Investment School: Learning Effective Startup Investments

Very soon, within the framework of the educational program #tceh_edu, a new course will start - the School of Investments . The course is held in conjunction with the IIDF Accelerator and the Fund's investment team and is intended for potential investors, business angels and those who are interested in the theory and (most important) practice of venture investments.

The program includes not only seminars, but also field work with portfolio projects of the IIDF Accelerator, as well as the opportunity to participate in the investment of IIDF portfolio projects on special conditions.

To understand who a modern venture investor is, what he needs to know and what he can give the project, how to relate to venture investments during the crisis and why it is necessary to form a Russian community of startups and investors, we talked with the lecturers of the course:

• Ilya Korolev - Investment Manager of the IIDF, investing in mobile and Internet projects on behalf of the Fund;
• Sergey Negodyaev - Head of the IIDF Investment Portfolio;
• and Maxim Chebotarev, head of the IIDF Investors Club, dealing with angel investment in Russia.

What does a modern venture investor look like? Is it true that in order to invest in IT startups, you must either work in a venture capital fund, or represent a large corporation or, in extreme cases, have multi-million dollar capital?

Ilya Korolev: There is no single portrait of a modern venture investor. A lot depends on the investment goals and strategies of the investor, as well as the degree of risk tolerance. I will mainly talk about investments at an early stage. It is not necessary to work in a venture fund or corporation to invest in start-ups, but to have an adequate supply of funds for financing in the company at an early stage, where risk and potential profitability are high, is very desirable.

It is necessary, as they say, to be in the “topic”, that is, either invest in areas in which there is a fairly serious expertise, or have easy access to such expertise. It is also advisable to make co-investments with business angel syndicates, sharing risks, or co-invest with venture funds, as they have a large pipeline and the opportunity to attract better companies is much greater.

If we talk about investments in IT, then I want to see more business angels from entrepreneurs who made successful exits from technology companies, rather than managers of oil companies who have formed free capital for investments, since not only or not so much money is valued in an investor, and additional development opportunities, access to a network of specialized contacts and examination of the market in which the company operates.

Sergey Negodyaev: It’s very important to understand that startups and investors are very different. A modern professional investor today is usually an organization in which people with financial, consulting and IT experience work.

Angels are, first of all, individuals who have enough capital to invest. As a rule, such people have from 5 to 30 million rubles of savings, some of which they are ready to lose.

Angels can gather in clubs or give money to professional managers. Now there is a certain tendency towards the consolidation of small players into associations whose investment capacity is higher.

Maxim Chebotarev:A modern venture investor in Russia and the world is, so far, somewhat different people. In Russia, this is, one way or another, people associated with the technology market or the business of IT companies. In the world, early-stage investors (business angels) are people of all kinds of professions, from dentists to university professors.

Well and accordingly, how can we conclude: in order to become a real startup investor, you do not need to have any secret knowledge or huge capital. In Silicon Valley, a business angel is someone who invests from 100 thousand dollars a year (this is approximately, but close to reality) and does this in syndicates with other investors. In Russia, due to the fact that resources can be spent more optimally, a business angel can be called a person who invests from 1 million rubles a year.

What is more priority for the investor: a deep (from a technological point of view) understanding of the industry in which he invests, or knowledge of business processes, economic conditions, soft skills?

Ilya Korolev: Technological or market expertise is extremely important when investing. Knowing the methodology, working smarter with companies that at an early stage do not fulfill the plan, but are still in search of a business model, is a big plus. An investor is not a money bag, a gambler or an outside observer, he is, first of all, a partner who shares the company's vision and helps to systematically realize it.

Sergey Negodyaev:As a rule, everything is important for the investor. Without an understanding of the industry in which he works, it will be difficult to attract partners and customers. Without knowledge of business processes, it is impossible to build and develop a company and manage it, although you can always hire an operations manager. Without soft skills, it’s difficult to interact normally with partners. An investor must possess all these skills to work effectively.

Maxim Chebotarev: The most important thing that should be in a business angel is a set of different competencies and connections that a technology startup does not have. In the early stages, investor money is much less important than the opportunities that it can bring. Accordingly, it is important to understand the industry and the connections in it.

Obviously, not everyone has such connections and knowledge, and it is for these people that there are various clubs of business angels and associations of investors (the so-called syndicates). Within the syndicate, there is always one leader who collects it, it is a professional business angel with maximum competencies, and there are other investors who can join him.

Is it possible to consider venture investments as a “working” tool of your investment portfolio along with company stocks and other financial instruments? Are such high-risk investments needed during a crisis?

Ilya Korolev: Like any activity, investments pay off only from a systematic approach. It is hoped that one investment will bring billions, but according to statistics, the probability of this event tends to zero. In this case, the quality of companies at the entrance to the funnel (pipeline), the number of companies in the portfolio and industry knowledge are very important.

A crisis is a time of opportunity: lower company ratings, business models that may have less chance in a fast-growing market may start working, companies begin to think about the business, and not about “pumping” the cost with the growth of non-key indicators.

Sergey Negodyaev:I'm afraid not. History shows that in order to grow, a project at an early stage needs to make a lot of effort, both from the point of view of the team and from the position of investor. If the investor does not engage in projects, then he is very much at risk of losing his investment.

Do you need venture capital investments during the crisis? Of course! Now the amount of capital available for the project is being reduced in the market, especially in the early stages. If a new player with money appears on the market now, then he can count on very good conditions for investing in venture projects.

Maxim Chebotarev:World statistics already say that it is possible, since venture investments give a higher percentage than bank deposits in developing countries. But here we must understand that the likelihood of being successful is still less than the likelihood of losing your money. Statistics say that on his first ten investments, a business angel learns, and only then begins to earn.

During a crisis, investing in technology startups is one of the best ways to invest money. If you competently approach the selection of portfolio companies now, it turns out that the time for the release and sale of your share will coincide with the moment of the highest market position, when the price and multiples are maximum. Not a single crisis can last forever, especially in one of the largest economies in the world - Russia.

Can (and should) a "common culture of venture investment" be formed?

Ilya Korolev: Of course, it can and should. For example, when investing at an early stage, in no case should you take more than 10-20%, the founders should have enough motivation to develop their own business after another 3-4 rounds.

On the other hand, investing a lot of money at once is also not worth it, since limited resources and the level of uncertainty force entrepreneurs to leave their comfort zone when searching for a workable business model. There should be enough money to cover the costs for 3-6 months (with an angelic round or pre-seed).

On the one hand, it is necessary that all market participants understand the general rules of the game (how, with whom and in whom to invest, on what conditions), on the other hand, infrastructure is needed (law, development institutions, and so on).

Sergey Negodyaev:I don’t really understand what venture culture is. It would be right, probably, to speak about the education of ecosystem participants. Projects need to better understand why and how investors finance projects. Now very often, incoming projects do not understand not only what the investor needs, but also in their business.

It is necessary to increase the level of professionalism of the founders who will be more technologically able to approach goal setting, sales formation, and processes. Now all the founders are talking about attracting rounds, and no one is talking about revenue and cash flows. Here we have to work on this.

Maxim Chebotarev:Of course, it can and should. Culture creates beautiful deals and good stories that motivate entrepreneurs not to be afraid to take money from business angels, and business angels to give money to entrepreneurs. It is important that both the startup and the investor understand their responsibilities and take a serious approach both to the process of structuring the transaction and to further work.

A common culture is not only some informal things, such as the expectations of the parties to the transaction from each other, but also, for example, various important formal details: how to properly structure the transaction, how to approach the choice and formation of a portfolio, which can be requested from an entrepreneur, and what is not worth it.

Investment money is sometimes compared to a very expensive loan - but what can an investor bring to a startup besides money?

Ilya Korolev: From the point of view of money, indeed, investments are the most expensive source of financing, but not only money is important here, but also additional opportunities for growth, a network of contacts among potential partners and buyers, as well as among possible subsequent investors, expertise and the competencies that the investor can bring, as well as possibly the infrastructure that he can provide.

Sergey Negodyaev: The main thing that the right investor brings is not money, but competencies and partners. Competencies help to avoid major mistakes, choose the right directions of development and attract customers and partners.

How important is it for the development of projects to form a local community of startups / investors? How developed is this interaction in Russia? What role does the IIDF play in its development?

Maxim Chebotarev: All in all, many experts talk about 100 real business angels who constantly monitor startups and invest in them. For a vast country, this is a vanishingly small number of business angels. And, accordingly, it is necessary to form a community. World practice shows that investors best invest money and time in startups that are not far from them.

Sergey Negodyaev:The local community dramatically increases the effectiveness of the ecosystem, as sites are formed where projects begin to interact with each other. Projects begin to share experiences, help each other and organically evolve. It is easier for investors to work with the ecosystem, as it has a large number of projects, which reduces the cost of their search.

In Russia, such interaction is actively developing. Platforms are formed where projects communicate and develop, technology parks are built, accelerators are launched. These sites are constantly attracting investors.

FRII and the Moscow accelerator FRII are the largest site in Russia by the number of projects. We have gathered huge databases of projects and partners, developed practices for successful development and are constantly conducting industry events, which positively affects the quality of investment projects.

We can only add that the "School of Investments" will begin on June 18. Fill out an application and find out more about the program and course lecturers here .