Kai Chen (OceanIQ Capital): Investing is the ability to participate in the success of an entrepreneur without being in the trenches
28 Sep, 2021
After graduation from Boğaziçi University with BS in Engineering, he pursued a career in marketing with The Bosch Company. In 1999, he received a scholarship from the Cass Business School and moved to London, where he was awarded an MBA degree. Between 2000-01, worked as a new media consultant in London and served clients such as WPP’s Hill & Knowlton, on assessing and forecasting the impact of digital media on marketing communications industry. In 2003, Can Saraçoğlu co-founded Litespell, a next generation interactive marketing communications agency with full-service capabilities. The agency designed and developed the first viral marketing campaigns of Turkey for Procter & Gamble, Kraft, Honda, Henkel, Red Bull, Allianz, Opel, Nokia, The Coca-Cola Company, Kimberly-Clarke, Group SEB, L’Oréal, Microsoft and Nissan.
The agency also functioned as a Technology Holding Studio, which invested in online gaming, new media platforms and social networks. One of the spin-offs, a social site for the fans of TV series, Dizifilm.com was acquired by MedYapım in 2008. Eventually, in 2010, Litespell was acquired by Publicis Groupe and renamed as Publicis Modem Turkey, where Can Saraçoğlu acted as the Managing Director of the company. In 2014, Can Saraçoğlu co-founded String Ventures, a seed, and early-stage VC fund, which invests in disruptive startups in Silicon Valley and Eastern Europe. Also, he’s a lecturer at Bogazici University Computer Engineering Dept, training future engineers to become startup founders. String Ventures also runs the accelerator programmes of the top tech universities of Turkey – METU and ITU.
I have founded my company in 2002, and it was some kind of a next generation digital interactive agency. We have some extra-capacity and were able to build our own products, too. So our company became a kind of a startup studio. Back then, in 2003-2004, we didn’t have any venture capital or business angel in Turkey. For me, the best example was Better Work – they were a startup studio and they built their own product as well. We tried to do that too: we created the first fashion blog of Turkey, tried to build an online game. But none of them became really successful. As well as Ukraine, Turkey has very powerful TV capabilities, TV series are big things. So we built a social network site about TV series. It was pre-Facebook time, and the network attracted a lot of traffic and even began to influence on ratings of series as well. One of the biggest TV producers wanted to acquire it. And it was that feeling, when you built something and then sold… I sold the agency and started a Publicis Modem group. In 2012 two people quit Publicis, so I began to look around, doing some angeling, some consulting, and eventually it grew on.
I apply a lot of my ideas now. I’m very interested in how great ideas are born, where they come from, what experience or mental effort they spawn out. I’ve been looking at how Facebook comes out, how does Google, how all these world changing ideas come along. As a part of this interest I teach in Bogazici University — it is famous for its educational quality and its engineering department that is the best in our country. Also, I’m helping accelerators; we have strong university accelerators in Turkey because state provides tax reductions and grant support. So, I help other universities. I help these teams to come to their brilliant ideas and then encourage them to come out and find out what customers really want. And then they may either improve their initial hypotheses or start building something else. I really enjoy this work. It’s good to see the results, but I really enjoy being at Stage 0 to 1. I’m really passionate about it.
I don’t have much of verticals limitations. I’m rather interested in really good youth cases with real demands, powered by real good stories, strong passion or a strong personal observation. But there are verticals I am more comfortable in: IoT, Software as a Service , seed term investments, and, most of all, AI powered solutions. Some of those are from 2015-16, so they aren’t new to me. We have beautiful new technologies, and if we can apply them where they are really needed, we can create a great value. Also, I’m interested in mobility and autotech; I’m consulting a big auto manufacture, too. My undergrad is mechanical engineering; before becoming an entrepreneur, I spent several years in the auto industry and understand it, too, and it’s a big industry with lots of areas to apply.
So, my only restrictions are areas where you need a lot of expertise, like biotech. As for region, I’m interested in Turkey and East Europe, especially in Ukraine and Belarus, because startup founders in these countries are more ready to break the boundaries of their markets. Unlike old and prosperous countries, people there have more passion; they want to break the chains, the restrictions. Also, these countries let me split. Belarus, for example, is very strong in AI, with AIMatter acquisition by Google, so now many brilliant programmers are looking at that area. Turkey has a leading consumer economy, not rich, yet we have a lot of consumer applications. Ukraine is in between these two, it helps me to balance my portfolio: consumer applications, great tech startups and in between.
I usually mention Dropbox example. Drew Houston had a very good product and applied to Y Combinator, but they insisted on getting a co-founder. But in my portfolio there is a one-man startup, its founder is really passionate, he has a good product and works on its development. Startups are like jackets: you need to try it on to find does it suit you or not. Every story is unique. Yes, it’s hard for a single person to deal with the ups and downs of this journey, and if a second person cannot be supportive, it won’t work as well. Sometimes I meet startup teams, who have a marketing background and want to fight. It’s just won’t work. The ideal team consists of one hustler – a passionate mastermind – and a tech person. Maybe, a designer, but as a support. Yet, we have AirBnB, where all three co-founders were designers, and it’s a multibillion company now. So, we have guidelines, but there is just no single golden rule for every case.
You know, everybody says, “A great team.” Or, “A great idea. A great hustler.” Over time I noticed, that even when I maintain relationships with a team (a very good team of interesting people), but they do not produce a good product that meets market demands, I don’t invest. But I invest my time – accept meeting invitations, discuss ideas. But I don’t believe in an idea that once you have found a good team and give your money, they somehow find their way. It just doesn’t work that way. And I noticed the same thing in Y Combinator as well: they used to work with teams, but for, like, 3 years now they don’t take a team onboard, only products. Because that may burn down a big amount of money. A team may have a bunch of previous investors and obligation and still have a need to start from scratch. So, I do look for a great team, because even if an idea is brilliant and a market is right for it, you still need a team to produce a result. Yet, if a team is great, I will invest my time and mentorship, but not money.
It depends on the source. If I do angeling and bring investors, the amount is somewhere from $50,000 to $400,000. But if it’s my own money, I invest $10,000, maximum.
I look for a minimum viable product (MVP), when the product is good enough for a customer. I just check, whether or not a customer uses it, and if does, it’s enough for me. I’m not expecting a super-product – I support a journey. I don’t invest into pure ideas with one exception. If it is a very interesting high- tech idea, disruptive technology. In this case I check, whether the founder has a capability to implement it – education or previous experience, maybe, the founder made already an attempt, it may be a good sign (or not!). But I always need an MVP. If a second-founder had already made a good product meeting market demands, their experience may double or triple final outcome.
I mostly invest at the seed stage and at this stage the company liabilities or value is not the case. More important to know, whether the founders tell you the truth about the list of demands, about the production, do they have a running product or not. The product may not work properly, have bad reviews – you need to know it. We want to know about other liabilities, like one of a founders still working full-time or has commitments with another company, and it is a liability.
At the seed stage we want they to be 100% dedicated to the job. Still you need to trust people, because you can never be quite sure. I think this is a reason why early investors and angels tend to co-invest more, because they feel safer in that case. You can’t pay PWC for due diligence, so you trust your friends and other parties who co-investing with you. In my first company we created a portfolio that became a GP commitment of a bigger fund. And when they tried to evaluate the companies (2-3 years old at the time), I got in touch with PWC, Mazars or Deloitte, and they couldn’t evaluate those companies, because it was a new market. They could only tell, if a company has a bank loan of unpaid taxes, but it is not of much importance.
I see a lot of projects, because I run accelerator programs and help people to run accelerator programs, I’m in several juries for programs – I see a lot. It’s something like 1500 startups a year. But it is just a review; sometimes followed by a Skype session or two, and only then, in rare cases, by a meeting in person.
A lot of them are direct applications from my site – it has a web-form. Many come through LinkedIn. But the quality of those two sources applications is lower than for those coming through accelerators, mostly because these were already reviewed. An accelerator receives, say, 5000 applications, reduce the number to 300, and I only see that part. It is a filtered, condensed source. In terms of quality, those are the best. I meet a lot of people at conferences and other events. For example, I’ve been at Wolves Summit in Poland – it’s a very effective matchmaking event. Also, as long as you know a few people, they will introduce you to others, you may be interested in, and so forth.
It rarely depends on me, rather on the other side. Sometimes they still have other liabilities, sometimes still working on a product, getting to MVP. If I like the story, I will follow, but it depends. Sometimes they even have MVP and go out, but don’t get strong reaction and realize that they didn’t hit the goal and need to work more, and it decreases the fundraising inflows a lot.
First of all, intelligence. The background, how they get to the story. I don’t expect them to be charming or talkative. The most impressive teams were quite opposite: not charming, yet having a brilliant story read in a brilliant way, and it was impressive. I look for well-balanced teams in terms of talents, like one hacker/one hustler type of balance. I look at how the equity divided: if one has 75% and the other 25%, they are not co-founders, rather an owner and the first employee. The second most common reason for a startup failure is founders’ dispute, so I check how long they know each other and had they already achieved something together. Even if they went together to India with backpacks and didn’t kill each other, it’s a good sign. Even if co-founders have known each other for a long time, they will dispute a lot, because startup is a stressful business.
Also, I always look at the market – whether it is attractive or not, developing or stagnating, is there a real demand in that market and how big is it. The #1 reason why startups fail is because they don’t know what the market wants. I want to hear their personal stories led them to their idea, like a story of the Google founders. They need to solve their own problems or problems of other people, but I need to be sure that they know the needs of their customers from inside. I like to mention Y Combinator’ company HomeJoy, which is closed now. It was an on-demand home-cleaning company, and the founder worked as a cleaner for 3 month before starting her own company. I don’t like people who work for a couple of years but still are tourists at their own market, and I like to ask the question, “What did you learn from your customer last month?” and listen to the answer. In venture capital you take a lot of risks; on average, it’s like two successes to eight failures. And you want these two companies tenfold your investments, otherwise you won’t be able to move on. That’s why the market must be big and grooving. The nature of the product is important, how many times it’s used, how often. You can work with a product needed once in 3 years, but it’s very hard. Everybody wants a new Instagram.
You know, a couple of years ago every startup wanted to create a mobile application. And I kept telling, “If to solve the problem of your customer, you need to send a guy, who will push the lever, do it. Don’t waste your time on mobile application.”
Sometimes it’s a personality – too much ego, too much impatience to critics. A founder must be open to reality; being delusional is a red flag to me. I want people to know numbers by heart, if I ask and they look at each other reluctantly, it’s a bad sign. I want founders to know how much money they have, how long they may survive with those money and how much they really need, how many people can hire – it’s a basic company economics. They need to know their customer lifetime value, customer acquisition costs and how feasible their goals are. If they don’t have any idea, it’s a red flag for me. Also, as I said, other commitments. I have a team where one person was working for another company, and three months later he was still working somewhere else. It was the last time we met. If you’re not ready to risk, you cannot expect others to risk their money for you. It’s a huge red flag for me. And passion. They should like what they do, otherwise even a brilliant product won’t survive the journey. Inconsistency. If I notice some inconsistency, or data covering up, or painting the reality, it’s a big red flag. I look for people with emotional stamina, who can manage the team, but, first of all, themselves in ups and downs. And if they don’t give this signal, it’s a red flag.
It’s really a rare situation when you make a decision to invest in the very first meeting. It happens only if, say, a team needed $500000, already raised $450000, names of backers are strong, and you need to act fast. Most of the time you meet 2-3 times, weeks pass, and want to see progress, some movement ahead. If you don’t feel this progress, it’s a weak team and a HUGE red flag for me. I am an old school guy: I ask questions and take notes. And I want to see progress, change in metrics, problems solved, products improved.
All blog posts of Paul Graham, the Y Combinator founder. People at Y Combinator have seen a big lot of startups, they keep learning and developing – pretty much as a usual startup. And he shares these insights. I also recommend Graham’s book Hackers & Painters. I learned the most from Paul Graham, he is my reference source of a kind. He’s not as active in blogging now, but his thoughts are still fresh. Lean Startup by Eric Ries is the most well-known book on the topic, a must-read. I suggest also Lean Analytics by Alistair Croll and Ben Yoskovitz, it discusses the metrics I mentioned and is very useful. At the seed stage, when founders have no money, we, investors, look at the numbers and metrics.
Marc Andreessen and his browser Mosaic. Jobs’ and Wozniak’s output – Apple. These three people changed the way we communicate with computers. And iPhone, IOS and Apple Store opened so many possibilities, creating on-demand startups, like Uber, or new social platforms, say, Instagram. So, I am fascinated not by startups, but rather by platforms, that opened new horizons and changed our world.