Duncan Davidson (Bullpen Capital): In Silicon Valley failure is a feature, not a bug.
04 Feb, 2022
Jacek Łubiński is Principal at Market One Capital, a Pan-European early stage VC firm that specializes in digital platforms and marketplaces. Jacek has been a venture capital investor for more than 8 years.
How did it all start? How did you decide to enter the venture investment business?
I was always interested in technology and started my professional career as a software engineer. Later on, having interest in finance as well, I switched to a more corporate finance role, and I tried this for a couple of years. When an opportunity to join a VC firm arose, it seemed like a place where I can combine my passion for both tech and finance, so I jumped on the occasion and it’s been a blast for me ever since.
What was the most unusual startup you have ever supported? Or, maybe, your favorite one?
It’s difficult to name just one, because I very much enjoy working with all of the startups I have a chance to cooperate with. At Market One Capital we focus mainly on marketplaces and digital platforms at an early stage. We also spend a bit of our time and money supporting software companies which also have network effects potential, but also we reserve a portion of the fund to support some companies pursuing other business models, and these are less typical for us. From this perspective, these are the most unusual ones for us; among them TIER Mobility is probably the one which is very much different. They are a leader in Europe in terms of e-scooters and overall micro-mobility solutions for cities. Their business has a very solid hardware component, which is something we do not have among the companies we usually support. Probably, they are the less usual one, but supporting them for two and a half years now has been very much a pleasure and a rewarding experience, also in their expansion to Poland.
And how do you select startups to support? What are your criteria?
Being an early-stage investor, for us, the most important aspects of the project are the team and the market. We look for very strong teams which have the potential to create €500M+ valued business in a period of 7 to 10 years. From a team perspective, what we look for is the domain expertise, some kind of unique insights which give them an additional advantage. We very much look for founders who are good storytellers both towards investors and other stakeholders like employees, potential clients, and so on. We very much value determination and tenacity, because there will always be difficult moments. Then, the market has to be big enough to potentially give a possibility to create a very large business, so that’s also something we would always take into consideration, but of course, there are many more. Product and value proposition is a very important aspects, we put a lot of emphasis on these as well. At the same time, if it’s a super early stage, a good team can always pivot into another direction with the product if they see the opportunity, so we are not very much super attached at the very early stage to this. Other aspects which we also consider are business model, if there’s an opportunity to create some kind of revenue streams for the business to make money on. Another one is the valuation potential, how big of a business this can be. We also take a close look at the competitive landscape and the market trends, how the value proposition fits, who the competitors are, are there any benchmarks already or not, either within the same space or in some adjacent spaces. Also, previous experience of the team on the team front is important.
How do those teams usually find you? Do you wait for inflow or scout actively?
We do both. We receive quite a lot of potential investment opportunities from our broader network; I mean here co-investors, our portfolio companies, LPs, a lot of network-driven opportunities. We also have our own theses on certain spaces or market trends and opportunities, so at every moment in time, we have a couple of these which we are exploring, and within this, we also actively approach startups from a certain space. I would say that the vast majority of the investments come from these two sources, the majority from the network but also a larger and larger chunk from our thesis-hunting activities. Obviously, we also see a lot of companies at different events, many companies approach us directly, so we receive a lot of inbound, and we’re open to these sources as well.
Can you name industries you really like yet will never invest in or are not likely to invest in?
It would be highly unlikely for us to invest, for example, into some hardware companies. It is not totally impossible, as I have mentioned with TIER, but it’s super difficult. What interests me is brain-machine interfaces, companies which are trying to combine the power of computers with the power of the human brain, and these types of companies I find super interesting. It’s probably highly unlikely that we would ever invest in one of these, but I think this idea is very promising.
You’ve already mentioned at which stages you usually enter, and when do you usually decide to exit?
In terms of our entry point, it’s usually seed stage, sometimes pre-seed or, occasionally, it’s Series A as well. In terms of exits, it’s difficult to plan this always. It very much depends on how the company is performing, what are the plans of the team behind the project. I would say that the most successful startups usually take quite some time to develop and grow multiple times, so when thinking about the most successful startups, it’s usually, like I said, more or less a ten years journey, sometimes it’s less, sometimes it can be even more than that. From this perspective, these companies tend to achieve either unicorn status or a bit below that and are big enough that the exit opportunities are usually multiple: being a standalone business and doing some kind of liquidity event, doing an IPO, or any other action which lets them be a publicly listed company, that’s one example. Another example is a merger or an acquisition by a strategic player – with startups which also perform well, but may not get to an IPO stage, are a bit smaller or a bit earlier than that. Usually, it is more frequent that they might be interesting for some potential strategic buyers. I would say that these exit methods are probably the most popular. I think as the whole market matures, there might also be more opportunities when financial investors or private equity funds might be interested in acquiring businesses at some level of maturity and size, but for the time being, it’s definitely less frequent.
What is your due diligence procedure, and how long does it usually take?
The whole investment process we divide into two main stages. The first part can be called commercial due diligence, which is the time when we dig deeper into all of the most important aspects of a project through a series of meetings, calls, email exchanges, and data exchanges with the startups, and this part usually lasts between 3 to 4 weeks. However, we also had cases where this was much quicker than that. The second part is already after the agreement on the key terms has been achieved between the startup and the main investors, and the rest which follows is a simplified formal due diligence, mostly on the legal part, and also the investment documentation preparation. This second part again usually lasts around 3 to 5 weeks, but it can also be longer or shorter than that depending on many aspects, such as how many parties are involved, what is the history of the startup, how much of the due diligence needs to be done, are there any other things which need to be taken care of like some kind of analysis of tax aspects or anything additional. Usually, the whole process, from start to signing the investment documentation, is around two months or so.
Has your fund’s approach changed after COVID-19 started?
I would say that it was not a big change, but rather further gradual evolution of the investment process. What we have done already before COVID is we have done fully remote investment processes. We had occasions when due to some limitations, we were not able to meet with the founders in person but only through Zoom online meetings, and this had definitely accelerated after COVID when there was a period of time where actually between ourselves we were also working from home and were not able to meet. Other than that, I don’t think that COVID had any significant impact on our fund in particular.
So you don’t see COVID as a threat, but like an opportunity to the VC world in general?
Yes, I think that overall the world got much smaller because of that, and everybody got used to online meetings. They are much more frequent, so it actually helps to invest in startups that are further away from you.
Investors usually prefer to work with teams, but have you ever supported a one-person startup?
Yes, we had cases where there was only one founder, and we supported the teams; for us, it is not a deal-breaker.
And when you see a team seeking investment, what qualities would you like to see in them?
Some points I touched upon before, definitely having at least in some industries some kind of domain expertise or unique insights into the problem and the potential value proposition is helpful. Having good storytelling skills is something very important. Then, the more key functions you are able to cover within the core team at the very beginning, usually the better. This would definitely cover product, sales and marketing, technology, so these three are usually the most important aspects of a project, and if you have them covered well within the early team, that’s a very strong advantage. Apart from that, as mentioned, we are looking for people who are determined and have the tenacity to go through this long journey, who are smart and hyper-curious, very much wanting to get better both personally and as a company.
Have you ever rejected a startup and then regreted it?
Many times. We have an internal anti-portfolio list of companies which we wish we had invested in, but we didn’t. I guess it’s just part of this game. Definitely we’re trying to learn from any mistake which we have made within our process. If it was something which we did not assess well, then that’s a great learning to have and to implement and not make the same mistake twice. But as long as the portfolio which we create is great and we have some great companies within this, that’s the most important part, much more important than regretting the ones which we could have invested in.
What are your red flags when you see a company approaching investing?
Definitely fit between our investment criteria and what the startup is doing in terms of stage, geography, business model, activities, that’s one thing. Another thing is ethics. Whenever we have some signals that there might be some compromise on this, we take a very cautious approach.
How big is a check you usually issue?
Usually, the initial investment we make is between EUR 500k and 1M, but the range is much broader than that. I think the lowest we did so far was EUR 200k and the highest was EUR 1.5M, so it very much depends on the stage of the company, the size of the round and so on.
What is the geography of your interests?
We invest across Europe. Half of our portfolio companies are in Western Europe, including Portugal, Spain, the Netherlands, the UK, Germany, and so on. The other half is in Central and Eastern Europe, including Poland, Greece, Austria. It can even be a company which is not headquartered in Europe but has some operations within Europe. We are also investors in some US companies which have a European subsidiary and part of operations on the European continent.
What are the major differences you see between the European and, to say, the US market and ecosystem?
We are not that active in the US, but the main difference we see is that the US market seems to be even more competitive than the European one, although that is also quickly changing. The investment processes with American companies are probably shorter. Of course, the overall size of the VC market is much bigger in the US, which means that there’s more startups, more capital available, so Europe has some catching up to do.
What is your process of working with startups once you invest in them?
That is a bit dependent on, first of all, what the company wants, and, second, what is our role within the company. Usually, if we are a lead investor or one of the key investors within the company, we have a seat in the board – a non-executive board member or a board observer. If our role is smaller and there were larger investors within the syndicate, it’s not that formalized in terms of having a board member. Generally speaking, what we see is that a lot of work we do with the startups is around supporting them in further fundraising for the next stages, helping them to get connected to potential next-stage investors, building relationships with them. We are well connected within the VC ecosystem, so we have a large network of VCs who are either potential co-investors or later-stage investors with whom we maintain relationships. Another aspect is recruiting and helping companies find the right talent, having some leads for potential people who might join them, and helping them assess some of the candidates. Then, there’s the overall product and strategy aspect of the company where we are sparring partners, talking to the company about the value proposition of the product, the go-to-market strategy, and other strategic aspects. As mentioned, we specialize in digital platforms and marketplaces, so we have a lot of expertise which is very specialistic in terms of network effects, marketplaces, how some of the typical problems on the product side or go-to-market side can be addressed, seeing this through pattern recognition and seeing what has worked in other experiences, in other companies. Helping them with a broader network of consultants or advisors; whenever they have a problem or some aspect they would like to have better covered, be it SEO, AI, Customer Success, from within our network and some of the cases from our previous experiences in-house we have a network of people who can help them on this, which they could talk to on how to approach these aspects. And, of course, the financial resources to participate in follow-on rounds. If the company is performing well and is able to attract more external funding from solid investors, we’re also there to support with follow-on funding; we can invest up to several million euros per one project.
To your mind, how much runway should a startup have to feel safe?
There is no golden rule, basically they should have enough runway to achieve certain KPIs and milestones, which will enable them to raise the next fundraising round at the higher valuation. Usually, this is between 12 and 18 months period. If you’re an early-stage startup and you’re growing three times year over year or more, this is very often a solid sign to be able to attract further external funding. Of course, there are other important aspects which you also need to take into consideration in order to be ready to raise the next fundraising, which again depend very much on the stage. It’s a different set of criteria if you’re raising Series A vs. a seed round. However, usually, you should be able to achieve significant advancements within 12 to 18 months.
Can you name the three most breakthrough startups in history, for example, in the last half of a hundred or a hundred years?
I guess Apple would be one of them – a company which was founded somewhere around 50 years ago, which has really transformed the way we live and interact with each other; that’s definitely one out of these. Then, Tesla might be another one. They have really made this electric cars trend move faster, they have made significant progress, and they are the global leaders in the EV space right now. They are rewarded for it with a very solid market capitalization, much larger than all the other automakers from the previous generation. They probably would also be on the list. The third one is probably Amazon. What started as a simple e-commerce business has transformed into an enormous company based on logistics, supply chain efficiencies; also being able to turn most of their cost lines into revenue-generating businesses has been spectacular.
Are there any great startup failures you can think of?
There were many startup failures due to different reasons. Some of the more spectacular was, for example, Theranos, with the history of Elizabeth Holmes and how they were deceiving many external and internal stakeholders. They were already a high-valued startup by then. It very much depends on the time scale, because there were many companies which were super successful at some point in time but have lost their position, like IBM. I guess these two come to mind, but there’s much more startup failures than startup successes. That’s the ratio which sometimes we tend to forget by focusing on the success stories, but there’s also a lot of determined, hard-working entrepreneurs trying to change the world, who don’t succeed to some extent, and they also should be valued very highly by the society.
What are the common mistakes startups usually make?
You could generalize them into not having any more runway, but that’s always the final effect of mistakes which happened before. This might be around the product, whether you are able to solve something which is a true pain point for your customer and provide a very solid value proposition. There are companies which are providing solid solutions, but the problem for the client is not that immediate or not that strong, and it’s much more difficult for them to grow. Then there’s a whole bunch of stuff around team building, around building the right culture and having the right values and passing them along within the company. Then there’s a lot of things around recruiting and building the team which will be better than you in the functions and specializations within the company they focus on. Some companies tend to scale too quickly before they nail it, so building a too large organization for a very early-stage company which has not found the product-market fit, that’s something which also happens. Nailing the product, that’s super important. Some companies operate in spaces which are capital intensive and need more fundraising. They might be in super competitive spaces as well, so then there might be cases where a good company loses versus a better company.
What qualities, you think, are important for a good VC?
I think that a good VC has to have some specialization to be able to provide not general but rather more specialized, sophisticated value add to the companies they invest into. I think that a good VC always understands that they are supporting the project, but they’re not behind the wheel really. A good VC also has solid abilities within the sourcing and filtering of the investment opportunities, not only being able to see a lot of companies but also having the capabilities to choose the ones that have potential. A good VC has to have the ability to win deals by the value proposition; I mentioned specialization already, but it’s usually a much broader package which can convince the startup founders to include such a VC within the round. Ultimately, venture capital is an asset class, an alternative investment, so a good VC has to have good returns to be able to repeat the cycle with the funds; that’s also an important target which must be met.
What are the most important things you learned from startup founders?
A lot of them. It’s a lot about pattern recognition – the things you see, how the best startups and the best founders operate and evolve, so definitely the ability to build very mission-driven organizations and having this common theme within the team, this common target, being able to attract very good people to join you on this journey and help you change the world and having this same broad vision, that’s super important which I have learned. Another aspect is around being able to scale; once you have the product-market fit, you can scale geographically, either organically or through some M&A, but also scaling the product into some adjacent spaces and being able to be this more defensible comprehensive solution which really is able to provide a broad array of things, can make you indispensable. That’s also something which great companies and great founders do very well.
The same question for fellow investors. Is there anything you learned from them?
Definitely. Great investors are close allies and supporters, but on the other hand, it’s also about having differences of opinion which are respected by the founders, and having these very candid but close relationships makes the chances of achieving something big for the company higher. As VCs, we are very much pattern recognition machines. We have seen what has worked or what hasn’t worked in the past, so great investors are supporting their companies in this regard a lot.
The final question, your advice to startup founders and teams.
I would encourage you to, first of all, pursue the dream and the vision and the mission that you want to have, to listen to your potential clients a lot to nail the value proposition and provide an experience which is ten times better than what they have right now, and not to scale too quickly before you see very strong signals for product-market fit. After you do, very much use this opportunity and surround yourselves with solid people who can support you on the journey both as team members and as advisors or supporters who have seen this being done in the past.