Maciej Sadowski (StarFinder Capital Fund): Before you meet an investor make three evenings long sessions of understanding your market. It is simple and requires only Google. Sometimes it costs $15 but usually, it is $0

By Roman Bdaitsiiev

18 Jan, 2021

Maciej Sadowski is Venture Partner at StarFinder Capital Fund
Maciej Sadowski is Venture Partner at StarFinder Capital Fund

Maciej Sadowski is co-founder and CEO of the Startup Hub Poland Foundation (2012), which advocates innovative Central Eastern European high-tech talents in starting up a global venture in Poland. He is Activist of the high-tech startup industry supporting talents in finding investment and proliferating their solutions. Maciej is IP transfer specialist and R&D commercialization panel expert. In SHP Maciej searches for best early-stagers from all hard-tech and IP-based sectors. For best teams the Foundation prepared a soft landing program, non-equ grants to €50k and exclusive VC/industry bootcamps.

In 2013 Maciej Sadowski worked as a due diligence analyst in a Israeli-Polish VC, Giza Polish Ventures and later as an investment manager and Managing Partner in two seed-VC ([email protected], StarFinder VC). Maciej worked on ~60 investment processes, invested in 14 hard tech startups. 13 out of 14 attracted next round of financing, from which 3 brought to Poland additional international investment capital for rounds A and 2 companies IPOed on the Warsaw Stock Exchange in 2017. From that time Maciej plays the role of a Venture Partner in StarFinder with an interest to hard-tech early stage solutions from ICT, bio/med-tech, energy and chemistry.

Maciek holds two MA Degrees of the University of Warsaw (Philosophy, Political Sciences/European Studies). He is Scholar exhibitioner at the Universität Salzburg. In years 2009-15 – a PhD applicant in political philosophy (human dignity concepts in contemporary social life). Maciej is Academic teacher i.e. at the University of Warsaw where he lectured logic, analytic philosophy, Eastern-Europe regional policy.

Maciej Sadowski is expert of the National Center for Research and Development, chairman of the Committee on New Technologies and Innovations to the Polish Chamber of Commerce, member of the National Development Council to the President of Poland (2015-20). In 2015 he was listed among NewEurope100 international high-tech leaders and in 2019 among top 30 Polish startup community pillars. Maciek have been hosted as a keynote speaker in startup and VC conferences i.e. in Atlanta (GeoriaTech), Budapest (BrainBar), Gdańsk (Infoshare), Rome (Blast), London, Reimes, Kiev, Tbilisi, Monako, Riga, Berlin and LA.

How it all started? How did you decide to enter the venture investment business?

My path was very unusual, but this very young market of venture capital is full of unusual paths. In other countries with 300 years of free-market history like the US or Great Britain, it’s more like a normal career, whereas in Poland we did not have venture capitalism and venture capital industry during the socialistic time. Later in the early nineties, we didn’t have it either. We were rather concentrated on private equity markets. There haven’t been many specialists at the beginning of the 21st century in Poland who could train or teach young people how to deal with high-tech early-stage ventures.

I met my mentor, Marek Borzestowski. He is a founder of Wirtualna Polska, which is a company like Yahoo. They are very popular in Poland and it is still the number one or two internet portal. He created this company and successfully exited it through a venture capital deal. In February 2014 the Polish Grupa o2” together with private equity fund Innova Capital have completed the acquisition of Wirtualna Polska. The combined companies started to operate on the market under the name “Wirtualna Polska”. The purchase of 100 percent of the Wirtualna Polska shares from a subsidiary of Orange Polska SA (formerly TP SA) by the Polish o2 Group completed the formal process of forming a new Wirtualna Polska Group. After that, he became a wealthy individual and he started to support early-stage startups as a VC.

I met him when I was studying philosophy at the University of Warsaw. He was looking for some young cat, a young fellow who can help him with his endeavors. And he attracted me to this new dimension of business and activity, which is support for very high-tech driven and very intellectual property relevant companies from our region. He actually opened my eyes that in Poland you can do lots of value not by investing in real estate or arts, but rather in companies that are small, fragile, weak, but in years they can become absolutely strong and very valuable.

Thanks to his leadership and coordination I found out venture capital industry interesting. We have started several projects together. One of them was Startup Hub Poland, which is an intellectual platform for early-stage inventors to find first financing, first mentoring support, maybe some grant opportunities and grow their companies with a significant element of scalability and a prospect or perspective to become big and expand to other regions. We also started some incubators for startups. Later we also joined our forces in running a very small seed or pre-seed venture capital fund. Actually, it is a seed fund, if you prefer; a fund that provides tickets up to €0.25 million.

As you could see, I started my VC courier nine years ago, in 2012. I wouldn’t say that the curve is impressive. I would rather find myself more like an assistant or a servant of this community because I’m not an inventor myself. I am not that smart or equipped with some high-tech skills. If I want to participate in this new economic or even social movements to build the economy based on startups, not on big factories and traditional businesses, the only way for me is through venture support, not through inventing or creating my own startups. I’ve never looked at it as a career because, for me, the real career is to be made by engineers, inventors and developers. And I’m just a supporter, a middle man, a servant or facilitator, not a creator.

I like the concept of servant entrepreneurship when an entrepreneur is a servant and not a shark or a money-driven person. Of course, money in a certain way is a goal of every person who is active commercially. But on the other hand, you can earn money from so many other conservative safe domains and industries that you need to have a certain amount of vision, be a dreamer, or have a genuine fan of new technologies. I think it is also important for people who are philosophers to participate in this movement because we can make new inventions and new high-tech solutions a little bit more humanistic and a little bit more oriented in inclusion. We can help, of course, on a small scale, but we can help in building a better society. It was always my dream because my philosophy teachers always try to help me in understanding there is another perspective than just being rich.

What industries are you interested in?

Right now, I’m in a smooth process of changing this view and trying to criticize and adjust it, but for the last eight years my view was that the significance of your work can be observed if you invest, or help startups based on intellectual property and not only on great marketing or use case, sales strategy or business model. Everybody says that the business model is a king and you have to know how to earn money. But I believe that you need to know how to develop a leading top-notch technological solution that works. And then you do not need to be Alpha and Omega in sales and market expansion. You can license your technology to a bigger fish, a bigger company, a giant player, or even sell your company to a strategic industrial partner. And this partner should be responsible for having great markets, have understanding, salesforce and access to customers.

I like startups that are based on very impressive and difficult to copy intellectual property, exclusive know-how and intervention in terms of technical and scientific research. My main interest lies in medtech, biotech, agritech new materials, physics and mathematics. But it’s not just simple ICT in the sense that we will build a new mobile application that does something by math. I think about algorithms and very sophisticated detailed engineering processes that can be utilized in a certain app, service, or software. I was born in 1984 and I am 36 years old. Software alone does not impress me today. What really impresses me is good software with an unbelievably accurate and sophisticated way to do something. I am talking about deep tech and top-notch technologies.

I consider myself a citizen of Central Eastern Europe. I am located in Warsaw, but intellectually I live somewhere between Berlin and Almaty, Helsinki and Athens and I cannot ignore the fact that my region is strong in some areas and weak in others. Areas that I have defined for myself are agritech, medtech, nanotechnologies and new materials because I know that we have great universities that can provide our markets with beautiful minds and souls who are experts in these fields. I would never focus my attention on fintech. For example, Great Britain is a country of great trade. In Poland we have trademarks like Krakow, Warsaw, Gdansk, Kyiv, or Tallin, but we are not as good traders as British people. We are great engineers. And I’m looking for engineering solutions.

Can you name industries you really like, yet will never invest into?

There is a very good definition of the niches that I like and appreciate but probably will hold myself from investing in. These are very narrow niches of niches where you can invest only if you are ignorant and just don’t care about due diligence. And you are fine with that. You can play with your money. You are happy ignorant, or you are a deep insider. And this is, of course, the way I do like to go.

Imagine we are talking about petroleum and spectral chemistry. I am not good at it and my understanding of this industry is very television-based. Although, I believe that we need to work on new technologies in the field of petroleum and fossil fuels, because of the lack of understanding of even basic processes I wouldn’t invest. I would only invest if I would have a venture partner with solid professional experience from this industry. If I have this condition met I would invest.

Every very detailed and narrowly defined niche should not be in my particular interest because of the lack of understanding. In my opinion, you should at least have a basic plus knowledge of a field class. You need to have partners who will give you that and satisfy this lack of knowledge in your investments. But if you want me to answer more, I would say all of these marketing-driven things. If there are 100 or 1000 teams on this planet who can easily copy your solution or product, it’s not a way for your investment, because you have to expect that somebody will do it smarter, faster, or with greater money.

If I was a Silicon Valley dweller, I could think from a different perspective: who can bring more ammunition to the battleground? And I would probably be the one who can bring the most ammunition because I can fundraise $100 million for a startup round. In Poland I can raise $5 million with huge difficulties. This is why I would never fight with startups like Alibaba. I’m not talking brands, I’m talking categories. Alibaba, Uber, Airbnb, Tinder and eBay. These topics are not interesting to me.

What geography of companies are you interested in?

I am happy that you want to cover this topic. I am a deep believer in Central Eastern Europe. This region is totally neglected by most venture capital firms from all over the world. They do not even recognize that there is a huge chance in this region. They know Berlin, they know Tel Aviv and they know London in Europe, but they’ve never heard about great interventions from this belt of countries between Germany and Russia, or Germany and the Ural Mountains.

Everything that is reasonably close to our region or my country, even republics like Azerbaijan, Armenia, Georgia, Turkey, Finland, Serbia, Slovenia and Austria are interesting for me, but today I can have the comfort to neglect a little bit the geography lesson. If somebody is coming from a great university in Egypt, Ethiopia, Scotland, or Kazakhstan, it’s still a 3-3.5 hours flight. When looking at a map I see not countries, but cities because they are more interesting for me. I would go to Krakow for the internet of things solutions because it’s a great hub for IoT. I would go to Dnipro or Bucharest for cybersecurity because these cities are very well related to AI and cybersecurity. I would go to Tallinn or Riga for energy efficiency solutions. Countries are so diverse. Ukraine is the second biggest country in Europe. It’s hard to reduce Ukraine to one or two niches because Kyiv is different than Lviv which is different than Odesa. And Odesa is different than Kharkiv or Donetsk. So, I’m looking at cities. This is my geographical lesson right now. I don’t look at countries.

I know the rule which I learned in the US from my colleagues and mentors. If you want to be a VC manager you can invest only in startups that you can visit flying or driving your car in the early morning, spending half a day with a team and then return for dinner or supper back home. That should be your range. And I think it was a very good idea 10 years ago when we did not have this habit of global flexibility in traveling. Right now, I don’t need to meet in person, it is switching.

I can even prove my case in numbers. For the last four-five years there is a new movement in Silicon Valley saying not to invest only in a white male that live in Silicon Valley. You can invest also in founders who are of different gender, skin, color, backgrounds and are not necessarily from Silicon Valley. You can look at Toronto, Atlanta, Houston, or even Rio de Janeiro or Paris. Now they are extending our research and geographical scope of investments.

On the other hand, I have something more to say. After eight-nine years of being in this industry and making lots of mistakes, I have a feeling that Poland between other Central-Eastern European countries has probably the best environment for startups right now. Because we joined European Union 15-16 years ago, we’ve got a massive inflow of EU standards and money. We have a brand new infrastructure and legal framework that is common to Spain, Sweden and Italy. We also have very good connections to other markets and we are not a small market ourselves. Maybe Poland is not the biggest market in CEE, but you can test several early-stage hypotheses here.

I believe that venture capital funds could attract people from other countries to run their business and make an R&D center in Poland. I am a genuine friend of countries like Ukraine, Hungary, Estonia, or Belarus. But even if I was Italian, I could come to the same conclusion that it’s good to set up your company or R&D center in Poland, of course, for some time. I do not expect startupers to retire in Poland. We are global travelers. You can be one day in England, the next day in China and then you are in Amirates. But at least for the seed round, for proof of concept moment it’s good to come to Poland. When I see a great startup, I usually do everything to convince them to come closer. Again, my geographical field is very much compliant with my idea that is good for a startup to come for a certain time to Poland and to check it as a development market.

At what stage of the company’s development are you investing?

This is a tricky question. I think it’s very hard to exit. Even if I am willing to do it during pay rounds it’s a little bit too early and the company needs so much money. If there was €2 million on the table, it’s really hard to take them as your exit. Usually, the dynamics of negotiation discussion says: “Okay, let’s use this money for the good stake of the company, not to buy out the seed investors”. The seed investor needs to wait. Sometimes the IPO on the stock exchange gives you the opportunity to exit. Sometimes investors want to check out because the technology is so complicated that stock investors cannot make a due diligence check on the technology. They need to observe the first investors. If they see that the seed investor is running away after IPO, they would say it’s not a good deal. But if the investor is still willing to wait and they will observe the growth of the company, they would be more eager to invest.

Often seed investors are being frozen for exiting even IPO companies for one-two years. Usually, it’s a B round when you can exit or when the strategical partner, strategical purchaser, or buyer will appear before B rounds. In projects like e-commerce, you can be certain that you will need B rounds, but in high-tech projects like those that I’m interested in, you can assume that there will never be B round because after A round your company should be ready to go to Procter & Gamble, Nokia, Samsung or Microsoft with technology worth $1-100 million and try to sell it. You don’t want to develop it further and be a standalone company. You want to sell it to giants for commercial usage.

What was the most unusual startup you ever supported?

The most unusual one was HiProMine. I didn’t understand this startup at the beginning and I haven’t been very optimistic. I did not understand why it matters. I met two great inventors from Poland who told me they want to build a new production line for organic protein feed for animals made from insects. At first, I didn’t understand why did they come to me. The reason was that this is the new big trend for the western world. Western Europe, North America and Australia are regions where people do not eat insects. We have cows, pigs and fish. But insects require 20 times less water than a pig. If you want to have one gram of protein from a cow you need to add some amount of water, and if you want to have one gram of protein from insects you need 20 times less water. You need to have 16 times less energy and land for growing these creatures.

This investment came in 2015 and right now I see many projects all around the world. People are fighting to build the best technology to make protein feed accessible in a very affordable way with little energy, bio waste, land and water requirements. HiProMine is something that still blows my mind and I’m happy to participate in that investment because it also has a tremendous social impact. Imagine how much land we can reforest again if we’ll get rid of cow or pig production. I am not proposing to exterminate cows and pigs to decrease the scope of how we explore the planet with our extensive food production. And from ethical, business and environmental reasons a protein from insects is the next big thing in the future century for our planet and for other planets too. We will not be able to have cows in space but we will be able to have insects on Mars or on the spaceship that will be flying from Earth to Mars for a few months.

What are the requirements for startups as an investor?

There will be no surprises here. I can tell you very briefly. First of all, a very excellent team with complementary competencies. A great team is not three engineers, but two engineers, one fundraiser, one financial person and one intellectual property person, a team with a good composition of skills and experience. Of course, you cannot wait all your life to meet an excellent team that has everything. None of the team can have everything. Every team will have some deficits and you need to understand your strengths as a broker or investor and try to add some competencies to the team to decrease the deficits. So, first it needs to be a great nicely composed team, that likes to work together. There cannot be conflicts inside of the team. The conflict may not devastate the corporation, but the conflict in a startup will devastate it. You need to make psychological due diligence or network due diligence. If the team likes each other they can work together and they respect each other.

The second thing is intellectual property. The startup needs to show and prove they have a significant entry barrier to keep its competitors away from making a similar solution. It’s either a patent, a patent-pending, a great invention, or know-how that is very limited only for top-notch insiders of the field. You should not invest in companies that are easy to copy. The barrier of entry is definitely another element.

And the third element is, you need to clarify there is a corporate or at least a market need for such a solution. For example, if you develop today a great way to transform Jupiter’s atmosphere into oxygen, it would be a great solution and it’s really feasible. But we should not invest in it because it’s too early. This technology will be necessary for the second part of the 21st century. Right now, it will be a waste of money. Today you might consider technology that terraforming Mars and it is still very risky because today we are quite far from Mars and its terraforming. Even if the technology and the team are great, but the invention is too early and it’s just too early for the markets. Neither Samsung, Erickson, Google, Microsoft, Tesla, or other giants, nobody will buy from you. You probably should not invest. You should invest in something that will have a significant value in the next 7-10 years, but not in the next 70 years.

What qualities you are looking for in teams?

Very often I get pitch decks from startups that are run by very smart 30 years old managers from economic schools. And they say: «We are not inventors, but we can hire inventors to our team later on in next year». For me, it’s a no-go. You need to have an inventor already on board. I don’t want to invest only in five brilliant Economic graduates. Economic graduates only are too little. If there is one Economic graduate, a brilliant manager and a few engineers then it’s okay. There is no startup without CTO.

Investors prefer to work with teams. But have you ever supported a one-person startup or family business?

You always need a team. A one-person startup is too risky. If I found a startup with a solo entrepreneur, I will spend half a year with the founder before I invest to find partners for him or her and it’s still risky. Life is difficult. People have depression, problems, family issues that need their attention. And if all of your money needs to rely on one person it’s too risky. You always need to have a balance, at least two very reliable founders. Three founders in my opinion are good. This is math and I’m a student here.

I think from the button of my heart, that investing in family businesses is tricky because there might be some psychological or social issues that are dangerous for the company. For example, founders are going out of the company. They close the office and are going back home and there they have quarrels, ambitions, some issues with hierarchy. It’s very hard to find a good team that is based on a family.

Families on one hand are a source of success because they love each other. But I used to believe that you should not invest in family businesses because it’s very difficult and too risky.

On the other hand, I am also learning and changing my views over time. I see some companies (about 3%) that I am interested in our region, in Poland or Ukraine,  are family businesses and they are doing quite well. So, in some cases my general doctrine towards family businesses is mistaken because some families are really great fighters not between each other, but with the competitors. And sometimes my doctrine is not working because I see those startups, they are growing and they are delivering beautiful solutions.

How big is a check you usually issue?

Our sweet spot is a zł1 million, which is €230,000. Sometimes it happens that the round is a little bit bigger – around €0.5 million. Maybe not super often but quite some time there is a chance to make a smaller investment, like €100,000 only because the technology is more code-based and requires less money than for example, laboratory experiments. So, sometimes you can go for a seed round in Poland with only €100,000, but the sweet spot is €0.25 million.

What percentage of ownership of a company is fair to take for investment?

I will dissatisfy you with my answer because it very much depends. Usually, when you open the book for venture capital seed investments you will see that it is around 20%. Sometimes it’s 15%, sometimes 25-30%. You need to make a very good assessment with your future partners, which are startup founders, to understand not the real value of the company, because it’s maybe not stupid, but a little bit premature to talk about the value of a company. You have rather a value of individuals or early research, but not the value of the company. This is why my perspective is not to make a very good validation, but evaluation of a startup’s value.

I rather think differently. What is the acceptable value for the next round, let’s say A round, for the investor to invest in this startup and steel have more than 65% or at least 60% of the ownership of the company lies in the hands of founders? It is reversed math. It’s not from button to the top, but from the top to button.

When I want to propose an evaluation for a seed round, I am trying to wear the shoes of an A round investor. What would he say? For a strategical acquirer it wouldn’t be that important whether founders have 50%, 40%, or 30% remaining. But for A round investor the value of founders is bigger than the value of the company. In my opinion, the startup on A round is useless if you get rid of the motivation of your founders. They need to be motivated, they need “to die for the company”. They should be absolutely devoted to the startup and you cannot demotivate them.

So, if a seed investor will take 35% and then A round investor – another 20%, diluting a little bit seed round, founders will still have only half of the company. Some of them would think they’ve made a mistake of their life. Their wings are broken. They don’t even want to proceed with this technology and their life is shit. You cannot make your founders feel they were drained too early. It’s better for you as a venture investor to use ESOP – employee stock option program, or Earn-Out mechanisms to change the equity position of founders after significant and important milestone is being achieved in the future.

I think that the seed investor position in a startup is purely technical. You can see an investment agreement with 20%, 25%, or 15% of shares, but it’s still technical. It does not mean too much because A round investor will come and he will make a revolution. He might force you to dilute your shares as a seed investor. And you will do it. Why? Because you want him to invest. And for this you can accept a smaller cap table position.

There should be always a mechanism that motivates founders to proceed with the technology. You haven’t asked me this question, but I can tell you that the biggest problem on the market is the motivation of founders after two, three, four years of working on the project because they are growing, they are getting older and they do not see the return on investment. A venture capital investor is a person who can wait five-six years. And he or she is prepared for waiting. Founders very often live in a fairy tale with a vision that they should be rich eventually. One year comes, the second year comes, the third year comes and they are still not rich. They are still humble founders and humble scientists. Their motivation goes down and you need to protect the motivation of your founders. Without seed investors the company will survive, but without a founder, CEO and especially CTO the company will not fly.

What multiplication of your investment do you expect on exit?

It’s a great question and I have a very good answer for you. I counted it for myself. If you want to invest in 15 companies during your fund lifespan and build a portfolio of 15 companies, you need to expect every company to be able to give you a 15-30 times return for your investment. And two companies will bring you 5X. That is still a lot, but the remaining 12 companies will bring you zero. It will be just cashing out. So, if you want to return your investors the money they invested plus hurdle rate, which is usually something between 9% and 11% (the cost of money in time) and then bring them another 1X, you need to expect from every company to be able in a very positive, very convenient scenario to bring you 25-30X. This is venture capitalism.

You cannot invest in a newspaper store. It will never scale that big, but nanotechnology, cybersecurity, deep data, cloud computing, or agritech can bring you 30X. And there is one company that I use as a benchmark very often. It is Ivona software from Poland. It was a great company and five or four years ago they made an exit to Amazon for around $100 million. And this is a great example of how you can invest $1,000,000 and get 30 times return on investment if you are a seed investor.

The whole fund should return twice. It’s good if you return 100-200%. 2-3X is very good and you are a very successful venture capital manager if you return twice or three times the money for the whole fund. And again, we are speaking about Poland, Ukraine, or the Czech Republic. If you do that, you are a super good manager and superstar. To achieve a two or three times return on investment on the whole fund for the whole portfolio you need to select startups that possibly can give you up to 30X of ROI. So, if something is giving you less than 10X, for example, you’ve got an email from a startup and there is no way this startup can give you 5-7X you should never invest. And your predominant scope should be oriented to startups that possibly can bring you 30X of ROI. Of course, there is a 95% chance that it will become bankrupt.

We are a young group of venture capital firms. We made some indirect exits when we exit with our shares in exchange for shares in a buying company. We are in the process of a few exits, but nothing really huge to report for now. Maybe in half a year I can tell you a bit more.

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 contract and check to sign?

Usually, the due diligence starts with technology evaluation. You should hire experts who are far better than you in understanding whether the technology is feasible. And that takes up to two months to make a proper technology due diligence. Of course, it’s not that you can only use January and February for technological due diligence. If the first hypothesis is being proven positively after three-four weeks and you have symptoms, not a certainty, that the whole technological due diligence will go fine, then after three weeks you can start a business and intellectual property due diligence. That is very much related to technological and personal due diligence: conflicts, ego, ambitions, smoothness of relation between founders and the vibration that the team has.

After that I always recommend making a legal due-diligence or regulatory due diligence. And I will give you an example of why. Once I encountered a great technology in the field of nanomaterials – active silver nanoparticles. I like this technology a lot, but when we made regulatory due diligence, we understood that European Union in about one or one and a half year will prohibit this market because nanosilver can be dangerous for customers and European Union created a law that will highly decrease the chances for the market growth or application of the technology. It was for food packages. The founders claim that our food packs, containers, or refrigerators should have a nanolayer of silver because it can kill lots of bacteria and microbes. And it may keep your food fresh not for one week but for three weeks, which I thought was great. I was ready to invest, but then we made an initial regulatory check and understood that there is a high chance advanced markets in America and Europe will disqualify this kind of technology because of regulations. So, we can only expand into South America, Arab States, or China. We thought that the risk is too big. You need to have certainty or possibility that your technology can be introduced to the market when it’s ready without the hazard of regulations.

People very often neglect that, but if you want to make venture investments you should read the situation in Brussels or wherever you live. You need to understand what is possible to expect in the next two years in respect of your technology accessibility. If you know that it’s going to be banned, you should not invest in that technology.

How many projects do you consider per year?

If you want to make 10 investments in one year, you should have around 5,000 leads or proposals in your pipeline. You can make a first eye assessment of 300 projects out of 5,000 proposals. From these 300 projects you can proceed with 50 projects with your due diligence. And from them you will be able to invest in 10 startups that you like most of all and are enthusiastic about.

Venture capital investment is a game of big numbers. If after one year of investment you will have a pipeline of 300 projects the math is against you. The math says you will not be successful because it’s very hard to shoot a star from a population of 300. It’s even difficult to hit the star from 1,000 or 2,000 applications. You need to have around 5,000 projects that you will have a look at.

How startup teams usually find you? Do you wait for inflow or scout for interesting ideas and perspective teams?

The field of the venture is not a place for single walls. You have to be surrounded by a good network of organizations and you need to be sure that every stakeholder in this process of looking for, identifying and selecting startups is profitable for each of your early-stage partners. Of course, you need to have a very good understanding of incubators, technology transfer offices at universities, startup contests, startup accelerators that you trust, cooperate and have good communication with. We all have limited resources and we cannot have the luxury to work with everybody.

At first, you should decide with whom you are working. Let’s say you have 20 favorite brokers and physical scouts and you really like, trust and follow them. You need to have around 15 R&D high-tech solutions and commercialization centers from your favorite universities, 10 incubators that you appreciate, 5 accelerators that you are particularly bound to. And that gives you a pyramid of steps you can afford.

If you find a good startup you do not need to invest immediately. You can build friendly relations with them and say: «Guys, first you have to go to this incubator and come back in half a year. I will observe you. I will help you to get into it, develop your technology and operations and verify your technological hypothesis. Then we will go together to the startup contest and I will also help you with this contest». So, you are looking for cheap ways to minimalize your risk in selecting startups, even if it costs time. Of course, you have a risk that some greater investor will take it from you, will come and bring a better offer for a startup. This is your risk, but still, you need to do that.

Apart from that, of course, conferences are necessary. You have to go to events and have a good eye on what is going on in trends that you are particularly positive and optimistic about. But I’m ending up this answer with one category of leads, which are your personal contacts. If you are well recognized on the market and have some reputation, I don’t mean that you are the number one in your market, but you have a fair number of good contacts of people like you, this is the source of best startups because people understand your work and what you are interested in. They proactively bring you some leads. And if a lead is recommended by your close professional friends and peers, it usually gets three times more attention, because the friend is also interested in success fee, finder’s fee, or in joining the team or maybe the advisory of the team. He will not spoil the contact with you by bringing a shit. They will bring you some good congruent projects because they know that if they will bring you 10 very bad startups, you will not look at their emails or hang out for a coffee hour anymore.

People who have built trust with you will do a selection for you and they will know what you might like. Of course, not every startup from this source would be good for you, but the chances that you will find a good one is far higher comparing to startups that enlighten you with a pitch at the conference. I attended lots of them and the problem is that if you have a good actor, playboy, or hustler, he or she will blow up your mind. A three-minute presentation will be like a discovery, but many startups are just overpromising. They are saying something that is not true and not feasible, but they have the talent in telling stories. You might think this is a great startup you need to invest in next month and dig deeper into it. And sometimes you shouldn’t because you don’t want just to invest in good actors. Being a good actor is not bad, but you can be fooled very well at conferences by falling in love with a solution that is only based on actual acting skills.

What conferences do you find really useful?

Of course, you have to attend startup events, but if you build a venture capital fund or an accelerator, that takes equity for its service, you should not rely only on conferences because there after a few drinks you can fall in love with a solution that does not deserve your appreciation. You can be fooled by a very good acting performance, not by technology.

If you have 1,000 hours a year to scout startups, you should invest 20 or 30 hours for best conferences, but you should never forget to call your best brokers and talk to your best colleagues from corporation and incubator managers because they are often a better source of great solutions that conferences only. Conferences are a necessary element, but I wouldn’t fetish them.

I am rather a pre-seed broker than an investor alone because my investment activities are not the only thing I’m doing. Actually, I am very much involved in training startups and building ventures. I am a pre-investment venture builder.

Startup Hub Poland organizes startup conferences for which we invite only very selected startups that we find absolutely great or have the greatest potential. Also, I am visiting events that are organized by our colleagues from the industry. Every year I’m selecting the 10 best conferences that I definitely should show up on, but I am not a conference pilgrim. For example, I like Infoshare and Web Summit in Poland, Lviv IT Arena in Ukraine, VivaTech in France and Slash in Finland.

They are very good, but I also like to attend niche conferences, organized by accelerators and that are not very popular, like demo days of accelerators. This is a good source for me because demo day events celebrate outcomes of three or four months of acceleration program where you can see already preselected startups and some smart people. Accelerators’ management selected great startups and saves your time. They made the job for you.

What are your red flags?

It does not happen a lot. Sometimes there are situations when you see that things are not going well and this is a materialization of risk that you assumed from the beginning. For example, I am not surprised when guys are coming back to me after some very important experiments in the laboratory with bad news – it’s not working. They thought this substance will cure cancer, but after in vivo and in vitro experiments results are close to placebo. Of course, it’s not a red flag. Probably it’s the end of the company, sometimes not, but maybe this is the end of the project inside of the company and very possibly it is money lost. I wouldn’t say that somebody made a mistake. Verifying the hypothesis at a cheap cost is the core of this business. You do not spend billion dollars on hypothesis verification, only €200,000. I would never be disappointed, rather will even invite the team to make another startup and maybe invest again. The fact that somebody is negative with a technological hypothesis is fine for me.

The red flag would be if after the investment or during the investment you prove that the promise made by a startup was false. They knew it’s not going to work that way, but they are better than you in understanding the difficulty and complex process. And they cheated on you. For example, they said their battery will work, they know it for sure. They checked it in a laboratory with their researchers and they know that their battery is working six hours longer than the standard battery. And it can be easily recycled. And you understand through your due diligence that they made a false promise because they had all the necessary information to know that it is impossible or too early to say.

Sometimes people say they have great talks with a big corporation. And unfortunately for them, these guys from the corporation are not your best friends, but you can meet them. And after one month you understand that they are not very far in these negotiations or with technology presentation. Of course, there has been a meeting, they’ve got the feedback, but honestly the corporation is not super enlightened or satisfied with that. This is why very often investors require a letter of intent signed by a corporation. And when you have it in your hand, you call this corporation trying to understand if it is just the best friend from high school who is a director in this corporation who gave them the signature. Letter of intent does not say much. It’s not a contract. It just is a signal that there is an interest. Sometimes you can get this letter of intent because they like you, or there is a friend on the management board of a corporation who just can give you that letter. And it does not mean that they will invest. It’s just the paper.

You also need to check the company’s background. There might be a red flag if there is a problem with reporting and the startup is blocking or ignoring your request for reporting. This is also a very bad sign if you want to better understand what is going on here and you cannot get information. You ask some basic questions and they don’t answer your email very fast and it happens constantly, the startup keeps ignoring you.

The next red flag that I am very much aware of is when two co-founders are fighting with each other like one is saying a sentence and another one interrupts, saying something different and attacks you or his/her partner. If you see this kind of symptom, you immediately light a red light for yourself. And this is a problem because you cannot say to these guys: «I’m sorry, can we stop a meeting for a second? I see that you are fighting all the time. I see that you are not in a good mood. It’s not good. You even do not respect each other». You cannot say that because these guys are not stupid. You will hear they are best friends and it happens just today. And they will know they need to pretend in front of you. They are both smart. For some time, for three months or half a year they will pretend they are best friends. They will even take pictures on Instagram from a beer garden drinking together. But only because you warned them that you don’t want to see conflicts inside of the team does not solve the conflict in the team. It is just makeup, perfume, but it will not change the situation. It can make an illusion for weeks or months, but the genetics of the conflict is still there. That would be my next and probably the last red flag for now.

What are the most common areas of weakness in startups?

I prefer to talk about mistakes. Because weaknesses you can very much understand from what we have spoken before. A team that is not congruent and not well composed, things like that.

Let’s speak about mistakes. For example, you get $1 million on your bank account as a startup company. It’s a lot of money. A very common mistake is that you actually forget that you are a startup and you still need to work humbly and on a low budget. The team is buying very expensive computers not because they are necessary for genome analysis, but because they are fancy. They are buying super-strong computers for plenty of money ignoring the fact it’s not actually necessary to make another milestone of the technology.

Another mistake is when startup pays a lot for PR to show up at most impressive conferences because their ego makes them being present at every conference and they can spend $10,000 to show up at a conference where there is no place for them right now. They should not go to the conference. They are not ready to present any deliverables, but they have 1 million on their bank accountant. And you cannot say this is fraud and it is stupid. You cannot say that they are stealing money from their own company because they will have an answer. They will say you are not an expert in this field. And they definitely need to show up at this particular conference, because Nokia Networks and Motorola will be present at it. Founders will find an excuse for why they should go to this conference and you cannot interfere too much into this startup. You already decided to invest in them. You should give them flexibility and autonomy to decide whether they want to go to the conference. And you are torn because on one hand, you don’t want to be a CEO of the company and interfere all the time, but on the other hand, you don’t like that they are spending more time in television, news and in the media with journalists, then with laboratory and team. They are not building an engineering team, but they are playing playboys right now. Everything is about proportion and it is not good.

Another example, when you have $1 million on your company bank account and you stop thinking in the necessary way to identify experiments that you need to make in order to check market or technological hypothesis, which are most necessary and prior and those which are cheaper. Sometimes it’s better to make a cheaper experiment and get a negative answer, negative verification of your hypothesis and stop the project because you already have the answer. You should stop doing experiment number three, four, five because experiment number two shows that your development strategy is bad and should stop here. Especially when you deal with researchers from universities who are used to a grant structure. They’ve got a $3 million grant from European Union and they know that their job is to utilize the grant till the end. I tell these guys to imagine it is the money of their wife, father, mom, or their own money. It is money they could spend on a great house. Company money is even more precious than your private money. Think about every dollar you spent. Will you do it if it’s not your investor’s money that allows you to play for two years for free? Make fancy action – treat it as your own money. Would you do the same experiment? Why did you select to start with the most expensive experiment while you could make three cheaper experiments and get another result to prove that your technology and strategy is incorrect? Our goal as a venture capital accelerator or startup is not to make any kind of experiments that will probably give us positive answers. For many people this is difficult to understand. It’s like Carol Proper methodology. Your goal is to find negative answers. Paradoxically, but you are interested in sick ice under your feet. It’s easy to go conservatively and check something that you believe will bring you a positive answer and you spent half a million dollars to check something obvious. And when comes audit of a grant provider or your investor, you cannot say they wasted time. No, they were working from 9 a.m. till 6 or 8 p.m. and they were doing research. But they made it wrong because it’s not the one they should start with. They started with a trivial problem but they should rather spend less money on the most significant problem and be happy that the answer is positive. And if you are not a good observer, you might be fooled. From the book they are doing okay, they are not spending time on Madera or Hawaii. No, they are working. They are going to the laboratory or the office. They are working.

The next and the last thing on this subject is being closed for feedback. People don’t have this humility to listen to feedback. They meet with a big corporation, like Oracle or Apple, and get very negative feedback. Sometimes founders are coming back to me saying they met such idiots on the other side who told it’s not going to fly. And they heard different arguments and startup founders were surprised how weak staff does this corporation has, what a poor quality of managers in this corporation is. This is definitely a red flag and a huge mistake because even if they are wrong, they are the stronger party and the hegemon on the market. You need to listen to them, even if you think they are wrong. Also, you need a balance here because sometimes these people from a corporation are mistaken and they are actually idiots, but it happens very rarely. Usually, guys in corporations are not idiots and you should accept their feedback and be humbler saying, maybe they are right and there is something. I think a startup does not have luxury to close eyes and ignore a feedback feed. My favorite proverb in investment is that when you are early stage garage-based startup, feedback is your most precious currency and it’s better than money. In our part of Europe people are averted from feedback. They don’t like it; their ego reacts very badly to the negative feedback. And negative feedback is such a positive thing, but not many startup founders understand that. I love when startups are coming back to me, saying they spent two hours with a corporation and they’ve learned one year of knowledge. They’ve heard so many bad things about their approach, mechanism, solution and method. And people from a corporation are super good guys. Unfortunately, the project needs to be stopped for one week for reinventing the strategy because it’s not going to fly. I love it! One week is nothing, even if it costs us 10% of the capital. We know there is a full stop at the end of this motorway, and we should not drive as devils to make a crash with a wall. It is great! Okay, we’ve lost 10% of assets, but we still have 90% and an advantage over competitors because at least we know what is the negative scenario for us.

Have you ever rejected a startup and then regret it?

Everybody has an anti-portfolio or dark portfolio. I like to check rejected startups again. It’s not that I rejected them, but I actually did not invest enough time in understanding this solution. It’s not that we have been into a very deep process and we just stopped the process. It’s just that we never actually started real talk with them. After the first meeting I thought to myself that it is not a project for us and I haven’t listened to my prejudices about this field of markets, because I thought it’s just a stupid solution. If they are reading this interview now, I can return full respect to these guys. They knew what they are doing and they were far smarter than me. I am happy that I can admit today I was stupidly ignoring this opportunity.

I try to be more like a stoic in my work. And it’s a little bit immature to be sorry for something that happened and you cannot change it for a long time. You can be sorry, as a lesson. You can give yourself a hard lesson, go for a drink and say «Damn it!». But it’s enough. After you learn the lesson you should forget about the missed chance. And I will tell you if an investor does not have a negative portfolio, it is a very bad symptom for him. It means that either he or she is not seeing good startups. When you didn’t have a chance to reject a good startup, that means you are not a good scout and not a good startup selector. It means that you are not learning from your own mistakes and not learning at all.

A negative portfolio is another paradox of venture capitalism. It is very educative and positive. You will never have 100% accuracy in shooting. It is good to have 5% accuracy in shooting, but if you are shooting good targets.

Sometimes negative portfolio comes from the fact that you are greedy and I’m not saying that it happened to me. For example, you see a great prospect, a great startup, and you know that founders are not well-informed and you have a temporary advantage over them in terms of information. You might force them to accept a better deal for you. But they are not closed in a basement or cave. They also use Google, read articles and have smartphones. Somebody can call them and after a couple of months of negotiation with the company they are just sending you an email, thanking you for the time you have allocated to them, but they are terminating your talks and are going with an investor from abroad. And you know why. They will not probably send you feedback, but you realize that it is only because you try to force conditions that were not good for them if they were equally informed. Of course, as a business agent person who is working on a market, you don’t want to give up all the information. You always want to keep a little bit of extra information for yourself, because otherwise there’ll be no market game. But sometimes you need to give up some insight and you should say: «Guys, normal funds will give you a 1 million for 30%, but I know something that ensures me that even having 20% shares in your company will make me a rich investor. You probably don’t know it because it’s very sectoral information, but NASDAQ company is calling for those solutions. And in two years we can be unbelievably rich». So, if you don’t want to have too big negative portfolio, you should understand what is to be fair for your founders.

Has your VC approach changed after the COVID-19 started?

Because of COVID-19 the world in 2021 will be completely transformed after a huge evolution. That was not seen in March or April and I thought it was turbulence, but right now we know it’s an earthquake. We will arrive in a completely new situation. Many conservative people who would never think they can run a company online digitalized their workflow. Nothing serious happens during pandemic from a technological view. We just started to be more Zoom or Skype oriented, we use credit cards more often, but credit cards and Zoom existed before COVID-19. It is just a predominant part of the market and the planet got used to things that appeared artificial for them. Why should I have a Zoom meeting, if I can just have a coffee with that person in the next two weeks in an airport because we will meet anyway. Right now, you have to take into account that the situation in 2021 and 2022 will be very different. People will consume goods in a very different way, they will rather order online and watch movies at home on their computer screens, rather than in cinemas. They understand that you can have equal pleasure from watching a theater play online. And these are just examples.

I think that all things that are related to the online transfer, the capacity of wires, communication, data protection, cybersecurity, user experience and cloud storage will go into change immensely and logistics will change. Due to the threat of a new pandemic, let’s say COVID-22, we will not ship from China that much. Of course, we will, but lots of factories will be located in our neighborhoods. Drones will become sexier because we would be ready to produce something in Krakow and get it to Lviv, Warsaw, or Leipzig in shorter terms. It’s a great topic for a workshop with visioners at university, or at least for a long night with good wine.

Because of COVID-19 people in developed countries in Europe, North America, and Southeast Asia will change their minds and we will appreciate expenditures to public health. We will spend far more money on it. If you follow Polish news, you will know that we will invest heavily in public medical care and medical care in general, even private medicine. In my opinion, you will make no mistake in 2020-21 by investing in disruption in medtech, because there will be much more money than we have right now. The population is getting older and the demographics is working against health. We will be older and will suffer more diseases. It’s great if you can invest in medtec and new Green Deal solutions.

Our continent will transform very fast during the next 20-30 years and it will be very different. It’s already time to invest in new solutions for energy consumption, distribution and management.

This is the time for ICT. Even conservative persons see that we can’t stick in the 20th century anymore. Software changes everything. We will live with the software. Smartphones, email inbox, online bank accounts and bank accounts access become even more important. Your HR processes are more important to be online than offline. The onboarding process in a company is more important to be online. People our age will not see such a big difference because we are either inventors or early adopters and we get there very fast, but our moms and dads or our neighbors will join us. And for them it will be a huge difference.

So, is COVID a threat or opportunity for VC?

For 90% it’s a great opportunity and an offspring of venture capitalism. New fields opened up and there is no monopoly or strong structure. Of course, some venture capital will suffer in the next two years because they need to help companies they have invested in 2019 or 2018. They don’t want to lose money and they want to help. They don’t want to left their startup companies just to die. They rather want them to survive. It’s a normal business intuition. When you have some assets, you want to put your energy and maybe even more assets to rescue it. So, if you ask other venture capitalists, they will tell you it’s a difficult time for them on the market.

It is a very difficult and inconvenient time, but I am more optimistic. For great and brave VC managers it’s a good time for fundraising. I can go to a very wealthy person and use COVID-19 as a reason to invest. I will say: «Guys, five years ago I wouldn’t even bother you with some high-tech because it was maybe too hermetic for you. But now I think that every day you are talking about different scenarios of changing the world with your friends, relatives and children. We don’t know how this world will go exactly, but startup founders know. And we should invest in those startup founders. We will not be successful in every case, we will make lots of mistakes, but at least we will take a part in this race for new opportunities. And it’s not just like buying another house in Monte-Carlo and getting a 7% or 10% return on investment. You can actually level up to a new dimension of wealth if you invest in some good technologies that have new opportunities because of COVID-19». My heart and my intuition go towards optimism during COVID-19.

Your three advice to founders

Number one, before you meet an investor make three nights long session of understanding your market. It is simple and requires only Google. Usually, it costs $0. Sometimes it is $15 because you have to download a report made by KPMG or Deloitte, that will give you additional insights. Pay this $15, invest one week or three days to really good understand your market. If you will come to a meeting with an investor who should be less knowledgeable about your markets, but it turns out that he or she knows more than you, it’s the end of the discussion. Nothing will happen if you show some weaknesses in preparation. You don’t know all the numbers and trends. I’m not saying that you need to make a fast MBA or Ph.D. in your field. But you do need to know the basics of your industry perfectly. Come on, even I can do that if you’ll give me a subject. After one week I will be four times more prepared than today but startups are very often ignorant.

And this is my advice number two. If somebody asks you, what are your competitors and you answer that there is no competition for you, it is the end of the discussion. It means that either your product is unnecessary because nobody ever satisfied this need, with another solution or you don’t have enough knowledge. You don’t have imagination if you cannot indicate a competitor. You have to eliminate the answer «There is no competition for our solution» from your dictionary. This answer is shutting your doors for venture capital funds and any support.

Maybe the third advice is before you go to a venture capital company try to invest your own money. I know it is cruel. Ukrainians, Poles, Czechs and Hungarians do not have much capital on their bank accounts. I know that, but try to organize some amount of money before you go to VC funds. Show that you are not a grant seeker. You are not free money hitchhiker and you also put some blood into the business. If you really cannot find the money for your early stage and they didn’t evolve before you go to venture capital funds, it means there is no interest and it might be a mistake to invest in you because you haven’t found one person on the planet who can give you $10,000-$15,000. Or it means there was no alternative. You should collect some money. If you are unable to find this money, at least show evidence that you voluntarily work for your startup and you have already made some milestones. You can say: «Okay, I haven’t invested cash, but I invested one year of work. And it wasn’t that I did it during weekends like a hobby. No, I resigned from my corporate job and I was eating only tomatoes and potatoes for one year. I live on a very low budget just to make my research». That would be the advice.

What is your favorite city?

I would like to be a green energy farmer somewhere in the Mediterranean area, maybe in Italy. Also, it might be Scandinavia, with some very cold environments and beautiful forests around. It’s a very dangerous question. We should not wait and expect there will be a second life. We actually should try to go to our dream place and make our only life as we desire.

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About the Author

Roman Bdaitsiiev

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