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A growth in the number of ICOs will transform the VC market

A growth in the number of ICOs will transform the VC market

Alexander Tkachenko, Managing Partner of 2be.lu, has told us about the fund, the European VC market, and whether or not Russian startups need to move to the West.

Please tell us about the most successful portfolio projects of your fund.

At the moment, we have 14 projects. An example of a very successful startup is Ventrata (The Ticket Group), an online platform for distributing tickets for tourist attractions. We invested in the company in December 2017 when it was at the earliest stage. Now, in April, they are already close to break-even point. They stand a good chance to become quite an interesting company.
Another project is Mini Exchange/Sprii – a business that sells and delivers products for mums and babies. They started operating in Dubai; we joined the startup in 2015. Later, we took part in the second round and now we are going to participate in the third one. This time, we’ll be joined by the most eminent investors. By average estimates, the company’s business volume has grown fivefold since 2015.

What areas in the IT sector do you consider when selecting projects?

We have focused on three areas: e-platform solutions, blockchain market and AI market. However, we often invest in other projects too, if they are related to our primary areas of interest. For example, we can do it when we see that the startup’s team is highly professional and well coordinated.

Do you engage in venture investment only?

We have two vectors: the early-stage venture investment fund and the crypto fund for a closed circle of investors.

Why did you decide to concentrate on a narrow circle of investors?

Early-stage investment is rather a specific niche. This is why most funds work with a limited pool of investors. This is a standard practice in the industry. I’ve been living in Luxembourg for about 20 years, the fund is located there too. Investors come to us through word-of-mouth recommendations.

Why did you choose Luxembourg as a location for the fund?

Oh, Luxembourg is a very interesting jurisdiction because it is based on contrasts. On the one hand, the Great Duchy of Luxembourg is a very small country. However, from the point of view of an international fund or an international company, Luxembourg today is a major financial centre which attracts numerous businesses from all over the world – including, by the way, Russian ones. Not so long ago, a certain tech company from Skolkovo announced that they had set up an enterprise in Luxembourg. Last year, another Russian company engaged in nanotechnologies announced that they had decided to do the same. Luxembourg is currently a leading financial hub in Europe; one of the largest stock exchanges is located there. Also, it ranks second globally, after the USA, by the number of registered venture capital funds, including many alternative investment funds. The government of Luxembourg is doing everything possible to support innovations: it has created a fiscal regime and a regulatory system that are favourable for the funds.

What is the current sentiment in the European VC market?

The main problem for all market players at the moment is the rise in the number of ICOs and the growth of the blockchain sector.

How is it going to influence the VC market?

To my mind, now is a turning point for venture capital. VC funds haven’t changed much since the 70’s and the 80’s when they emerged in the Silicon Valley. Now is the time for a change.

What is likely to change?

There are several points here. The number of ICOs is going to decrease because many non-professional investors who have already invested in ICO will see, sooner or later, that this field needs professionals. That is to say, I don’t think that token sale will replace venture investment. On the other hand, however, ICO as an investment tool gives new opportunities to provide liquidity. Blockchain makes it possible to both attract via ICO and tokenize existing businesses. This is where the VC sector is currently looking.

Have any noticed any difference in the number of requests? Has venture capital lost much of its appeal since cryptocurrencies became popular?

Most investors in VC funds don’t see crypto investment as an alternative for venture investment – it’s quite another class of assets with a different risk and revenue profile, and a radically different investment horizon.

Apart from ICO, what other trends in the global VC market have you noticed?

Funds are growing in size, and with them the check at later stages is growing too. Because of this, large funds aren’t interested in early-stage investment.

What is the amount of your fund?

Our structure is rather unusual. Unlike most funds, we don’t attract investors’ money in advance. Instead, as we know our circle of investors, we attract funds for each deal individually.

Do you take part in seed stage deals?

We take part in both seed and post-seed investments. At the first stage we invest from 200 to 500 thousand dollars.

A small check – is it an advantage or a disadvantage for the fund?

Hard to tell. Especially since we invest another 0.8 to 1.2 million dollars in the next investment round. We think that 200 to 500 thousand dollars is quite enough at an early stage. The thing is, large checks aren’t relevant at an early stage. The task of the project team at this stage is to test their hypotheses about the market and about their product as soon as possible. As a rule, this doesn’t require much investment.

Who makes your team and what is their area of expertise?

We always engage experts: either it’s someone from the project team, or an external expert. When we were doing due diligence for a game development company, we engaged the CTO of a major video game company who was able to tell us about both the technical side of the project and the business model of the company.

As for locations, what regions do you consider apart from Europe and the UAE?

The case in Dubai is rather an exception. There, the team was fine and the business case itself was excellent. Mainly, it’s Europe and South-East Asia because we have a strong partner there.

What European city could be compared with the Silicon Valley?

London. Over 50% of the European VC market is concentrated there.

Would you recommend that Russian startups relocate to Europe?

There are many deterrents against moving. For example, inadequate knowledge of the business environment of another country or region. An English partner of ours always tells me that they, Englishmen, feel like aliens in America. He explains this by the fact that he doesn’t understand American business environment because he didn’t study there, neither at school not at a university, so he doesn’t have the necessary connections. This is why he doesn’t recommend moving to anyone. You must have really strong reasons to relocate your company from Russia to the West. Here’s a very good example. In our portfolio, we have a company named Chattermill. They provide automation services for processing huge data sets (comments from clients) using AI. The company was founded by two Russian developers who had been living in Great Britain for a long time. Their main problem was that they were unable to sell their product. As a rule, marketing isn’t a strong point of Russian companies. The reason we invested in this company was not because they were Russian but because I could easily understand their psychology, while Western partners didn’t. Over the next two years, the company attracted many international clients, including Uber.

If a startup founder still wants to expand their business to Europe, what would you advise them to give special attention to?

First of all, it’s crucial to have local partners or a local team with a knowledge of the market. Second, Europe isn’t a single market. It’s a number of diverse markets, each with its own specifics, each requiring special approach and allocated funds. You must first select one market – the one you can enter and the one with the greatest demand for your solution.

What is the quickest way to integrate into this business environment?

You must be there at least part of the time, as well as work with local contractors, partners, and specialists.

Let’s come back to your fund. Are you the only managing partner?

Yes.

What had you been doing before you started the fund?

I was one of the founders of a multifamily office in Luxembourg. Actually, I started my career as a reporter at Gosteleradio in the USSR. In the 1990’s I worked as a freelancer with Western printed media. Later, I turned to marketing, spent some time working for a Japanese advertising agency, then started working for another client – TDK. This already was in Luxembourg. We were one of the sponsors of MTV coming to Russia, we partnered with the Bolshoi Theater in some projects, as well as with La Scala, we also digitalized archives of the Mariinsky Theater. Later, in Europe, I went into private business. For over 20 years now, I’ve been living and working in Europe, mostly in business development. I have opened a number of companies from scratch, and I’m also a member of E100, the London venture investors club.

Original article in Russian is available via the link.

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