Angel Money
I 23 November 2012

Angel Money

There's more money offline than on the Internet, but on the Internet, it seems to grow faster. A survey by RAEC and Higher School of Economics, published earlier this year, suggests that every ruble invested in a virtual business will grow by one third in a year's time (on average, with some booming segments growing much faster). This cannot but attract investors, especially given the fact that young Internet companies are often in a bad need for funds.

Naturally, there are risks for investors, and naturally, they try to minimise their possible losses as much as they can. What you get as a result is not a simple business, and people who venture into it are far from being simple, either.
But there have always been more people willing to receive money than those ready to give it, so the 'investment market' is actually a market of investors. But who are they? How does one deal with them? What projects do they tend to like, and what projects are they most likely to simply ignore? Of course, there is no point in asking them that question directly, we know all the answers: they want projects with maximum possible profit and with minimal possible risks. What is much more interesting would be to ask an investor and their client about 'how it all happened'. That is what our correspondent Dmitry Frolov asked Maxim Medvedev, managing partner at AddVenture, and Anna Shkirina, CEO of Delivery Club.

Do you, as an investor, need money?

MM: No.

So you've got a nice big sack of it somewhere?

MM: Something like that. But I don't keep it at home or in my office or in a bank. It's a 'cloud' sack. The money comes whenever I need it. An investor's most important problem is not finding money, it's finding a good project. 
In the meantime, packs of start-uppers keep looking everywhere for investment. Perhaps, they just don't know of your inexhaustible source of funds?

MM: They know about it all right, or at least many of them do. We receive, on average, about 3,500 applications a year. About 80% of them are from projects that are green as grass. It is hard to have a meaningful talk with them: either they have little or no experience, or they overestimate themselves and their idea of their team, or their project may just be not our type of investment, or their business idea is fine, but their team or suggested strategy raises questions. We try to answer everyone, to hint them in the right direction, because if they come with an idea today, they may come with another one tomorrow, a better one, and we may fund it.

So, for convenience, there should be a 'trash' field added to the application form?

MM: Yes, unfortunately. Most investment funds have to deal with that. The remaining 20% of the applications come from people really worth talking to, so we write to them, begin dialogue with them. But only every tenth of them is actually worth meeting in person, that is, about 2 or 3% of all applicants. So we meet them, we examine their business model, we visit them, we analyse their past books, we talk to their competitors. In other words, we do a thorough analysis.

So who is responsible for all this filtering work?

MM: Just two people take care of it: me and another staff member.

Do you have a large team, by the way?

MM: The team fits in this office. There's four of us, we are a small entity. An investment boutique, if you like.

I see. So there's plenty of work and few people doing it. Do you have time for anything but sorting the mailbox?

MM: Of course. When you've been in this business for over two or three years, you have a kind of matrix formed, a framework. That is how it happens. Investors do not invest in re-invented wheels; they think in a rather primitive way: if some kind of thing is growing in the West, they start looking for companies in Russia who are doing the same kind of thing and who have already had some success. That is to say, nine out of ten investors will invest in clones.

But naturally, you are not like them.

MM: We are like them. And that is a right thing to do: investing in clear, big stories that have proven themselves in the West, funding their launch in Russia is the right strategy, and I'm not ashamed of it in the slightest. Why? Because it's not my own money that I manage (only a very small portion of it is mine). We are a fund that works with other private investors. And my mission is to earn money using their money. I can't afford experiments.

How all works

In other words, you want business models that have proven themselves, that's one part of an investor's matrix. What are the other parts?

MM: The second part of the matrix is the team, and how far the team has already advanced, what resources and assets they already have, and how it will evolve in the future.

And in what stage does a project has to be to get funds from you?

MM: There are different stages, I'll only be speaking on Internet projects, because we specialise in them, and they have a few stages.
First, there is pre-seed stage, when they use their own money to develop their own project. Here, the so-called three 3F are important: family, friends and fools. You get you first funds from you family, your friends and from some naive (usually) people who you happen to convince. Some things you have to do on a napkin, some things work, other things do not. Then you understand what you have to correct, where you need to change.
Then it comes to seed investment. That's where 'angel money' comes in. A single infusion can be about $200,000. That kind of investment is called a ticket, that cheque you receive from an investor or a business angel.
Then, the company continues to grow, and that's where early stage funds come in, investing about $1 m or a bit more.
Venture capital funds are investors who work with mature companies, ones with a developed infrastructure. They will invest between $5 and 40 million.
Then there are private equity funds, who manage billions of dollars and who only want to buy a working, consistent business, etc. Finally, there are all sorts of insurance companies and hedge funds who look at all this and say "we need a bit of venture, a bit of private equity, a bit of public market", they work with portfolios only. On the other hand, all types of investors, starting with VCs, tend to prefer portfolio investment, to a certain extent (usually depending on how much money they have).
The first Addventure began as a seed fund. Our very first investment (about $300,000) was made in early 2008. At the time, we were following the 'business accelerator' model borrowed from the American market..
The second Addventure was still rather a seed fund, only a bit bigger. The first one was worth $300,000, and the second one - $530,000, and our third fund was our first, serious, early stage VC, worth $7 m.

So the clients who come to you are on different stages of development?

MM: Yes.

But you are neither family, nor friends or, forgive me, fools?

MM: Nope.

But these are all foreign models. What is specifically Russian about your work?

MM: The situation here is quite different. Once again, we are only talking about the Internet here, about IT, not about oil and gas, smelting industry, etc., those fields are beyond my competence. We have very large funds here, I won't say the names, everybody knows them.

Your competitors...

MM: They are not our competitors. The are really large, multi-industry funds that can have thousand of millions of dollars working in each of their directions. And of course, companies want to see them, because heaps of money smells so nice. But when an entrepreneur comes to them, they ask questions like 'What's your EBITDA?', and he has no idea of what EBITDA means. In other words, there is a gap between the level of applications that are attractive to major funds, and the real level of entrepreneurship in the country, and, accordingly, the need for investment. The companies and investment funds speak different languages. And we see our aim is to close this gap. That is, to find companies who need a rather small amount, between $50,000 and a million, so that they can create their product, make their first money, reach their break-even point…

I don't get it. What is your differentiator: the amount of supposed investment or the clients' mentality?

MM: There's a strong correlation between the investment stage and the ticket. So the answer is: both.
Addventure is a corporate structure that has shareholders (three people). If we like a certain company and its business model, if we, between ourselves, in our team approve their application, then we put it on the floor with the investment committee. And if the committee, a body that includes very respected investors, likes it too, we fund the project. It only takes about a month. With major funds, the process may take up to six months. We don't have formal restrictions, such as only funding companies whose value is between this amount and that. We can join at any stage: the original idea or the later phases. We are very flexible.

A client's point of view
That's all fine, but all investors want to fund good projects, and there are few of those. And it's these promising projects who actually choose investors, not vice versa. Formally, it all looks like thais: a small investment company, a very small one, all their office fits in one room. What will the clients think of it? Anna, you are looking for funds as much as they are looking for you, right? How do you perceive investment funds? What is your criteria when you choose between them? If you have a really nice project, many will be willing to help, but how do you pick your 'one and only' investor?

AS: First, I'd like to give a little background info: we started just like Maxim said, with the 3Fs. We don't come under 'fools' category, I hope, but we do count as friends. We were a group of people who all knew each other, people with brains, who chipped in, I did that, too, and launched the project. 
How much did you chip-in, then? Sorry if it's a touchy question.

AS: That's OK. At first, we had about $400,000, I believe. The proportions were different, of course, some people's share was bigger that that of the others. We had a great team, one that understood what was to be done. It is not an easy job: so far, international companies could not enter our market.
So, as result of the launch, we had a company with partners, infrastructure, with orders. But we just failed to reach the break-even point by an inch when we ran out of money. So we understood that wee needed to 'surrender' to an investor.
I can't say we were particularly picky, but as the company's CEO, I had a felling that I didn't just want money.

Excuse me? What was it that you wanted, then?

AS: Understanding. Well, for instance, we went to a rather large investment firm. But as I looked at them, I saw there wouldn't be any smart money there. Because they really had a huge sack of money, but there was that lady sitting there, virtually picking her nose…

Well, it's her job meeting you. There's croeds of you and only one of her. If Maxim says they have 3,500 applications a year, larger funds must have even more. Imagine all the time and effort involved reading all that, and you, applicants, are not particularly easy to deal with, as Maxim has just said.

AS: No, the lady was rather smart, and in a good position, but she just didn't impress me. If we worked with them, they'd just say "come on, Anna", and that is it. But when we met Addventure, when we agreed on the amount, they sent us Maxim, who never says "come on, Anna", but rather "you need to do this and that and that, Anna". In other words, we got smart money from them.

Maxim, how come you have time to work so closely with a single client when you have thousands of applications to be sorted? And, you need the competence, too…

MM: Competence is not an issue. I was trained in IT business, where online marketing is like a foundation stone. And, we are experienced, we see the cases of other portfolio companies, too. Plus there is a network of contacts that we have developed in the last two or three years, and that means we are connected to the best IT specialists, marketing and PR experts.

Fine. Investors gave you the expertise that is a result of two or three years' work. But there are only four people working at AddVenture. That's only the expertise, a two-hour meeting once a week. And still, there's the 3,500 applications a year…

AS: Why once a week? In the beginning, Max would come a few times a week, there would be be meetings, brainstorming all the time. Max was practically responsible for our marketing. He tells us all about the channels that are available, what we need to do. And if we cannot do that particular thing at the moment, he can recommend people we can cooperate with.
What is the difference between a bank loan and an investment? A loan is when you just get a sack of money and off you go. But if you choose a wrong partner, then you get mugged, you'll be left with no money and no business. Investment, at least in our case, is something different. Max directs me, tells me where to go and where not to go, says what may be good or bad for business. It's like a safety net.

MM: This is a harmonious project here. The business is in the 'junction' between online and offline. I reinforce it from the online side, and there's another expert on offline, one of the founders who understand the restaurateur's mentality, as he is one of them himself.
And we really do a great job balancing each other. I keep rushing forward with my American or European ideas of business, I keep saying this and that, but then he tells me that this thing is going to work and that one isn't. So we find the golden mean that really keeps us moving forward. Sometimes I cut it too fat, sometimes he does, but we always consult each other, because we are a team.

Sounds like a happy Christmas tale. But it can't always be like that in real life. You must have had certain moments in you business history, certain bifurcation points when it could all have gone differently. Were you simply lucky? How?

AS: Certainly, we were lucky twice: firstly, when we managed to form a very good team, and secondly, when we found the smart money.

What was your criterion for choosing 'the money'? Was it by size? Or by mentality?

AS: By an intercrossing of these.

Who else did you see?

AS: We saw many people. One of our founders works in the same field as Maxim, so he knows all those people.

What are they like?

AS: They are awful bureaucrats. Just as Max said, they keep nagging you about the papers you bring them, you business model, the number of your founders, everything. Major investors usually think like banks: we give you the money, and you just do whatever you want. So the recipient bears all the risks.

So now, when you've passed all these circles, what is your advice to other start-uppers: how does one finds an investor?

AS: I'm good at sales, I'm a sales specialist by both education and experience, so I could, of course, start giving advice from that perspective: "how does one sell oneself". But I won't. Working with investors requires a different approach. If you are trying to sell yourself, to force yourself on someone, the effect can be quite the opposite. Naturally, you'll need figures, you'll need plans. You'll need to come and tell them what the idea is, what the team is like, but it all has to be down to facts, investors hate that empty blabbing. But don't try to seem a better person, a better project than you are. Let them see you as their stroke of luck. If they do, they'll try their best to help you.