PassiveLogic activated $16M Series A financing
21 Oct, 2020
Vijay Tirathrai is a Managing Director of the Techstars Dubai Accelerator called Hub71 which was created to support entrepreneurs through special mentor-driven programs that help them succeed. Vijay is an angel investor and a serial entrepreneur, so he has a rich background to lead the growth of selected startups.
I’ve been an entrepreneur for over 30 years and I’ve built many companies, some successful, some not so successful. And as an entrepreneur, I’ve gone through different scenarios in a startup skilling up as well as in building sizeable business mostly in the brick-and-mortar business rather than in the tech career. One of the things I was very keen on is how can I channel my experience, my skills into helping others grow and succeed in a productive way. So, of course, mentoring comes to mind, and that’s something I’ve been doing for the past 20 years.
But I felt I wanted to do more than that in a sense to have skin in the game and I thought being an angel investor might be a smart way to do it. But I haven’t been really successful as an angel investor because you need a lot more capacity in terms of process needs. This is where I realized that being with an organization like Techstars allows me to both deploy my entrepreneur skills and experiences, but the same time, leverage on the institutional infrastructure that provides access to a global network, provides access to resources in the venture space, particularly in the early stage investing, heavy illustrative backup, such as legal, finance contracting, marketing to solicit deals and deal flows, and then concluding the investment deal. And that’s when I really felt that Techstars was an excellent choice to get into the early-stage investment space, and rather than doing it alone, working with them gives me a lot more leverage and I can be more effective in my decision making.
Typically this may not be groundbreaking, but we look at the team, but also we look much at the credentials, the experience, the ability to execute. There’s a bit of science in that, there’s a little bit of art. And I think, as an entrepreneur, I can relate to sniffing the right entrepreneur who I think is authentic, genuine, building strong values and have the tenacity to work hard and build a company. That’s not an easy part to detect but in the job that I do as a managing director at Techstars we go through hundreds of different applications, and it becomes almost intuitive to be able to separate the good apples from the bad apples.
The second area – of course, we look at the idea and the implication of the idea in the marketplace where it should solve the problem. If an entrepreneur can articulate what is the problem, then I’m more intrigued to work with them. But if they can’t articulate the problem to which they are trying to find the solution, for me that is a mismatch of product-market fit. They need to be very clear what the insights of the problem are for me to be convinced that they have the right deal to back.
And then comes the technology application, and then there goes the market strategy. So: the team, the ideation of problem, the go-to-market and the technology use are all facets that we at Techstars all look at. I think there is also a small emphasis for me personally where I look at the industries that I can relate to because of my experience in the past, so that has a built-in bias to seeking that kind of company.
What’s a successful startup and an unsuccessful startup? It’s the amount of support they get at the very early stage. And I’m in a business of providing support, helping other entrepreneurs to grow. And if I can’t relate to the business or the entrepreneur, then it’s a non-starter. But if I feel that there’s a strong connection and I resonate well with the entrepreneur and his ideas, then I’ll give everything I have to make sure that he is successful. So, there is that element beyond the assessment of the viability of the starter that I’ll also look into whether I can make a meaningful contribution and add value in that journey.
At the program that I run at Techstars, it’s mostly tech. Although we do have more preferences. For example, energy renewals, fintech, supply chain as well as certain e-commerce related matters. From the geography point of view, we are very global, especially if it’s opportunities in the emerging markets, particularly in the Middle East because I base here in Abu Dhabi. We look at the advantages that we might have to be able to allow a company from the UK or from Ukraine to take advantage of a certain geographical situation. So case in point, we briskly invested in Hydro Wind Energy from the UK that produces a device that converts seawater to potable freshwater. There’s a water crisis in this region particularly, and all the water comes from distilling seawater. But they’ve developed a device that can eventually manufacture water at more than 95% less cost. It doesn’t use any energy, it uses nature to convert water from seawater to water. So, that’s an example: they could do this in the UK, but it’s not really strong marketplace for the need, whereas in the Middle East, given it’s dry, desert-like climate and its accessibility to oceans and seas, that’s a great proposition. We look for options like that, where we can add value.
We have about 50 programs around the world, and the vast majority of programs are vertical specificity, for example, mobility, fintech, food, life sciences and it goes on and on. And some are more generic. And again, the experience of the Techstars program is quite universal everywhere, whereas the differences depend on the vertical, the makeup, the curation of the content, and the mentors will vary a lot. And especially in the case of the choice of mentor.
So, you’re working on, say, energy. You clearly want to be accessible to mentors who have been in the energy sector, who built companies in the energy sector, and the go-to-market economy is very different from, say, fashion or food. The distinction of these programs by virtues is vertical and will speed to the content and the mentor pull we bring together that helps the founders understand that at the basis of the accelerated program it’s a mentorship-driven program. The principles are the same but the personalities and the content will vary to suit those verticals.
I am personally bombarded on a daily basis with a lot of inbound inquires through emails, LinkedIn, my numbers are accessible, people can leave me messages in WhatsUp. The way I basically approach them is to say: “Look, I don’t have the bandwidth to be responding to random inquiries, it’s not very productive from my point of view, so we establish application open and closing date on a Techstars website.” And we then say: if you meet these characteristics, if you intend to use benefits, you want to spend 3 months with us, and these are the verticals that appeal to you, then, please, apply online. And there are no barriers to entry, so everyone applies accordingly.
And let’s say we get a hundred applications in the system. I’ll personally go through all the applications with my team. And then we go through the selection process where we start eliminating the applications. And only those that we feel most enticing we would call for a series of interviews. Some of these interviews could be five rounds before we come to a final decision. And in every stage, the interviews are mostly done across video conferencing, it’s very rare that I meet someone in person. Meeting someone in person doesn’t necessarily have an advantage, it can be, but doesn’t necessarily. But it’s quite hostable to have that process down through a video link. And at each stage of the interview process, we have different questions, we have different people participating to give different perspectives on the applicant.
So, just to put this in context, we typically look at the 500+ applications to get 10 companies, so it’s less than 2% who will be successful. Given the volume, it’s impossible to meet everyone in person. So the tips I’d give to a lot of the startups is to really make sure that you give the best-detailed answers you can on the application form, give well-defined responses, the video uploads you can provide, one-page documents, your answer is going to be authentic, rich and convincing. That is all you need. You don’t need to meet me in person because we will review everything in detail.
What I’ve explained is the general rule. But there’s an exception to the rules. I do work with a number of collaborators around the world. I usually visit about 10 cities in different parts of the world from HongKong to Hungary, it could be San Francisco, Boston, you name it. We have collaborators who conduct either at the conference or an exhibition or in pitching competition. So, I might have a VC, say, in Poland, and he puts up a shortlist of 5–10 companies, I’ll fly down and I’ll review those companies there.
So, that is the other way that we do it, and that applicants have a high chance of getting to the final selection because of the reviewing attitude by the third party. But in terms of the total number of the applications they represent 20% of the total application group. They don’t represent 100% of it. The other 80% come through the online offer that we have, and we process it.
On average, about 500 we review per year.
Typically we take any company that’s up to Series A, there are as exceptions Series A companies, but mostly we take from ideation so Series A. I like to look at the companies that have a little bit of traction. I happen to see a company that has at least a viable product. It’s very rare that the company with an idea gets in unless you know the team from past experience that has proved to be great entrepreneurs and they come in to do it the second time. And we’ve made decisions based on that. But that’s a rare exception. In most cases, we look at companies within the MVP, we look at the companies with the POC (proof of concept), but some fraction has to say that this company has the ability to go to the market and do business. And our job is to accelerate that growth. So, we’re not an incubator, we’re an accelerator. We don’t incubate ideas, we accelerate a proven viable product and we give them all the knowledge to take it to market even faster. So, that would be an ideal application.
What is your due diligence procedure and how long does it take you to cover the whole way from the first meeting with founders to contact and check signing?
The first face due diligence screens would be interview process valued through the applications, so, checks, interviews with questions, going through a committee – all that might take 3 months. Once we have convinced that that is the shortlisted candidate that we want to invest, we have another four weeks of legal due diligence: to check the background, to check the legality of the company cooperation, the shareholders’ agreement. And only then we finally include the deal in the contract to pass to make the final offer. And once that is done we usually write our first check within a week. We are very fast in the deployment of capital.
It’s a combination of 20 000 of equity + 100 000 convertibles. Those combine as 120k USD that we wire transfer at the start of the program.
One of the things about dealing with early-stage companies is that there isn’t a lot of financial data, there isn’t a lot of track record out there you can rely on. So a lot of this is dependent on the verbal communication and information provided by the founders that itself can be problematic because is it accurate, is it verifiable? So, we are only relying on that source of information. But the way to deal with it is that we devise a system where we have frequent check-ins, almost on a weekly basis during the selection process, contracting process and during the program. So, if we see that there’s a pattern of deviation, then that suggests a red flag.
The second red flag is when we see differences of opinions within the founders. We know it’s problematic because there’s a lot of reasons why such things can cause a dispute among co-founders.
And then, of course, if there is a falsification of documentation. That’s very, very rare that we come across.
Finally, I’d say that it’s very, very rare that even if we see a red flag that we put out a deal. In most cases, if there’s something that’s problematic, we would have an honest conversation and we’d say: “Look, we need to fix this together, because we are partners with you, and there’s no correction to the issue, so please, let’s address this issue, and then we can help you move forward.” And typically there is some resolution around that matter, and we come together and we work through these issues.
Yes, if your question is about a solo founder, then yes, we have invested in solo founders. Of course, you might hear this as a common cliché that we prefer teams. It is a fact because when you have more than one person you have bigger bandwidth to deal with the intensity of starting up a company with a lot of learning that has to go through product development, marketing and so on. But the other point is also skillsets. No single individual is naturally good at everything. Also, there’s a point when it comes to risk. Should the poor fellow gets run over by the bus, if he’s a solo founder, that’s the end of the company. But if there are two people, you have a risk of 50/50 that the founder would seek another co-founder and move on.
Those are basically very theoretical concepts that we work with. But, in practice, we do find exceptions for that rule. We find sometimes great solo founders who have strong leadership skills, the ability to assemble a team, who are not co-founders but can be part of the founding team and having minority equity as invested interest. They are able to build companies that are very successful, so we have no issues with that. So, I just want to be clear: it is not binary, where “yes, we like teams and we don’t like solo founders”, it’s more that we have a preference with teams, but we’ve also invested in solo founders.
This is a serious matter. The situation we’re living in today is only the beginning, the tip of the iceberg of the massive economic damage that is going to come. I’ve lived through four recessions in the past, and we can sense that this is different this time. We’re not dealing with a supply crisis, we’re not dealing with the dot-com boom, we’re not looking at the overinflated stock market crisis or falling of governments. We’re dealing with something we are not able to wrap our heads around and that’s dealing with virologists, and there’s no answer today as to how the end of this is going to become. The immediate repercussions are that to contain this the economy has to come to a standstill. This means you can’t open up restaurants, hotels, airlines, and so on and so forth. So, all these industries are grossly affected. And there’s no definitive timeline of how this is going to be, but you can safely assume that if these industries don’t function for more than 3 months, you’re looking at massive bankruptcy, massive layoffs and massive debt being piled up. So, that’s obviously the worst case which we hope doesn’t happen, but it’s very likely that that could be the scenario. A few industries in the frontline will take the immediate hit right now. But it has almost 90% impact across all other industries. It is going to affect all types of businesses, including technology companies, startups, large businesses.
That said, in every crisis there are opportunities. So let me give you a couple of examples. We have a company we’ve invested called Aumet which is a healthcare marketplace matching suppliers and medical distributors using AI. In the last one we’ve seen a search in two thousand times in terms of volume for the supply of personal protective equipment like masks, gowns, ventilators – across the world. And it was a right moment and the right time for them to see the search, but it is a great tech solution because it is not gaining any middlemen, it just matches suppliers and distributors, and has transparency at the best price available, it limits any false pricing in the market.
So, that’s one example that’s taking place. Another example is a company called Audigit based in Dallas and they’ve got a wrist bracelet using a Bluetooth technology that can be worn by individuals to show the distance between you another person. So, this works for social distancing and you may think it’s a nice thing to have now. I think that people in services that have to function during this crisis, healthcare workers, the police force, nursing homes and so on, find that often it’s really hard to ditch your distance in the workspace, and this gives you signals and data. So that in cases of breach, and the virus testing is positive, the data is able to capture the entire population coming in contact to say “you need to quarantine and you need to take these precaution measures”.
So, these are a couple of examples of companies really taking advantage of the crisis. But I think what we’ve not seen yet is hundreds of different businesses that will emerge over the next 2–3 months, arising from the new anomaly that we are moving into which is working from home, the redesign of communities. Because we have to function, we have to live, we have to work, we have to play, but in a different environment. And this provides a tremendous amount of opportunities for startups to address those pinpoints and problems that maybe before the COVID crisis were not really meaningful.
So, we are going to see two things: we’ll see a lot of damage for sure, but we’ll also see the rise of new technologies and businesses. And this is why I’m really, really excited personally, and very optimistic that while there’s a lot of gloom and doom news coming out every day with the number of cases and economic data, but the way I see it, looking into the future, investing into the future, it’s very exciting. And I’m really very optimistic about the world for the future that it will be a better place.
I think my last statement kind of answers that. I have to say that it can get quite intense and mundane, but this crisis has actually given a fresh breath of air of how I feel the future is going to be so different. And I’m even more excited than I was, say, three years ago when I did this job about investing in the new future of ours. So the answer is yes, absolutely.
Look, there could be many other options that may come my way, but if you ask me specifically, I find I’m more energized than I was 2 months ago.