in order to develop and attract more revenue, they need to develop their algorithm, and the result is more and more scary. My opinion that we’re living in the Era of Facebook, because they are shaping the way we are thinking. Now anything that creates a controversy – anything far-left, far-right, radical, contrarian, nasty – creates a lot of clicks, discussion, likes, dislikes, talks, energy, and stickiness. And, therefore, a lot of advertizing revenue. It’s fantastic, but horrible and scary, because people are increasingly turned against each other and stop using logic, believing in any kind of fake news.
Ten years ago, when we just started, I asked a friend (who happened to be a founder of Friendster Jonathan Abrams). He knew me from Fotki.com, so I asked him, can he introduce me to somebody interesting. And there was an absolutely fantastic startup, growing like crazy. No revenue, horrible burn rate, something like a 1m a month. But the growth was unbelievable, adding millions people a month. We said “no,” because the company had no revenue. So we could invest 1m into 50m evaluation in company called Pinterest and get back 300-350m.