Alexey Girin: The trailblazing new trend of ICO investment
An investor with 15+ years of experience, a managing partner of Starta Capital and Starta Accelerator, Alexey Girin discusses in an interview how his team helps tech startups scale their businesses, raise funds and prepare to access the lucrative US market. Thanks to a partnership with Cross Coin, the Starta team now provides the chance for everybody to participate in venture deals through an ICO opportunity on the Waves blockchain platform.
Starta Accelerator operates in Russia and in the USA at the same time. Why?
The USA is the largest market. If we consider the Russian IT sector, it’s only 1–1.5% of the global share, while in America the figure is 40%. In addition, it has liquidity, i.e. companies are being bought. This is what allows venture investors to secure good returns.
Russia has strong IT specialists and talented mathematicians. At the same time, it’s not that easy to grow and profitably sell a Russian tech startup, and so we are working to improve this. Russians don’t tend to invest money in things they can’t see. Besides, venture deals can be complicated, both technically and legally.
Within the promising US market, our companies need to build awareness with customers, partners and investors, to adopt new cultural patterns and learn the best way to work with consumers. We help them to do so. Good outcomes at this stage are a new round of investment; growth in earnings; and for the B2B sector contracts with customers, helping them to join larger accelerators, and so on. The final goal is a sale to a strategic partner at the highest possible price.
There is a belief that startups are born in California. Why did you choose New York?
There are many old-fashioned companies in New York — it’s the classic business centre. At the same time, competition in the country is high, between different states, businesses and people. Implementation of technology is the only chance for such companies to gain a competitive edge. This is why people here are more willing to introduce technological innovations, and startups have better chances to implement their product. That means that as the accelerator, we have better chances to sell the startups.
Hi-tech monopolies, the industry giants, flourish in California. Startups in this field are rarely paid much attention. You attract attention only when you are doing something really extraordinary. This is why even Californian startups move to New York to get their first clients.
Another reason is the time difference. It’s a 10-hour difference between Moscow and San Francisco. If an investor or a startup manager from California wants to talk to the team of developers at their morning meeting, they need to be working at 1 am their time. With New York, the 7-hour difference makes it much easier to conduct meetings.
– You are one of the first in the VC space who has come up with an idea to use blockchain technology to support startups. How did this come about?
Firstly, there is a company in our portfolio that builds businesses on the blockchain, iCoinSoft. Secondly, we follow the most promising trends on our own initiative, and it’s clear that blockchain is just such a trend. The third factor is that we met our future project partner Kairat Kaliev, who leads the financial and technical department of the International Financial Center of Kazakhstan, at a conference some time ago. We discussed the problems facing Eastern European startups, including the issue of financing. Since Kairat works in fintech and is familiar with IT, he suggested raising money that he would then invest in us via an ICO (Initial Coin Offering).
– What is an ICO and how does it work for this application?
An ICO is — in some ways — similar to an IPO (Initial Public Offering), but conducted on a cryptocurrency platform.
In a classical VC model, you have to make a significant investment and wait for a long time. Previously, there was no way to make such an investment without a cheque for at least $100,000, maybe $1 million, and there was no way for you to diversify your investment without big money coming in afterwards. With the advent of the ICO, investors with $10,000 or far less can also do this. Starta tokens, issued by the Singapore-registered Cross Coin company, will cost $1 at the initial offering in the framework of our project.
The mechanism is attractive in its openness. This is the model that all venture funds should strive for. Transparency and market liquidity are maintained; investors can exit at any time.
How does our ICO work from the standpoint of an investor who will acquire tokens? As an accelerator, we receive 7% of the sale of the startup stake when it is acquired by a large strategic investor. After all tax payments, 33% of this profit goes to Cross Coin — in proportion to the share of this company and in an SPV specially created for investing in the pool of startups from the last two batches of Starta Accelerator. This 33% goes to the exchange and Cross Coin buys tokens back at market price. This happens for every exit of the startup from the pool.
The system allows investors to choose their strategy: wait for an exit or make a decision based on expectations and newsflow on the token’s secondary market. If a significant event for the startup occurs and the price of tokens on the exchange is growing, investors can react to it and exit with assured earnings at any point. So these are our project’s USPs: the democratisation of VC and a developed secondary market.
– What do startups themselves think about the ICO mechanism? Does it affect their operation?
Project teams implementing startups are quite progressive — they are interested in this. By the way, all our companies can be found on social media. Investors can follow them and their founders on Facebook, for example, and track their newsflow. We are now witnessing a degree of openness in the market that has never existed before.
– You help startups enter the American market. Why can’t they do that themselves?
Domestic companies face enough internal and external barriers. They may lack funds. It might be difficult for them to understand how to make the product more popular and how to attract customers. From experience, we also realise that companies geographically located in the US enjoy greater confidence from US investors.
– Investors do not always want to invest in startups. They find it difficult to assess prospects. How are you doing this? What criteria do you use to find out whether the companies are ready to scale to the US market?
We emerged as a seed venture fund and invested in companies at a stage when institutional money wasn’t ready to invest. The startup has no performance indicators that can be analysed.
For this reason, you’ll find the same broad phrases and figures in any pitch: about the team, potential market size, and so on. This is customary for the Russian market, but US investors use a more nuanced approach to evaluate such companies. They look at how the team works and how it deals with specific problems.
We use a similar method to evaluate our companies. We look at the startup founders and their potential: whether they are able to achieve the goal of moving from A to B. We conduct multiple interviews. We find out how well people know the sector and whether they are ready to hear and listen to others.
At the initial stages, startups are confident that they know more than others, but usually no good comes of it. This is why we check whether people are ready to take information on board and adapt. Of course, we are looking at the market and scaling opportunities too, but first of all we evaluate the potential of the team.
— What can Starta Accelerator offer to startups?
The main task of the accelerator is to provide startups with as many opportunities for networking and establishing useful connections as possible. In a short period of time, the company gains a significant amount of feedback from competitors, entrepreneurs, investors, potential customers and partners. This is how a startup can understand the best fit of their product or service, as well as the business models that are most in demand on the market. This degree of networking would typically otherwise take one or two years.
– What are your startups trained to do? What are their strengths and what is it most difficult for them to master?
First of all, they learn how to be proactive and not to be afraid to ask questions. They don’t wait for someone to say, ‘You’ve got a great product — let’s develop it.’
They learn how to work independently. They study UX, sales and marketing, and PR. We embed a temporary expert in the team for each company. They do not just come, listen, give some advice and leave. This is a fully-engaged employee. It’s a mentor in the sales department. Working hand-in-hand with the startup, they develop a strategy tailored to the company, they think through promotion channels, they design offers for customers and test hypotheses for the market. Then the team implements all this and returns to the manager with feedback. They address problems and build new hypotheses. This is done for all the competencies that the team and startup founder lack.
This is carried out to ensure that employees have gained the experience and expertise they need in these fields. It is important that they learn how to do everything themselves. A startup has to go through all the stages itself: understand who, how, where and what to sell.
We develop the team’s thinking and hone their business models. According to our observations, 40% of companies opt for business models that differ from the ones they initially chose.
– What companies usually come to the accelerator?
The first batch was dominated by online companies from the advertising and marketing sector. The more recent batch is dominated by fintech companies, and there are companies related to agritech.
In terms of size, companies develop rapidly thanks to the programme. There are examples where revenue has grown four-fold in nine months — they entered at $50,000 and now make $200,000 a month.
– We are talking about revenue growth. Can you talk about profit growth?
Once you try to stabilise your costs at the income level in the venture industry, you lose the potential for rapid and massive market expansion. This is extremely important for the IT field, because the winner (or the first three winners) takes everything. Due to this, companies need to scale in the early stages as quickly as possible.
This is what investments are raised for: to spend more, to seize the market, to improve services and to overtake competitors. Once you try to enter the phase of stable income over expenses, you lose the growth potential. Everyone understands that you will then only develop at the pace of a classical business — perhaps 10–20% per year.
– An investor always wants to have an approximate understanding of prospects and time. What has changed in this aspect in recent years?
The average age of an acquired tech firm is 6–8 years, but these figures are decreasing. Old-school companies actively acquire tech firms. Now the average business age is 5 years. It should be understood that there are exceptions in either direction. For example, GeoCV, Navigine and Centrobit have already had offers to be bought up. As such, we know that a sale might take place as early as the 2nd or 3rd year of a company’s life. The startup founders themselves are not always ready to sell so soon. Many of them realise that if they raise additional investment and use it for development, they can achieve a much higher evaluation for their business.
– What future do you see for VC and ICO?
IСO is a new reality in which startups can become transparent from both a social and financial standpoint. It is a reality that requires a different approach.
At some point, the authorities will start to regulate the system intensively at the legislative level. In any case, the ICO model has already changed the investment landscape. It’s just not always noticeable. The ‘shell companies’ a priori have no chance to raise investment. They won’t be trusted, because the information will spread instantly. Any misguided action will deprive them of a chance to develop. At the same time, the ICO system will help startups with a strong product to accelerate the growth process.