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
Marcin Szeląg is Partner at Innovation Nest in Krakow, Poland. He is focused on European early stage SaaS companies. He is mostly interested in martech and vertical SaaS. As he sasy: “We do not have flying cars yet, we do not travel to Mars on a regular basis but we are definitely getting closer.”
It’s all started almost 10 years ago. In 2007 or 2008 I was working in a startup here, in Krakow; it was building social networking sites for teenagers. At that time Facebook wasn’t that well known in Europe, and we were pretty successful. Then the company was acquired by a German media corporation. After the acquisition I was looking for a new opportunity. I always wanted to work in VC, as I was always interested in tech and startups. I met a friend of mine who was starting his own fund after being an angel investor for several years and who just exited Onet.pl, which is now the biggest news portal in Poland. I joined the team in 2011 as the investment manager associate. Since then our fund grew up to 13 people, and now we are investing our second fund of 40 millions Euro. We are investing across Europe.
First of all, a little background on innovation. We are a seed fund focused on B2B software, this is the only business model we invest in. When it comes to B2B, SaaS or cloud based software we focus on the companies that have the potential to scale internationally, so we don’t invest into local businesses. If you’re in the software industry, it is a global marketplace, and today companies can launch anywhere and scale outside their local markets. That’s why it is highly competitive, and if you’re focusing only on your local market, chances for you to be highly successful and grow the company to the large scale are limited and at some point you will face international competition. We’ve seen this across many types of industries that software companies target. That is why this international mindset and ambition are very important for us, and we have to understand whether a founder thinks the same or not. When it comes to the stage of company development, I would say we don’t invest in pre-product or idea stage. A sweet spot for us would be a company with 10 to 20 people, product is already on the market, and there is some initial traction in customers and sales. We would like to have at least 6 to 12 months of data we could look at in terms of how sales dynamics look like, what are the conversions, how supply chains look like, what are the cohorts telling us – all those business metrics. Typically we look at companies somewhere between 10-12k of monthly revenue, up to even a 100k in MRR. We participate in rounds leading towards Series A. When we come in, the company is looking to raise for the next 18 months and, as an objective, they are trying to validate the initial goal to market and traction on the product, so they can attract later stage investors for the Series A. In terms of geography we had invested in multiple countries across Europe by now, so we are country agnostic as long as it’s Europe. When it comes to different types of software markets, we like a couple of things. We like some data element or network effect. Basic software is not good enough in terms of building scales because there is so much software already around. You have to have something unique in your product. Sometimes it comes from data you can use either to ultimate your product or bring more efficiency. Or your product can have natural network effect translating in lower cost of acquisition of customers. You will have better economics at your product when you’re building strong differentiability against your competition because of this network effect. Verticals we like include Hospitality, which, we believe, is underinvested in terms of software. We like Software for non-desk workers. If you look at software industry over the last 20 years, most software has been built for entreprise, for people who sit all day long in an office staring at the screen, while people in the field don’t usually use computers on daily basis and may not even own a computer, just a smartphone. The type of software available for them is very clanky and limited, so this is an area for growth in the next decade – more and more software available for those devices for multiple use cases. We like Machine Learning, we believe that we are in transitional moment now. The last 10-15 years was about building cloud software, now most of the processes are already in the cloud, and we have accessible structured data, and we can apply other algorithms on top of that data. We also love Healthcare focused on medical imaging and AI applications, voice, all kinds of video, something like that.
Nowadays one should understand that, because of the Internet, we live in the interconnected world. Most of the things are public or somehow visible, so you can access them. With that comes a lot of noise. Ten years ago, if you said that you were building software for X, Y and Z, it was in the cloud and growing, you, probably, would get a lot of attention. Today if you’re a team of a couple of people and starting to build a software product in the cloud, no one really cares, because we have an abundance of teams doing this. It makes things more challenging for early stage teams to get attention from investors, or media, or potential employees, partners, customers, etc. Media in our industry is dominated by announcements of huge financing rounds – almost everyday someone is raising tens of million dollars. If you’re just starting out and raising your first million or so, no one cares. What are the hucks to make you visible? I think, one is to be educated in an area you want to achieve something in. You have online access to information, but not many founders are laser focused on what they want to get. They don’t do research on particular partners in VC funds – what a person invested in before, how spends his or her time, is he/she available online. We’re living in a very open world, and if you’re unable to find this information and use it to your advantage, you lose. The second, you need to get aligned with a person on VC side you need to get in touch with. If you do B2B, you shouldn’t try to get in touch with VCs interested only in B2C. If you’re at early stages, it is no point in contacting funds focused on later stage investments. Try to find a match. The third is: how are you different? It is about communicating the story. A typical investor sees 10-20 companies every week. Out of those 20 he or she meets 1, maybe 2. It is a very crowded space, where everybody says pretty much the same things. What is different about you, your team, your company, your product, your space that you can communicate very clearly? If you’re not able to interest anyone in the story, it will be very difficult to move to the next stage. So, do your research, look for alignment with a VC you want to address and be different and able to communicate it. Outside of it you need to remember that the market grew up immensely and now it is, like 400m businesses globally. If your aim is B2B, your aim, your dream should be big enough for venture scale. We are constantly remained by out later stage investment friends that it has to be a very large opportunity for them to get involved. Of course, we are talking about unicorns, but the main idea is that your story should be big enough to catch attention of top VCs, you cannot be locked by a small market segment. Some smaller investors may be interested, but not big funds.
In terms of presentation techniques there are two types of teams. One has presentations not well thought or designed, there are even mistakes there, the data is not concise. It shows their inexperience in a way. The other type of founders is people who know how to play this game. They are great storytellers, and a design of a deck and the way they communicate their product, their market, their vision show it. They also have many additional materials at hands. It is always surprising. VCs are very open today in terms of what they are looking for. If you take time to understand this, you can prepare, because you will be asked for, say, metrics. If you’re not aware of what investors want, how you may be sure that you know what your customers want? So, very little time, dedication and research needed, yet most people don’t do it. It’s always disappointing.
Both of them at the same time, and it comes back to how the founding team should be structured. It is always a combination of a man with some business sense, strategy, vision, etc., someone on a technical side, someone on design and creative front. That’s the perfect combination where the magic happens. Every year in Europe there are tens of thousands of companies created. And only a bunch of them will be successful. That is why VCs say “No” 99% of the times, and that is why it is so difficult to raise money, despite we have an abundance of capital in Europe now. And I will repeat: do your research, do your homework, prepare and don’t get surprised by very и asic things.
Not really. I don’t know how many entrepreneurs I’ve already seen during all the time, maybe a thousand. If you do it long enough, you build up some kind of natural sense about trends, market direction, etc., and it is very difficult to have this WOW! moment, especially in B2B sector. In B2C there is no way someone can see the market from all the angles. In B2B you always see what needs to be built, the market is well structured. For the last 20 or so years, after Salesforce was launched, it is all about getting software into the cloud, and the next decade it will be software in a cloud based on subscription model. Also it will be about using data and automation, to make software simpler to use with less human impact. And what catches investor’s attention is some kind of insight a team might have in a specific field. For example, if someone is building a specific software on clinical trials for healthcare organizations, he or she may have some insight why it is so important right now. This is what may be interested to hear in a pitch. Otherwise all the pitches are quite the same.
It’s always a team effort, but, yes, sometimes we have a solo founder. It is always a question, is this person able to handle all those challenges he will face. If you have a cofounder, you can share these challenges. Of course, there are successful entrepreneurs, who’d built international businesses, and teams who succeed as well. We prefer to have teams, because at the very beginning you need a dedicated group of people, who won’t get paid a lot, who put long hours to get the product to the market and get some initial traction. Usually, there is a person with the vision surrounded by a team that shares this vision, so our preference will be 2 or 3 co-founders, but we’re not excluding solo founders and did invest in such companies already.
Usually, it is a couple of hundreds of “qualified leads” a year, maybe 3 or 5. These are B2B SaaS, raising and having an open round, fitting in our sweet spot companies. Out of those we engage with about 10%, it is 30-40 companies a year. And we make 2-3-5 investments. But actual numbers are fluctuating: we’ve seen a year with 7 investments and a year with only one.
Our #1 source is network – we have a lot of leads from other investors, founders, partners, whatever. I would say it’s roughly 60% of cases. Our second significant source is direct search, the projects we identify in specific industries or markets. The next source are events, conferences, anywhere we go. And the last is cold emails we get from founders. I think out of all investments we ever did only a few, like single-digit number, was made from cold emails, so this is the least effective way. I would recommend to treat fundraising process as a sales process: set up a CRM or a simple spreadsheet, design a few steps in a funnel, build an initial list of investors you want to target, qualify them (they should be all investing into your space) then start reaching out them. Find some warm introductions; you may go to conferences these investors visiting. You may start following them on Twitter or LinkedIn – be creative. And once you’ve got through, the process is simple. The biggest mistake most founders make is that they don’t do any kind of research, they just blast emails to everyone without any consideration. It is very unproductive on both sides, because we look at everything we get and try to respond to everyone. Do your research!
We make it in few parts. One is business due diligence: we look at business metrics, e.g. KPI and all these data. When we’re more advanced, at post-termshit stage, we make financial and legal due diligence – checking documents and estimating shares. Sometimes it is superquick and we can do the whole process in one week; sometimes it takes several weeks when we are waiting for certain documents to be submitted and verified. And again it is about how is prepared the company to raise money from institutional investors. We are professional investors, we have our own investors, we have fiduciary duties to those investors, we have certain processes – we cannot just write a check if we liked an idea. And we have some work to be done before we actually invest in a company.
We try to be flexible, because our market becomes highly competitive, still we don’t accept captables that don’t have sense, e.g. founders who try to raise their first round and are ready to give us 50 or 60% of the companyж we know the risk of investing at this pace at this stage. Still, we don’t have a list of red flags, it’s always a case by case. The biggest red flag for us is realising that someone wasn’t fully honest with us. We don’t want to be engaged in such a case. Also, it is always some kind of chemistry between an investor and a founding team. If we make a deal, we are going to work closely together for something like ten years. And you have to ask yourself whether or not you would like to spend so much time with these people. And if we don’t like founders as they are, it is a red flag too.
VC business, as every other, is about distribution of resources, and money is just one type of resources available. Another one is our time and attention. When we invest, or have very defined timeframe and horizon, say, if it’s a seed round, we know that a company needs 18 or so months to grow to the next phase, we know the objectives and risks, and we are fully dedicated to helping the company to succeed. Sometimes after those 18 months we see that we failed, on both sides: we failed to recognise our interests and a company failed in reaching its goals. There are two ways to deal with the situation. One is to be transparent and say, that it didn’t work, let’s close down the company and move on. Usually, it is an easy call as company has no money to finance its operation. The second situation is not that clear. For example, a company didn’t achieved its targets, but it’s not failing either, it has revenew to keep the most of a team and work on a product. It is a very difficult situation, because we don’t know for sure, will the company succeed or not, but usually at this point we are not interested in this company either, because most of the times this stretching of finance leads only to waste of the time.
It is a case by case process. The fastest, I think, was a 4-5 weeks, the longest took several months. It always depends on how educated on the process a founding team is, do they have an advisor and how complicated is the deal. If we deal with serial entrepreneurs with previous experience, they know the rules of this game, and you don’t need to explain every article of a contract or particular provisions. If you do need, it means additional time. My advice is: if you want to raise money for the first time, you should give yourself 6 months from the first contact with investor till you get money at your bank account. It may be faster, but the safe assumption is 6 months.
Our initial check is somewhere between 750k and 8m Euro.
Luckily, no. Actually, it is something we keep track of, and when we say “No”, we keep track of a company. Usually we see, that companies we rejected don’t raise significant funding. Sometimes we say “No” for other reasons: we like a company, but, say, it was too late for us, because an evaluation was too high, or it is not our verticals. If it was our space (B2B software seed stage), and we said “No,” usually those companies don’t raise much money.
Those regrets take a long time to materialise. VC cycle is at least 10 years. We’ve been investing for our new fund for the last 2 years or so, and most companies we invested are still small. Ask me again in 5 years, maybe we will have some regrets.
We are very predictable and don’t take any bets. Sometimes we may expand our geography, that’s how we invested in company in Israel. We might take an exception and invest in a company slightly later – almost at Series A – and be left with a smaller equity stake. But nothing more exotic, I’m afraid.
It is a point where science meets art. I would say that each round you have to be ready to give about 20% of your company to investors. It could be 15% in a given round, or 25%, still it is something like that. You may give 20% at seed stage, 15% at Series A, 30% at Series B, then, if your market is big enough, you may decide even to go IPO, diluting most of the stake left – it is still OK, because the value of your company grows exponentially.
In our industry, “Never say ‘never’.” Now we see interesting companies in spaces we don’t invest, e.g. in FinTech, where market is being disrupted by companies like Revolut, or TransferWise, or N26. This is one area. Also we haven’t really looked at Blockchain-related companies, because we still don’t have any defined view on how those companies will change anything, despite there is a lot of traction at that space, many companies emerge with different ideas. Of course there is a lot of companies in Climate Change, Sustainability – it is an area we have no expertise in and I don’t see us investing there in any time soon. These are very interesting areas.
Speaking of events, it depends on what you want to achieve. If you want to meet investors in B2B Saas, you need to go to SaaStock in Dublin or SaaStr or B2B Rocks in Paris. If you want to engage with potential customers, go to industry events. If you need information on processes of building a company, like sales or marketing, there are smaller events exist, discussing those topics. Speaking about books and blogs – there are just so many of these today! 10 or 15 years ago I was a fan of Fred Wilson from Union Square Ventures and a couple of other US-based investors, but now, I think, you just need to go google. Be active on Twitter; Quora is a good source of knowledge – this is what I can say of the top of my head.
If you look at the progress and the last 3 industrial revolutions, what happening now is pretty interesting, because we see unprecedented acceleration of everything science and technology related. Of course, you can mention Apple, or Tesla, or any other successful company, but it is a process that impresses the most. Microsoft brought us PC revolution. Google changed the organization of information in our world. And, of course, Apple introduced iPhone and App Store concept and made possible for thousands of companies to emerge. These are my 3 in software. Also I think that what is happening in Sustainability and labs growing meat is very interesting and we will see many interesting companies. Otherwise I think we’re reaching the point when we must focus on very difficult challenges, like fighting cancer. Maybe, we will be able to do it thanks to quantum computing or AI – I don’t know, but our goals are somewhere there.
We are definitely at right time and at right place, this decade will be interesting to us, because there is so much needs to be done in software. And I’m really like to be a part of this process.
There is a lot of situations when you can apply rap lyrics to VC and tech industries.