Vlad Panait – Founder of Sparking capital - talks about the Romanian ecosystem of start-ups, the role of business angel and the opportunities of the current crisis for start-ups and investors alike.
SB: Your professional experience comes more from the corporate world. How can this help start-ups in an early stage of their development? What can the start-ups gain from your experience?
VP: That's right, I worked for 20 years in corporations in various industries and geographies. The added value that we bring is business experience – In my case, marketing, sales, trade-marketing – useful in general for tech-startups and for those founders who have little business background, as is the case of the polytechnic and cybernetics graduates or in the case young founders, not very experienced, yet. This is how we bring value - with this operational experience.
We also bring corporate governance know-how that you find quite a lot in large corporations, which helps start-ups learn a particular discipline in execution, without jeopardizing their agility and responsiveness. Similarly, we bring strategic planning, access to our network, help with client acquisition, growth strategies – things that my partner and I, have experienced in the corporate career and we can apply into the start-ups.
SB: What was the moment of your career that made you consider yourself a business angel?
VP: I started exploring this area in 2017, when I was frequently following crowdfunding platforms, especially from the UK and the US, and began to realize the opportunity. I made my first investment in October 2017 in a UK start-up called Mindful Chef – a food-tech start-up, similar to Blue Apron or Hello Fresh, a vertical that exploded during that period – accessing in 2018 a series A investment from a large private equity investor in the UK.
SB: How would you describe an ideal business angel?
VP: A business angel should bring some key points to a start-up. It is the operational experience and a network that can facilitate things for the start-up. In fact, in most cases, a business angel is similar to a co-founder, without being legally a co-founder. He must be the closest to the founders of the start-up and included in the extended team, meaning he should be involved in all important strategic decisions. Add to this the financing that s/he brings, which in most situations is received in the pre-revenue, pre-MVP phase, the phase that involves only the family and/or the founding members. Practically, business angels are the ecosystem components that can develop these start-up nurseries, and prepare them to enter the next stages: traction, development, and financing.
SB: What are you missing from all the qualities listed above?
VP: Working so much in corporations, I did not have a very significant hands-on entrepreneurial experience. However I am building it now, with my already 3-year old investment fund, which is an entrepreneurial experience itself.
SB: Which sectors are you closely following, and how do you see an ideal investment portfolio?
VP: I keep an eye on some verticals, such as Marketing and AdTech, E-commerce, Marketplaces/Market Networks, Education-Tech, Travel-Tech, Property-Tech, Circular Economy and so on. I monitor them due to some past experiences but also because of the potential and added value they can bring.
As for the ideal portfolio, we make an investment decision based on the growth potential and on the possibility to have a gross return of at least 10x. We pursue start-ups in different stages of development and invest in both pre-revenue and pre-MVP stage start-ups, which have a higher degree of risk but also a higher return on investment potential. We aim to have a share of 15%-20% of these, in our portfolio.
We also have a target to have about 60%-70% of start-ups earning their first income and having a first product market fit - i.e. they already have a MVP launched on the market, they respond to a market needs and have some customers who pay for their services.
We also look at start-ups that are a bit more advanced, in the growth/scaling stage, but for a smaller share in our portfolio. Having them in different stages of development is meant to balance the risk.
The equity we target in the start-ups is different too; larger in the early stages, and smaller in the more advanced ones – also in balance. The verticals in which the start-ups are functioning are those in which we can bring value and growth– those listed above.
There are also industries in which we have not invested and will not do it, like MedTech; it needs industry expertise, it is heavily regulated, it requires lots of approvals and validations to be able to sell the products or services, the period of exit is more extended, and so on. So, we have a list of "don'ts" that we follow in our investment strategy.
SB: While any crisis has a negative impact, it also creates business opportunities. Please define – from your perspective - two types of such opportunities in terms of investment?
VP: An opportunity I see is in the Education Tech from at least two perspectives.
On one hand is the content that this vertical could employ. In our society, children still learn by traditional methods and from somewhat dusty textbooks. The improvements that have been made at the curriculum level are relatively limited, if you look at a length of time of decades. There are many new areas in which children could be interested in, and there is currently no curriculum for those, in or outside the traditional education. We live in an increasingly tech-focused world where technology will have a considerable impact and children could learn about this. I do not necessarily expect such subjects to be introduced in 5th grade of the national school system, but maybe at least as extracurricular activities or as opportunities offered by the private sector through interactive, digital content.
The second perspective is how this knowledge can be delivered. One of the impacts this crisis has had is that students, unable to attend school in person, had to use technology to attend virtual classes, in a country where the technology is not well spread.
This is a great opportunity! Education will change, both within the formal framework regulated by the Ministry of Education, but also in the less formal one.
Children can also learn from home, through digital technology, AR, VR, etc. if provided with a great deal of extra-curricular content. This is an excellent opportunity for parents to ensure that their sons and daughters learn modern skills, which will help them later, to integrate into a labour market in which technology plays an important role.
Another opportunity generated by the COVID-19 pandemic is that many businesses operating offline had to move online because they could no longer carry out their activities otherwise. This has led to an increase in e-commerce and its user share. Many age categories who were not thinking about buying online had to do so. This offers an interesting perspective to the Marketing and AdTech players because more consumers have now a digital customer decision journey, and companies' ability to target them effectively is becoming more complex; the performance and costs are becoming increasingly important.
SB: What do you think the local start-ups miss?
VP: The growth strategies, marketing strategies, client acquisition, business model, governance. They do not know how to scale internationally, or what clearly matters when they want to attract financing in later stages.
SB: What do you think are the strengths of local start-ups?
VP: For the vast majority, the product is the main strength. In other cases, there are also specific entrepreneurial skills and proven experience.
SB: What do you think are the biggest challenges that a start-up faces today?
VP: One of them is scaling up and growing outside the primary market - in this case, Romania - because things are not as simple and there are not many examples of success (although we had few in recent times). Many founders do not know what steps are required and have a rather opportunistic and less strategic approach.
Also, like in any crisis, access to financing becomes more complicated. There is less money to invest, the number of rounds is lower, and the investment value per round is also lower.
SB: From an investment fund perspective, which do you think are the biggest challenges you have to face in the current context?
VP: Access to finance. In a time of crisis, risk adversity increases, suddenly the cost of money is higher, and there are other opportunities. These things generally affect any investment fund's work, especially in an early stage, or in a market that is not well developed, as it is ours. Another affected area is the scaling of the start-ups already in the portfolio.
SB: Sparking Capital is a fund based on private sources - private investors. How did the current crisis impact the support you have received from them?
VP: There is a certain reluctance to finance the next rounds, as is the case for the decisions to invest in start-ups, because a part of the limited partners are also in the board of investors and are part of the decision, with us, General Partners, on the investments we make.
SB: Which investment in the recent portfolio are you the proudest of and why?
VP: We have five companies in the portfolio, which we are proud of, and some new deals we work on. We invested in some of them in 2018, and they had time to develop.
TechInfluence is a tech-marketing start-up, which has had outstanding growth in Romania, attracting market leading clients from many verticals such as banking, consumer goods, e-commerce, fashion, and retail. They have excellent market traction, and have become partners of Facebook this year – which is a confirmation of the quality of their product and the business potential.
EverToys is part of the toys and games vertical, following a subscription model influenced by the current trends, as consumers rent toys online. The whole e-commerce segment shows good growth this period.
SB: Which newspapers or specialty publications do you read every week?
VP: There are several categories: I read financial newspapers like ZF and Financial Times, but also specialty publications such as Start-up.ro, PitchBook, CB Insights and PE Hub. McKinsey has also some interesting articles about trends.
SB: Thank you for your time and valuable input. Would you have anything else to add for SeedBlink's readers?
VP: The crisis we are experiencing has left deep scars in society by loss of human lives and the number of people who have become sick and suffered. Despite the challenges we see every day, we are also experiencing significant change both in our lives and also in how we relate, socialize, and work. All these changes come also with extraordinary business opportunities and can be exploited through the appropriate mindset.
This kind of opportunities happens about once every 10 to 15 years – we need to seize them!
By Bianca Iulia Simion
PublishedFebruary 22, 2021
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