You can tell a Startup Wise Guy from the bright red hoodie — a candy apple color that pops and catches your eye — and you can tell Cristobal Alonso, Global CEO & El Patron of the private fund and accelerator, because he’s always on brand wearing red hoodies or red glasses, red suit jackets or red t-shirts, red ties or red sneakers. He’s proud of Startup Wise Guys and has every right to be.
Since 2012, when SWG was founded in tech-savvy Estonia, the company has invested in more than 185 early-stage startups (incl. dynamos VitalFields, StepShot & Sorry As A Service) run by over 400 founders originating from more than 40 countries.
Their region of focus, which stretches from Estonia to Turkey, has dealt with its share of troubles in the past and, in some countries, is still facing current economic and political challenges. But to the Wise Guys, this is just par for the course, and the rewards for working with the techy, talented and purpose-driven people from this part of the world are well worth it.
Cristobal has lent his hand to the Wise Guys from the very start, first by mentoring the founders in the early batches, while he himself was running his first startup, and then by coming on to lead the company in 2016. Today, the Wise Guys are on Batch 19, with no signs of slowing down.
We recently had a virtual sit down with Cristobal to get his take on investing in our corner of the world, how he looks at scaling startups & founders, and the search for unicorns. This is Part I of our conversation, which has been edited for length and clarity. Come back next Monday for Part II.
Let’s talk about the mission and ethos of Startup Wise Guys.
If you look at our purpose, its basically to help founders become entrepreneurs and deliver great international tech companies. There are two things here: One is the transition to anything like a larger company — and few can actually really grow a company — so how do we support those founders in that journey?
And the second is the level of ambition. Our people want to create a company, but do they want to create a great international tech company? So grade is important because grade is actually sustainable. It’s values driven, not just large, right? It’s founders who from Day One want to create something that is international. That is that level of ambition that we’ve built into the mission.
How do you look at the growth of SWG over the long-term?
We’ve always said that every year we’re aiming for 1–3x growth at SWG, which, in a way, makes us the role model for the startups that we’re investing in. We’ve always said that we are role models for everybody, so we need to be going to ‘X’ all the time.
The interesting part is that we’re always saying we want to go 3x and never have more than 50 people on the team because, from a cultural point of view, I think it’s very difficult to maintain your culture when you’re going up to 50 people. If you go over 50, you become a different type of animal, not a bad one, but just completely different. We have 24 people now.
I don’t know about a ten-year strategy, but we want to have more than 1,000 investments in the next five years. We want to be the largest early stage investor in all of Europe and one of top three brands in the world. So basically, it’s going to be Y Combinator, somebody else, and us. That’s the level of ambition that we’re putting out there.
— Cristobal Alonso
By now we probably already have the largest founder alumni network. ‘Alumni’ is a very typical concept in business schools, but it’s not a concept that was familiar in Eastern Europe. The transformational culture of long-term-thinking alumni networks is already having a huge impact here, and we want to be impacting as many founders, families, and ecosystems as possible.
What has surprised you (or not) about working with local founders from different geographies from countries that have had such a varied geopolitical history over the past, let’s say, hundred years?
I think what was surprising is the long-term view. How many people are sort of in focus? How much data do you try to read in the long term? In fact, not valuing the network is a huge inheritance from thinking, ‘You don’t know what will happen tomorrow so take advantage of today.’
The second one that has been a big surprise is that, in many of these countries, a lot of the little money that does come in is from angels from the diaspora in the US, so for example from Armenians or Ukrainians living abroad. With 200,000 euros in the Valley, that’s two months and you’re dead, right? In the Baltics, that gives you 18 months to find product/market fit.
Did you notice anything about our character traits — like being extremely resilient and gritty or resourceful — because we grew up in the time when we had less?
I think that our typical role model that we see is the very technically knowledgeable, deeply ambitious person: ‘I want to keep growing. I want to prove something in various European countries. I want to prove something in a way where I cannot fail.’ But it’s not the fear of failure, but that they don’t want to fail because it has something to prove. I think that’s where the resilience comes from.
Some of these founders, you might see that there’s no traction for two or three years, and then in year four — boom — something happens. In Western Europe, they would’ve already left the company 18 months before. So call it a combination of resilience, frugality, impatience, and that they want to prove something to the world.
Also, maybe the last thing is most of the parents of our entrepreneurs made their careers in communist times. So if you’re going to look at your parents and your grandparents as the role models from a professional point of view — they might have great personal values — but professionally, you don’t look at them because they were not in the same world, right?
When the founders see all the people that are not from the region that are willing to invest time and energy, they’re very, very open. I don’t really see that in other Western countries. I think here experience is more respected, and the energy and willingness towards your experience makes for a very powerful combination.
How do you think about the strength of the idea when you invest?
Well, I actually don’t value the idea almost at all when investing in companies — we invest in teams. So when I’m looking at teams the question is: Do I want to work with these guys? Do I think they have what it takes? Do they have complementary skills to build something interesting?
The second one is, ‘Why are they doing this and what is the personal connection with the problem?’ With the advantage of being in EE, I know that we’ll have enough time — even if it takes six months and extra iteration — and that they will do it and won’t quit right away.
The other question that I always ask them is: How will you build this into a 100 million euro company? The 1 billion, they can’t even think about, but the hundred million gives me an idea. Are they ambitious enough?
— Cristobal Alonso
Do they have at least the basic thoughts of how to scale, and are we aligning where they want to go? Do they want to do a lifestyle business or a venture-backed business?
How do you look at scaling & encourage founders to scale?
I think the key part is to lay down some time for what ‘scale’ means. So that you know, a scale is 30% MoM growth on your MRR, which is okay in months 1–5. Then you put the number together as a team. Now it can be actually scary.
The second part is doing that, but then we always ask them, ‘Okay, about when do you reach the break even point? Can you reach break even at 50,000 MRR?’ How do you go about the growth so you reach a point where you don’t need more funding? This is the point where funding is just fuel for the machine, but the machine is already well-fueled.
How about the founders themselves scaling in the sense of growing with their company?
We have a sort of contract with our founders, so we tell them that they have one year after the acceleration in which we treat everybody equally. After one year, you’re going to be between four categories of expectations, and we will prioritize energy and efforts on those meeting expectations and above expectations, right? If you’re below that, you can call us but if we have time, we’ll help you.
What qualities do those founders who meet expectations have?
An ongoing capacity to improve, keep challenging themselves, and keep being coachable. So even if they’ve reached 30K, 40K, or 50K, I don’t think that that’s the end of the journey. You need to have reached 1 million, which is not that common here. At that point, to still think that you need to keep growing, that’s actually powerful.
Here we’ll usually see a certain level of criticality complimentary skills in the founders so that they’re challenging each other in a way, not just kind of becoming one voice only. This is useful in the more international teams because I think they come with different points of view and the ongoing ability to keep seeking out help and advice.
To be very clear about what the challenges are on an almost monthly basis — it is always the challenge of ‘right now,’ as in, ‘This is what we need to solve right now.’ How can you help them with that particular challenge and in different quarters, right? And also, our program is very challenging. So you’re not going to be enough and we are here to help you. Some of the founders become very defensive, and you see some of them don’t.
And by the way, if they’re founders who are above expectations, they don’t need us. Within 18 months, the next VCs are on board, and they’re pushing them, etc.
I think what we focus on is making what I call the ‘middle class’ become better. So our model is not to get a unicorn out of 100. There will be three or four out of the next 16 or 20 that are good. The thing is this ‘middle class management,’ as we call it. The fantasy is that when you invest at a half million valuation to start, either you make it to a 25 million valuation or you make a great exit.
You’re describing an interesting process where the game is not about the unicorns — the game is about creating a sustainable ecosystem of startups where people will be focused on process and will be growing. And, there will be some kind of reward at some point, but it’s not life or death whether it’s a unicorn or not.
You perfectly summarized it. This is the world in which we work here because even the founders are a small piece, as they call themselves. We have 25M–30M funds. But those guys are actually entered in the companies with 1–2M ARR, or 4M ARR. If I can transfer this into 8M, and I can plug into that, I will actually make a lot of money. So if you have 1–2 million ARR in a sustainable way, you will get a liquidity event that doesn’t have to be the unicorn.
To me, this sustainability is actually fundamental, and we encourage that way of thinking from Day One. It also pays back for our investors, and by then we can prove with the numbers that this mentality is a method of microsystems.
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This concludes Part One of our conversation with Cristobal — stay tuned for Part Two next week, where we dive into the subject of Eastern European investors, mentors & the world of seed capital.
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Lightning Round
1. Dream car: A classic red Porsche 911 Carrera
2. Last thing you streamed: I rewatched Hoosiers
3. Number of countries you’ve lived in: 14
4. Favorite sport: Basketball
5. Secret hobby: Not secret, but apart from cooking, I think playing the piano covers that
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