The Era of Russian-speaking Tech Entrepreneurs Has Come
The following is an interview with Alex Chachava. Alex is a serial IT entrepreneur, founder and managing partner of LETA Capital, as well as the Board Member of a number of portfolio companies and a member of YPO — the world’s largest association of business leaders
Interviewed By Galina Polozhevets from BIT
– Alexander, being a successful entrepreneur, what motivated you to become a venture capitalist? As you once said “VCs lose millions of dollars even outside of crises times upon startups going bankrupt”
– I believe the transformation from entrepreneur to venture capitalist happened pretty organically in my case. At the time (around 2011), I was having an entrepreneurial career, having launched several companies. Serving as a CEO and shareholder of Leta Group, which at that point employed 500 people and had revenue of about $100 million, I realized that in order to move to the next level, I need to change my business approach.
At the time, we had around 30 top managers and key people in the company, whom we would leave for two or three days for brainstorming sessions with, especially when we needed to make some important decisions. We had an internal company culture of “Chinese Democracy” as I call it, where everyone discusses the problem, finds the solution, and I, as the main decision-maker, am responsible for the implementation. As a result of one of such brainstorming sessions, we came to the conclusion that we as a company reached a certain mediocre level of growth and development.
But how could we return to a fast-paced growth again? Our vertical top-down company structure had exhausted its growth resources to a certain extent by then. Prior to this memorable brainstorming session back in 2011, I thought we would come up with some sort of a magical product or the like and would start implementing it. However, as a result of that session, oddly enough, the team concluded that we don’t need to centralize and concentrate all of the decisions in a single person, neither do we need manual control, having many smart entrepreneurs within our group and even more around us. So our job should rather be helping them realize their ideas and ambitions. The most effective way to address this is to create a venture fund.
However, at that time I had no idea of how venture funds worked. Adhering to the decision of our expanded Board of Directors, I went for an educational trip to Silicon Valley, studied peculiarities of investment funds, and eventually realized that I really enjoyed myself advising other entrepreneurs, which was also in line with the fact that I was ready to face new professional challenges, being a bit tired of running company operations 24 hours a day. So I handed over company operations and flew away — to Silicon Valley first, followed by South America and Antarctica.
I returned back home with inner fear — I thought I would find the ruins at the place where I left my company. But instead, it turned out the opposite. After arrival, the first day passed by and no one ever called me. The second day — my phone was silent again. On the third day, with a trembling hand, I dialed the company’s managers, and guess what I heard? “Oh, I didn’t realize you are back! How was your trip?”. When I asked about the company affairs, it turned out things got even better than before I left.
Nine years later, I still believe that decision has been the smartest management decision of my life.
Thereafter, we restructured our group of companies. Two companies were sold, the remaining four are still doing well, maybe even better than when they were part of the group. And suddenly I realized: what if I stop concentrating inwards and start looking outside? The world is enormous. That is how we started investing, ended up making about 20 investments in various startups.
As of today, these 20 investments resulted in a dozen of successful companies. Some failed, of course. We successfully exited from three companies. To be absolutely honest, I am happy the most not only about the companies that we managed to sell, although it is a quintessence of any venture investor but rather about companies that have built an effective business from scratch, currently employing hundreds of people and generating millions of revenue.
If we talk about the mission, my mission is to help entrepreneurs achieve success. This may not sound like a typical mission of a venture capitalist. The success of the business is always measured by money. Pretty much the same as for a venture investor. But frankly speaking, it gives me the greatest satisfaction to help entrepreneurs who want to create their own business, because I firmly believe that entrepreneurs are the best people on earth, they move the countries and the whole world forward.
Russian-speaking entrepreneurs just happened to be closer and more understandable to me than others. It doesn’t matter which country they are located in. The main thing is that we have a similar mentality to them. On the one hand, Russian-speaking entrepreneurs historically have a slightly more difficult life than others, and it is more difficult for them to do business. On the other hand, the era of Russian-speaking entrepreneurs is coming. They have immense unrealized potential. I believe that my mission and the mission of my venture fund is to support these people on the path to success.
I’m much better at helping entrepreneurs than being an entrepreneur myself. Apparently, this is my mission.
– There are many people in Russia these days who claim to be helping entrepreneurs. However, their support is often limited to generic recommendations. How can a first-time entrepreneur distinguish between real and fake supporters? How can one find an appropriate coach and investor?
- I’m going to be a little cynical here. It is extremely difficult to achieve entrepreneurial success, to build a solid tech company, especially an international one. Venture investments and venture success mean scale and significant growth of a company, which is one of the most difficult things to achieve.
Success can only be achieved by the person who knows the secret sauce. The image of a successful entrepreneur today is often associated with teenagers such as Mark Zuckerberg or Evan Spiegel, who had a huge one-time success. But if we look at the numbers and statistics, we would find that the best age to create a company worth more than $ 100 million is at 40+.
Such an entrepreneur previously failed with a couple of companies, built a medium-sized one, and today is running his company number three or four, maybe even five and is likely to achieve great success. Such an entrepreneur has already accumulated significant experience, has network and connections, and has spent 10,000 hours in a particular industry famously needed to become a true professional.
We don’t think it is smart to play against statistics; it makes more sense to bet on the entrepreneurs who have a higher chance of success. So when I say that I want to help entrepreneurs, it doesn’t mean that if ten thousand students would pitch me their projects, I would invest all of my money there. An experienced entrepreneur knows better than I do how to achieve success in the target sector. He or she just lacks several crucial components: money, expertise in specific areas such as financial strategy, fundraising, or global scaling. This is the type of help without which it is extremely difficult to build a large technology business.
We do our best to help founders in the areas which are peripheral to the core business, but which are still essential: financial planning, strategic development, and further fundraising.
If an entrepreneur requires investor’s help with the core business, then the probability that he or she will succeed is not too high. And it’s probably not our “ideal customer”.
And it’s not necessary that we can be useful when it comes to the day to day business assistance. My personal entrepreneurship career ended 10 years ago, now my entrepreneurial experience is not that relevant — the world is changing so fast. But our investment portfolio contains very strong world-class companies. Their experience is very relevant because one entrepreneur has already successfully entered the Chinese market, another one — in America, the third one tested a new method of sales development. We create a comfortable environment for entrepreneurs to communicate and ask them to help each other — which is very important.
We are well aware of what our stellar entrepreneurs need and don’t need. They are typically not too happy when investors put themselves above others, recalling their experience in entrepreneurship from 10–20 years ago, or when investors intervene in the company’s day to day operations. We make them feel comfortable. Quoting the Soviet movie “Mimino”: “Make me feel good, I’ll drive you so that you would feel good as well.” This is the principle we are trying to implement.
– Majority of entrepreneurs face a dilemma: whether to finance a business with their own revenue and savings or by external funding? The problem is that investors differ significantly. When a company founder brings on board an external investor, the former often risk losing control over the business. So the question is: can one build a successful venture without attracting external investments? Or, if one wants to achieve outstanding results, it is inevitable that one needs to raise from investors?
– Is it possible to make a fortune without attracting external investments at all? Apparently, it is possible. But the probability of this goes to zero. “Making a fortune” in my view means creating a world-leading company.
To be able to build a successful venture, one needs to be better than his or her American peer for instance, who has the ability to raise hundreds of millions or even billions of dollars. Which makes the whole thing very complex. We know successful companies from Russia and CIS that have become market leaders without external investments whatsoever. However, if they would have raised external funding, these companies would definitely be even more successful.
As of today, an IT company from Russia or CIS likely won’t be able to gain leadership on the international market without investments. The American business model has ruled out others, where investors keep pouring money for the sake of development of the company for decades and see their returns only after many years accordingly.
When it comes to investors, I also know many businesses that were destroyed by investors, or an investor’s involvement dramatically complicated the company’s further development. This is mainly due to so-called “toxic” investors — when a company wants to expand internationally, then they should definitely stay away from companies and people in the sanctions lists or money of suspicious origin. As in the future, a growing company will have to go through a lot of compliance. If investors with the tarnished reputation are among the company’s shareholders, no reputable investors would want to deal with it.
But a professional venture capital fund always invests mindfully. I know successful serial entrepreneurs who, having made a fortune from their previous businesses, would still raise from a venture investor.
You can think of a venture capital investor as an outsider’s seal of approval of a company’s business. It also serves as a strategic management body that accumulates global expertise and helps the company develop more sustainably. In most of the times, companies who partnered with venture capital investors, turn out to be more ambitious and robust. As a result of cooperation with a venture capitalist, the company enjoys both the financial resources necessary for the development and a very knowledgeable advisor.
– At what stage of business development is it better to raise from a venture capital investor?
Not too early, but at the same time not too late I would say. Let me explain. Oftentimes in Russia and CIS countries, a future entrepreneur has a well-paid job. At the same time, he or she has a dream — to start a company. At some point, he or she would start looking to raise funding. The first thing any investor would ask is “show me your product”? For that, soon-to-be founder retorts saying: “I have to have a job now, I have a family to support, so I don’t want to leave my job until you give me your money so that I could quit my job and launch my idea.”
Investors typically don’t like such people, because one of the main secret traits of successful entrepreneurs is a certain quality, which we call commitment. This term can be described as “persistent confidence in future success, for which a person is ready to sacrifice and burn bridges.” What do I mean by burning bridges? I mean leaving a well-paid job and bravely face potentially hard times, willing to take the first steps in entrepreneurship while investors are not lined up to finance the company. No compromises when it comes to selling your car or burning personal savings for the sake of financing the first years of the company’s life. I have the utmost respect for entrepreneurs who are confident enough of an upcoming success that they are geared up to sacrifice not only their time, which is most expensive, but also their personal assets.
First money is typically the most difficult to raise. But time is critical. I would advise a first-time founder to raise initial funding from their closest circle of people who know them personally as a man or woman who keeps promises and who can be trusted. And don’t waste time trying to raise from investors, accelerators, etc.
Having a business concept in mind, after you managed to raise $100–200k, you built a product within a year, no matter if it’s still a beta version or full of bugs, and moreover, you found people or companies who are willing to pay for your product, then it means you launched something which you can proudly call “business”. After you got quantitative proof that someone needs your product and is willing to pay for it, then you are set to invest significant amounts in promoting, refining, and polishing the product. This next step is hardly possible without venture capital money. This is an excellent time to look for a professional investor.
By the way, I deeply respect my top managers who leave the company to start their own business. When this happens, I often provide them with small angel investment, without even explicitly asking what exactly they would like do, just saying: “Here is a convertible loan and let’s wait until professional investors acknowledge of what you are doing”. Therefore, it is better to take the first steps by yourself or with the help of close friends.
– As a result of the crisis due to the pandemic, did you alter the requirements for companies that want to raise from LETA Capital?
– I believe that the crisis has had an exceptionally good impact on Russian-speaking entrepreneurs. We can already see the results of it and I am sure the positive trend will continue. The crisis has eliminated almost all of the fundamental disadvantages of Russian-speaking entrepreneurs.
Let me share a few examples. Prior to the pandemic, the location of R&D centres used to have great importance. Many foreign investors didn’t appreciate the idea of having R&D centres in the middle of nowhere (like Eastern Europe or even further to the East). Nowadays everyone switched to working remotely, so no one cares where R&D is. Geographically distributed R&D teams became a new normal. Previously, it was considered as a clear drawback of Russian and Eastern European startups, but now everyone stopped paying attention to it.
Prior to the pandemic, bizdev and sales were primarily done via client premises visits or arranging booths at the exhibitions, both of which is very costly. Russian and Eastern European companies often didn’t have enough money to do that. They always tried to do as many sales via teleconferencing as possible. Now we can see that the whole world moved to doing business via teleconference. Which is also the case for B2B deals: one can organize a call centre in Moscow, Kyiv or St. Petersburg, working the night shifts, selling to Western Europe or America. This is a new normal now.
If you ask me about the main disadvantages of Russian — speaking entrepreneurs, majority of whom are techies and geeks, my answer will be as follows: they are neither storytellers nor extroverts. Remote work is comfortable for introverts but is terrible discomfort for extroverts. While the lack of in-person communication drives American entrepreneurs mad, Russians are in their comfort zone, doing business sitting in front of their computer, which is exactly what they’ve been dreaming about for decades.
Russian engineers produce software of the highest quality. There is still plenty of other problems, but the undisputed fact is that some of the best programmers and data scientists come from Russia, which is reaffirmed by Silicon Valley particularly, which is densely populated with many such specialists. Close to a million Russian-speaking engineers work in companies in Silicon Valley. Our goal is to discover and materialize this potential by creating companies, products, as well as intellectual property. Selling an intellectual property is way more profitable than selling the work of programmers.
At LETA Capital, we track all of the investment rounds by Russian-speaking programmers and entrepreneurs. In the past six months only, we identified more than 50 rounds, each of which exceeded $10 million, which is a regular investment round by American standards.
Most Russian-speaking entrepreneurs have their teams mainly concentrated in Russian-speaking Eastern Europe, because it is cheaper, and most importantly, much more rational, as one can put together highly professional teams without breaking the bank. In Silicon Valley, for instance, it’s almost impossible to hire such team, because all of the exceptional programmers there are already employed with Google or Facebook, and it’s unlikely that you pull them out of there, even for the higher paycheck.
Therefore, if you compare the current period with the same period last year, I guarantee that you will not find 50 companies, each of which raised $10+ million within six months. But now we see an upward trend.
We see that the era of Russian-speaking entrepreneurs in IT and tech has come
– Why do you consider soft skills are an important component for the company’s success?
– I once had a conversation with Dmitry Grishin, the founder of Grishin Robotics. I asked him: “When you invest in Silicon Valley companies, what is the most important skill of the founder for you?”. He answered: “The most important skill is the ability to raise money. I want to invest in a startup that will become a unicorn one day, if the founder does not know how to raise money, the company will definitely not reach a large scale.”
You can’t build a company these days without money. Fundraising is all about soft skills and mastering sales. There are numerous startups with world-class products, but they can’t fundraise and are not good at sales. At the same time, I know many examples when an American startup raised a lot of money using soft skills, signed contracts with customers without having the proper product in place, made some money out of it, then raised even more cash and acquired companies from Eastern Europe for a relatively cheap price, in order to access world-class products.
Sadly enough, I have to admit, that in the modern world when launching a company, soft skills end up being more important than hard skills, simply because of the American business model: after you raise a billion, you will likely be able to build a product with this, won’t you? That is, fundraising first, followed by marketing and sales, and then product creation in the end. As long as it works well in America, then it will work all over the world. We cannot ignore these rules, although objective reality forces us to act somewhat differently. I believe this is not only a huge challenge but also a fundamental strategic advantage that will emerge after another tech bubble will blow up in the United States.
– Is it more difficult for Russian-speaking companies to expand internationally now more than ever?
– I would say it became easier to some extent, as compared to 2014 or later, when it was close to restrictive. After all, Russian entrepreneurs, especially in America, are not in favour because of their bad reputation and political clashes, so they have to mimic and adjust their businesses accordingly. However, by saying that it became easier, it still does not mean that it has become easy, just a little less difficult.
– What do you mean by the concept of developing a culture of Russian-speaking entrepreneurship?
– There is a culture of Israeli entrepreneurship. In Israel, there is a government-backed program aimed at supporting the best technologies to go global from Israel. To achieve this, the country has made a lot to attract the attention of American investors and strategists to Israel. As a result, numerous international technology corporates set up R&D centres there, the Americans buy Israeli companies and invest a lot in them.
We need to create a positive stereotype of Russian-speaking entrepreneurs who produce world-class IT products globally that outperform analogues.
Russian-speaking entrepreneurs have already earned an exceptional reputation in the field of offshore custom software development. If an international corporate needs a high-quality IT product, they order it from a Russian-speaking offshore company. When one wants a cheap product (that usually doesn’t work well), they order it to be done in India. It is important to spread the notion of IT products from Russia being the best blend of architecture, performance, etc. I like the term called “do it nation”. We are, in fact, a nation that produces top-quality IT products. No other country has the same large number of world-class physicists and mathematicians as we have. IT products of the future are extremely complex ones. Russia is definitely in the top 3 countries in the world in this aspect.
– How do you see the technological revolution in education evolving? How will education change and when will it happen?
– This revolution, in fact, has already taken place in China. People there independently decide what they want their children to learn, many opt for learning by themselves. In China, up to 40 % of the education budget of households goes to extracurricular education. In America, it is less than 5%. In America and Western Europe, it is believed that a child gets all of the necessary education and training at school.
In China, they think differently. People in China don’t fully trust the official school, spending an additional 40% on top of the budget to hire tutors, study online, etc. In order to stay competitive, a person needs to take additional classes and extracurricular courses.
In Russia, the same as for many other emerging markets, there is a certain distrust of the official education system. On the other hand, there is a firm desire to achieve more when it comes to learning and development. Technology acts as a great enabler in this case. Having said that, as of today technologies in education are at the 2.0 level. Online education is essentially a video service that lacks interactivity and involvement of students in the learning process. But very soon we will see the transition of education to a new stage of 3.0 with lots of interactivity and direct interaction between the student and the teacher, while attention retention will be better than in an offline audience. I believe that online education 3.0 will be comparable to an offline education, and it will be accessible for anyone from anywhere in the world. Education 4.0 will be considerably better and more effective than offline education. I believe that time will come soon enough.
– Are you still looking for a billion-dollar startup?
– We are always looking for a billion-dollar startup. The business model of a venture capital fund goes as follows: it doesn’t matter how many startups shut down, it’s rather important that at least one of them gets to incredible scale. It can be a hundred billion, a billion or 10 billion, depending on the size of the fund. For us personally, a billion-dollar startup is a benchmark. And I don’t see any obstacles for such startups to pop up in Russia on a regular basis. We are encouraging such process and in return are set to earn good money.
– What are the company characteristics that attract most of your attention for investment? I think that some of our readers will want to contact you.
– I wrote a special Manifesto — a cheat sheet for the person who decided to pitch his or her company to our fund. We are interested in companies that want to build a successful international software business. They must have at least a proof of concept and a developed product in place, as well as first sales abroad — at least $30,000 in monthly revenue.
The original interview is published in Russian on the website of BIT magazine (source).
