David Gardner (Cofounders Capital): We have a joke that if we don’t understand something in the first 2 minutes, we won’t invest.
30 Jul, 2021
Enis Hulli is a General Partner at 500 Startups Istanbul. Educated as an engineer he has a firm grasp of the technological aspect of the startup world and the ambition and knowledge to see the global potential in the regional startup scene. That is why, rather than venturing on the civil engineer path, he founded firstseed, a network of investors focusing on early stages investments
He aims to cultivate and grow the Turkish startup ecosystem, help talented entrepreneurs of the broader region and the diaspora in building explosive businesses that will integrate with Silicon Valley. His goal is to position 500 Startups Istanbul as the leading actor in the region in order to re-shape the future of innovation at EMEA. 500 Istanbul is an early-stage VC fund within the San Francisco based 500 Startups network, a leading global venture capital seed fund and startup accelerator with over 2,200 investments in more than 60 countries and venture partners in more than 25 countries.
I was actually an entrepreneur myself. About 10 years ago I started my first startup. And then I’ve operated various companies in different industries for 6 years. That’s when I started angel investing. At a very early age, I was writing really small checks of 25k to 50k to very early stage companies who had an aspiration to go to the US. My intention was to link them to really great US accelerators. That’s what I do now as a VC as well invest here in Southeast Europe and Turkey and then push companies to go to the US using the accelerators in the US more like a landing pad or a channel to expand into the US market.
That’s how I got acquainted with 500 Startups while I was an angel investor. I met them here in Istanbul in a conference, they invited me to their program in Stanford which was focused on VC education, and then we teamed up to raise the 500 startups Istanbul Fund I.
At 500 Startups we have more than 15 funds and we have invested in more than 75 countries all around the globe. Our fund, 500 Istanbul, is focused on Turkey and Southeast Europe, predominantly Bulgaria, Ukraine, Romania and Greece.
Whenever we are looking into a deal we try to dissect the world into 2 different parts, let’s call them Blue Ocean and Red Ocean. For the companies who are in Blue Ocean spaces where the market is not mature and you don’t know what the market size is going to be, you’re taking a big market risk, but you believe, if you believe that market is going to become a large market eventually the next 5–10 years, then we are okay with investing into companies post-MVP with a couple of customers, a couple of thousand dollars marginal revenue, we would be able to pull the trigger. But if that’s a Red Ocean company, in a very mature space, where we know the market size, but we have to understand how this product differentiates, whether this can execute on the existing market, then we need to see more traction.
In any case, there are four different ways of looking into a deal. Meaning target market, traction, team, and technology. And it really depends on the industry or the technology maturity to be able to choose which one is more important. For example, in really Red Ocean markets traction becomes much more important, you have to understand sheer and customer satisfaction, growth, etc. Whereas in very early markets, in Blue Ocean markets, you don’t care about the traction that much, because the market is not mature it’s impossible to grow the traction. That’s why you’d want to take early on that, that’s when technology and the team prior to domain expertise become much more important.
First of all, I like to invest in B2B, and I like high-level or mid-level enterprise B2B, so a larger ticket B2B SaaS companies. Looking from that perspective, I like industries that are less digitized by technology. So, this can be construction tech as a good example of that, a lot of pieces of health tech and in a heath valley generic is a good example of that. I like to invest into industries where technology adaption is really low, but it is going to happen eventually, the market forces, and the overall consumer technology adaption will push the industry to be technology reinvested, and it’s sure good to take early on that in such industries rather than going to industries where the technology is really mature and you’re trying to bet on the new economy who is going to become the best of the grid. We do that less.
We invest at early stages, and by early-stage I mean if the company is in the Blue Ocean space, we invest post-MVP with only a couple of pilots or a couple of customers. If the company is in the Red Ocean space, then we invest a bit later, when the company has substantial monthly revenue and we feel like we’re investing into the new economy on an existing market. But it would definitely be seed-stage here in Turkey, Southeast Europe and even in the US.
Our first check is 250k and our follow-on tickets are 1.5 million.
From multiplish perspective, we believe in outside returns. A lot of VCs have a lot of different theses but our thesis is that if you’re investing into 100 companies, 50 of them will probably fail and then 30 of them will give somewhat returns. Then there will be 20 of them that will become your fund returners. Out of that 20, there should be 1 or 2 that are going to return to fund to 1X by themselves alone, and for that to happen that returns should be more than 50X. To be able to get access to those deals that potentially are going to give you 50X, you have to continue to shoot for the moon at every single deal that you make. And that’s kind of our benchmark. So we’re trying to find companies that are going to then return our fund by themselves to 1X, and if we can find 2 or 3, or 4 of them in a course of a fund, then we are going to have our stellar great returning fund.
So, with Fund II, which is our new fund for Southeast Europe and Turkey, we are going to invest into 25 companies, out of which we are shooting for 5 large ABCders, that would give us 50X from the first ticket, but maybe 20X-ish from our follow-on ticket. Hopefully, that would make a great return from a fund perspective.
We have looked into around 4k deals in the past four years for Fund I. For that 4k deals probably 80% of them were cold outreach, so whether that’s a website application or LinkedIn a message, or cold email. Out of those we did zero investments. That shows how our investments are actually focused on either deals that come to us through referrals, or us just outreaching to the entrepreneurs ourselves, just because it caught our attention. So that figure, 4k, includes all the cold outreaches and the STR work. By STR I mean pulling down a database of the startups in Ukraine, for example, and looking into them one by one, identifying the ones that we would be interested in and then reaching out to them ourselves.
For a startup to catch our attention we have to make sure that the entrepreneurs are smarter than us. And we only invest into entrepreneurs who we feel like they are smarter than us. So, it’s not the company or the stage, or the market, or the traction that catches our attention, it’s mostly the entrepreneur himself or herself that catches our attention.
Definitely not. The goal is to access the outsize in the return asset class. If there’s a hundred deals out there in the market at any time, if you don’t have access to the best five of them, no matter how well you choose out of the rest 95 or no matter how well you manage your portfolio, it’s going to be a bad fund. So the goal is to make sure that if there is a hundred deals out there in the market, the best ones you are going to have access to. And to have access to the best ones you can’t just sit and wait for them to come to you, you have to outreach yourself as well.
And I think that’s a necessity, as you start in the investing business, you can’t just do PR, have a website and wait for applications to come to you. Sure, they will come to you, but not the best ones. So, looking into numbers, saying “X thousand entrepreneurs have reached to us” etc., that’s a vanity metric, no one cares about it. What we care about is did the best ones come to you, or not. That’s a binary outcome.
I think two main qualities supersede all the rest. One of them is domain expertise. The other one is the ability to learn. And if I were to put up the third one, that would be teambuilding. These are the three skills that build the core in the team.
A lot of the entrepreneurs that we invest in here in Southeast Europe and Turkey are first-time entrepreneurs. They are not serial entrepreneurs. Because of that sometimes they don’t have the domain expertise, and that’s when we feel like their ability to learn becomes more important than the domain expertise – because they lack that.
But then, teambuilding becomes really important as well. From early on great entrepreneurs build great teams, and that’s important for an entrepreneur to be able to attract talent who is smarter or has more domain expertise than him or her. So we try to access the team not just by the co-founding team, but also by people that surround the co-founding team, the executives of the company. And if an entrepreneur is able to attract high talent, right after he/she has started with a really limited budget, really limited cash flow, that becomes a really good validation to his or her skill set to attract the right people.
Unfortunately, we did, yes. Ideally, I don’t believe that much in solo founders. The only solo founders who have been successful are solo founders that were serial entrepreneurs, so they had the capital, they had the domain expertise, so they would probably go there what raises millions of dollars, and with millions of dollars raised, they are able to build a stellar team. That’s why they don’t need co-founders, they tend to be solo-founders, but from the get-go, they have this five or six key executives who almost act like co-founders. But we don’t have that many serial entrepreneurs here in Turkey.
So, from that perspective, investing in solo founder becomes much tougher. We have invested, but not much. Our of our portfolio companies in Fund I, I believe, two of them have solo founders, all the rest have large co-founder teams, sometimes even as large as 5 or 6 co-founders.
I like to invest into technologies that I don’t really understand in industries that I do understand. So, from that perspective, any pitch that uses a new technology to transform an industry that I already know (like retail or construction site as good examples of that), catches my attention right away. What I don’t like investing in is industries that I don’t understand with technologies that I also don’t understand. That’s how I try to limit my focus.
One of my portfolio company is a company called Firefly. And two guys that started that company are my good friends from high school. They’ve started a business in San Francisco. They came to me with an idea of putting the screens on top of vehicles, to do geotagging and context advertising. So, when they came to me with this idea, I didn’t like it at all, so I dismissed it. But as we are friends, I kept in touch.
I kept in touch over the next course of a year, and they were doing great. But I didn’t believe that. I didn’t see the technology defensibility from the hardware and the software perspective. I felt like the entry barrier wasn’t high, and anyone with the money could just go to the market with a similar solution, and the legal aspects were also with the question mark. And the network effect from the supplying demand perspective is not that strong. You don’t need thousands of devices to build that great network effect, even if you have a hundred vehicles, you can jumpstart your business. With that nature of the business, I didn’t like it at all. So it didn’t catch my attention. But when I looked into the figures and how well the team was executing, that was unusual, the traction they were able to build, the team that they were able to put together actually showed me that. Although I didn’t believe in the market that much and I didn’t believe in the business model that much, I really believed in the founders. And we ended up investing into that company. What happened over the next year is they raised close to 80 million dollars from the partners of Google Ventures fund, one of the major investors in their round.
We try to be fast and we try to brand our sums as a fast “yes” and a fast “no”. So, if it’s a “no”, we give the reject fast, we don’t try to drag on the process. As I’ve said, we’ve looked into 4k companies over the past 4 years, probably 80% of them we’ve never met face-to-face, it was just email back and forth, and then reject. The other 20% that we’ve met face-to-face, 10% (half of it) we rejected after the first meeting. And then that 10% lies in our watch list, we make sure that they know that they’re on the watch list. We tell them “Hey, this is not the right time for our strategy but we will be in touch over the next quarters to see how we progress.” And now we have invested into 1% of the deals out of that 4k.
The fastest deal that we’ve done has taken around 2 weeks. And longest can take too long because sometimes you just have to do more custom interviews, more employee interviews. But we can be as fast as 2 weeks. And we do legal and financial DD, but even though we’re an early-stage investor it’s really like touch. So our legal firm in the US or here in Turkey does legal DD into the company and its contracts, meanwhile we are looking into the PMO and the cash flow even though there’s not much to look into anyways.
I’ve come to learn that even if the company is not a product company, it doesn’t have a product, it can damage the business. We’ve done a couple of deals where the people had really good backgrounds, they had very good domain expertise in, say, biotech, but it was a product company, they had to have a product, and they didn’t have a solving product team, so we want that problem to be fixed before we invest.
Another one would be any entrepreneur who’s deceitful or not as responsive. If they’re trying to get an asset on us as an entrepreneur, and we’re not getting them as fast as we can or as honest as we want, that’s another red flag, we’d stop to process that and not move forward with it. Because at the end this is human business, and what we invest into it’s not the company, it’s the person that is sitting across you. So if you feel like that person is not smart enough, doesn’t know well enough or is fraudulent, deceitful, then, even if this is potentially going to be a 50X or a 100X return company, I think you should stop right there. That’s one of my principles.
Definitely. Since we’ve looked into 4k deals in Southeast Europe and Turkey, there were a lot of companies that we have rejected, especially in Southeast Europe – because we are not physically present there. And then they became great success stories like FintechOS from Romania or TypingDNA from Romania – they are good examples of that. These companies that we have rejected in their seed rounds, two years pass – and we see them doing an 8 million, 10 million dollars round. I always make sure to put it on their link saying “Oh, this is one of my anti-portfolio company”. And then we have a list of our anti-portfolio companies to see whether we are good pickers, or not.
But I think having anti-portfolio companies is a good metric. It means that you had access, so you were able to generate access to those base deals, you just didn’t pick well enough. What’s worse than an anti-portfolio is not even knowing about the company, and that happens a lot. So, a lot of these investors, they would say that they are good pickers because they’ve never missed good deals, but their real reason is they weren’t able to generate those good leads at the first place, which sucks.
So, having an anti-portfolio is a good measure to show that “Hey, you know what, in a lot of markets that I’m in I have access to the best entrepreneurs, and these are the ones that I’ve invested, and these are the ones that I’ve failed to invest, but we were in touch for a while.” Anti-portfolio is a strong measure.
A company can do good, a company can do bad. With the companies that do bad, you don’t feel bad about them because you take that risk as you invest in these potential outside return companies. But there are some companies that after you invest you see a large problem that changes your decision making and you try to find in your decision making as you are doing more investments. And that happens, definitely. So, if you look into the first 20 that we did from our Fund I, and then the last 20 deals that we did from our Fund I, you can see how our decision making became more fine-tuned from learning from the mistakes that we have done. It has nothing to do with the entrepreneurs, they were great, but looking from 2020 back to 2016, now we have more of an industry focus, we have more of a stage focus, we have more of a standardized due diligence process.
So those were all learnings that come you start writing checks. That’s why one of the great advice that I’ve taken from my course at Stanford was “As you start writing checks, start with small checks because you are going to make mistakes, and you are going to learn by your mistakes, just make sure that they are going to be small mistakes.” Which is what we did: our early-on tickets were as low as 50k. We started with 50k tickets, and now, with Fund II, we are able to do 1.5 million follow-ons. That shows how we are learning in the process, and as we learn, we are able to increase our deal size.
We have one startup that does pee-strips, that’s unusual. So, you pee on a strip, you take a picture of it, it detects your Ph, your infection levels, ketone levels in your blood, water levels in your blood, etc. And then they let you track your health data.
From a business model perspective, I think the most interesting is the company called Carbon Health, they are a health-tech company. To be able to create the best clinic software the entrepreneur actually started the clinic with the funding that we raised at seed, with doctors, and operated it meanwhile building its own text tech. Then he tried to sell that text tech, it didn’t work out that well. Then he unbundled that text tech to sell pieces of it like patient communications for example. It didn’t work out that well. So, what he ended up doing is he raised massive amounts just to be able to grow the number of clinics that he has and then become the largest clinic network in the US. That was an interesting business model pivot that he went through almost every six months, which is a rather unusual story that we have.
We don’t invest into operational businesses, but I like them. Some businesses have really low technology components, they are really much more operational, and VCs in the US love them, they love to invest in them. Airbnb is a good example of that. Is Airbnb a technology company? I don’t know. Is it a great company? Sure. They raise massive rounds and a lot of people love their value offering. But what we tend to love to do is to invest in operational businesses with a really low tech tag, and how we value that tech tag is we try to understand the value that the company offers and when you take technology out of it, is the value still there? If it is still there, then maybe it’s not a technology company. And Airbnb is a good example of that. Or sometimes you look into the company’s spending plan in the form of operational and expense management and try to understand what percent of its employees are engineers. If that percentage is low, then chances are that maybe that technology is not that vital for the business, it’s just good to have.
Those companies we don’t invest from the fund, but I like them. Personally I like real estate tech and a lot of the practical real estate companies that we look into, the ones that are not product-driven and are much more operationally driven, we don’t invest into them, but I like them personally, given my background.
First of all, I think that the core value that a VC gives to its entrepreneur is the introduction, and then that’s it. A VC shouldn’t do business model discussions or strategy discussions with an entrepreneur because the entrepreneur knows way better than the VC: he or she has dedicated his or her full life to that thing. So what we do is introductions. And in the case like you said, when there are two startups that can actually form really good synergies, what we do is we talk with both. We don’t push founders to partner together, just like we don’t push VCs or startups to raise capital from certain VCs. All we do is introductions, that’s our support. We do this support the entrepreneurs on the introduction level, and then it’s the entrepreneurs’ decision to move forward with this or that.
I like to invest into businesses with no existing demand, but my guts say that there will be existing demand, those are the sexy, the exciting ones. But looking from my portfolio, I’d say, 50/50. So, the ones in the Red Ocean spaces, even if they are doing well, they are still in the Red Ocean. They try to capture existing demands. Like one of our great companies is a marketing tech company called Insider. They now are operating in over 20 countries all around the globe, they raised their Series A from Sequoia. They saw that there’s a huge demand for marketing tech enterprises, and now they try to capture that demand.
But with Blue Ocean companies – a good example of that would be StructuonSite. StructuonSite is a prop-tech business and what they try to do is they try to digitize the construction site by putting in 360° camera videos on the whole construction site, so that as they do daily capturing: a) there can be remote management, so the company that is managing that construction can remotely see what’s happening in what part of that construction; b) it’s really important for crew procurement, because a month or a few months down the line when there’s a dispute for procurement people can go back and see what was done. And then, of course, we can see mistakes: what was the plan and the actual construction, as the whole construction site is digitized. There is no existing demand for that but it will happen. And my gut says that eventually every single construction site will be fully digitized, it will fully digitize operations for more efficiency and gains.
Another good example is a company called Botanalytics. They do chatbot analytics, and we’ve invested into this company even before Facebook announced its chatbot platform. Chatbots were huge in China, and we believe that the western world will also get its chatbot adaption, and as there’s going to be the chatbot adaption, the enterprise companies are going to need some analytics to better in peace their own chatbots. So our guts said that the demand will be, then we invested into the company, it’s been four years, and this demand still isn’t there, so we may be wrong, I don’t know. But it’s much more exciting to invest into businesses like that.
Profit and revenue are different. Revenue – no, except for all the biotech companies we invested (some of the biotech companies might not have any revenue, and they would still get acquired for a couple of million), but putting biotech aside, in every company we invest in we expect the revenue.
Profit is a different question. When you come to profit, some companies that we invest in are impactful entrepreneurs. Although they have a business model, they generate revenue, their priority is not profit, their priority is to maximize their impact. And we have invested into businesses like that, too. Like WholeSurplus does food waste management, and their main KPI is how much food they have actually recovered from being wasted, not the profit, not the revenue. But as they do that, they have to have a business model to be able to scale that impact. Or Eureka is a waste management SaaS company. Sure, they’re SaaS, they generate revenue, but we have to understand what percent of the waste management are we digitizing and how are we decreasing the carbon footprint into the environment. So, all of those are important.
So, do we invest into businesses that will never generate revenue? Except for biotech, no, we don’t. Are we going to invest into businesses that will never generate profit? Yes, definitely.
I think what’s better than books or movies, or blogs are podcasts. So, I’ve learned a ton listening to podcasts over the past 7–8 years. And from podcasts, it’s always great to start horizontal and then go vertical. So, when you start horizontal, you try to listen to things like This Week in Startups from Jason Calacanis or The Pitch where you listen to startup pitches continuously – that will educate you. But then, as you are going to go vertical and you want to learn about VC, you are going to listen to The Twenty Minute VC, or if you want to learn about certain industries, I think Andreessen Horowitz podcast is the best on that. So, you can listen to one hour on how the drug discovery process is worked out and what technology lies in that drug discovery. To learn more about industries vertically I’d suggest Andreessen Horowitz.
As for books, I try to put all the books that I’ve read on my Goodreads account. There’s a good sum of it there. Out of the books that really inspired me here was a book called “Seven Powers: The Foundations of Business Strategy” that talks about seven business models that make you more defensible and how large companies go from one defensibility mode into another one, that was a really good one. Apart from that, when I became an entrepreneur the “How to start a startup” by Sam Altman was doing Peter Thiel’s course in Stanford, was a big hit, so for any young person, let’s call them wantrepreneur, who want to be an entrepreneur sometime in the future, I suggest them aim to that course that’s called “How to start a startup” and watch the whole thing. It gives you really great 101 information.
And for different vertical books, as I’ve said, I have all of them on my Goodreads, and if you’re interested in marketplaces, I think a great book would be “Platform scale”, and if you like returning revenue businesses, then a great book is called “The automatic customer” – again, on my Goodreads.
If we take 50 years, I wasn’t around, of course, I’d say stuff like the Internet is the big solution. But for the time that I was around – let’s take for the past 20 years, so we’d have more values. I think that the most breakthrough was a mobile: having everyone connected is huge. The second is Cloud – getting that incremental cost of digitizing anything to almost zero is huge, so we can digitize the whole world much more efficiently. From the old world perspective, I think what happened over the past hundred years is the cost of human communication got down to zero which created this whole efficiency that we talk about. So now that we have communication at a zero cost, the next we should be having energy at a zero cost. And as we have communication and energy at a zero cost, then we are going to have transportation at a zero cost as well. And that’s when we as humans can actually start manufacturing stuff at almost zero cost of it all.
In the short-term, of course, it’s a threat. In the long-term, it gives great opportunities. In the short-term – liquidity squeeze, less VC funding, much tougher to raise funds, much tougher for technology businesses to grow and continue to grow fast because the enterprise values are going to come down. So, companies are going to stop investing in the future and start optimizing for the short-term, which is always bad for technology businesses.
But in the long run, since we’re investing into founders with really low-cost structures, our founders here in Central-East Europe and Turkey, they can get to break really fast, they can have an unlimited run really fast. So this whole capital around startups – it was a benefit to them but it was more beneficial to their competitors. So I think in the long run a lot of our portfolio’s competitors in the US or Western Europe would have a though time fundraising, and fundraising was their main advantage as opposed to our local entrepreneurs. So, we are going to have an easier time surviving, and as we survive, as the markets come back to normal in the long-term, some of our companies will be standing alone in their markets. So in the short-term, it creates a problem and drastic measures should be taken, but in the long-term, it is going to be a benefit for our entrepreneurs.
And the best way to look at it is: it’s not a finite game, this is an infinite game. In finite games you try to win. In infinite games you just try to be able to play more, to stay in the game, to survive. And that’s what we’re advising our entrepreneurs: this is an infinite game, and your goal should just to be able to stay in the market until things go back to normal, and then you are just going to be the last ones standing.
I like where I’m standing right now. I mean, I became an investor five years ago, I became a VC four years ago, and now, this year, we’re doing our Second Fund. I like where I’m standing. Am I aspired to do more? Sure. What I want to do is to increase my impact in the region. That’s why we are trying to grow horizontally, increase our geography. Hopefully, with Fund III, we are going to be able to cover more geographies. But we are also going down vertically. We’re increasing our portfolio support measures, now we have these experts in residence who are going support our portfolio. And we’re also increasing the ticket sizes that we invest into companies which would help us become potentially in the future cheap in two rounds: in series B or series C.
So I like where I’m standing, but I have to continue to grow to make sure that I continue to like where I’m standing.