When it comes to startups, some answers are easier than others. What does a startup’s life cycle look like in Silicon Valley? There are legendary books, hit shows, and movies that have you covered.
But take that same startup and seed it in a different soil, halfway across the globe? Now you’re looking at a different set of investors, mentors, talent, and — most importantly — challenges.
Last month, we chatted with Cristobal Alonso, CEO & El Patron of the private fund and accelerator Startup Wise Guys, to get his take on investing in our corner of the world. At the helm of SWG since 2016, Cristobal is an industry veteran who has had a significant influence on shaping founders in the region, from Estonia to Turkey to everywhere in between.
Altogether to date, the Wise Guys have invested in more than 185 early-stage startups across 19 batches, with founders from more than 40 countries that, until recently, were typically overlooked by Silicon Valley. Their record speaks for itself, and Cristobal has truly earned his green thumb when it comes to nurturing startups and growing ecosystems here.
This week, we return with Part II to discuss how new investors can get their foot in the door, what the “bad apples” look like (and how to deal with them), and European market trends. Our conversation has been edited for length and clarity.
How do you think a pre-seed investor can get their foot into the ecosystem, gain experience, and get access to deal flow to eventually invest in the right startup?
Ideally, as a professional investor, you need to check 100 deals to find one. As a beginner, you don’t get access to deals — and on top of that your capital is usually much less than you actually need. I think the best advice is not to make the first investment alone.
Put your money with an investing team that’s already out there, like ours. Learn the tricks and you will start having some deals. When you invest in a fund, be active, come to mentoring, network with other investors, and learn as much as you can. Then double down on what you like. In a batch of eleven companies, one or two will ring your bell.
With Startup Wise Guys, you will find plenty of opportunities to invest, even without us. You can even start making a couple of extra bets with extra investors apart from us. Basically you can be as active as you want. You can come to a selection of boot camps, mentoring sessions, investor trainings, and then decide what to do with the money yourself or give it to us and just wait for the reports. It’s your call. Either way, being involved is a very good education in itself.
To some extent it’s PR, but investors in Silicon Valley are usually very open and willing to help startups in their ecosystem. Is this approach already present in Central Eastern Europe?
In general, I think the willingness is there, but as a whole the CEE ecosystem is pretty fresh so there are still some bad apples — people who are not there to help but rather to enter your company and take too much equity.
We’ve recently done a number of online mentoring events, with over 150 mentors putting in their time. One of the things we were focusing on last year is helping to set up advisory boards. Getting those 4 to 6 advisors to support startups one day per month. Startups can work with those advisors for 3 months or so and, if the founders like them, they can bring them on and even give them some equity. I think it’s an educational process. We are still finding the right structures to do it.
Speaking of the practice of CEE investors taking too much equity, what do you think about the cases out there of investors taking as much as 40%, which leaves the startup essentially untouchable by other VCs?
We actually find 20–25% of cases like this, or less depending on which market. And we’ve gone to the investors saying, “This is not acceptable. You cannot own 30%. This is the type of cap table that we need for this company to be available.” I think we help a lot in that process, and I will say we have a 50% success rate with those companies where we suggest restructuring the cap table from initial investors in order for SWG to invest and for the startup to be VC-investable in the near future.
I think it depends on the founder attitude though. I have met people where they say, “Hey, you know what, I understand it’s 30% and this is just a learning opportunity for me. So this is not the one that is going to make a killing. This is the one that’s going to teach me.”
But this is what we’re very insistent about: You need to be values-driven. It’s important to find more and more investors like us internationally, who will go into an ecosystem like this and push the local investors to get their habits right, but it takes two to four years. So it takes some time.
To give you an example — I’m in Latvia. There were two investors in this one business network, and one of them actually was in one of the top roles in their system. These guys were very damaging, taking 20–25% with almost no money down, but had control on the board, etc.
By year three, everybody knew who they are. And from the moment I hear their names now, I don’t even want talk to that startup, right? So then you start excluding those people, and they go on screwing founders until they change their ways. But of course, if there is any scarcity of capital, some people with that mentality will take advantage of it. But again, if you own 30–40% of the cap, the startup is not investable afterwards.
With current market trends, will seed capital in Europe consolidate and focus more on quality rather than volume?
I do think that good VCs will be more conservative on betting, but at the same time will be pouring more money into their portfolios. We have to remember that a lot of already-collected institutional money must be spent in the next two years, so as a consequence some new investments will be forced. A lot of investors will disappear because they were simply bad investors doing bad deals.
On the other side of the table, great startups will still have no issue raising money. Good ones might give more equity to investors, taking a 30% cut on valuation if they cannot afford to wait 18 months. The whole situation will quickly bury the bad ones, which were already condemned in the first place.
The big advantage is that the amount of available talent is already much higher than it was three months ago and people have less choices. A lot of people have been laid off and some are reconsidering. They’re asking themselves, “Do I want to go to corporate for another 5 years or do I want to look at something else?”— Cristobal Alonso
And, some might look for new opportunities and consider working for free as a founder for six months or so. They’ll treat it as an adventure and at some point they might get funding or decide to bootstrap even longer. I’m not trying to say the big picture is the best ever, but I don’t think it is as terrible as it may seem.
Have you seen barriers for startups because of a little bit of a nationalistic sentiment in Europe, for example like French companies mostly want do business with French companies, or Italian with Italian?
In B2B, I don’t think so. In B2B, I want the best offer available. I look online, I look at the pricing. I look at the reviews because of recommendations. And I go buy something. In B2C, you have to be much more local with brand development, etc. But in B2B, I don’t see it.
Can you describe your typical week? How do you allocate your time?
So I’ll tell you the overall. 30% of my time is team management, approximately one full day per week, during which I’m working with my team to help them with performance, strategic issues — you name it.
Two days per week, I’m working with current batches and our portfolio. So there is a rule that I dedicate around 10 days per batch, and 3–4 hours per mentoring session. On our portfolio and within the 30 companies I manage personally, I have six to seven startups in my periphery that are doing well, so they’re mostly not needing my help, while I’m working on that immediate set of 10–12 startups to take them to the next level. I’m also very demanding when they ask for something to make sure my time is being used effectively.
I spend another day per week on strategic issues, and a lot of the focus now is on how we build better online products. I’ve been working a lot on our online offering these last two and a half years, and we’re on our third iteration.
The next full day is spent special international expansion, so looking at Poland, Italy, or a new sustainable vertical. And now I’m also writing this book, so I have to find a sixth day, which means that I work every Sunday writing to try to get the book out.
When will the book be out?
The e-book is going to be available online later this month, and we’ll get feedback from people for a few weeks that we’ll then put into the second version, which will be printed in Q4. It’s almost there, but it’s been almost two years and a very interesting process.
For the people who want to learn more about SWG and the European ecosystem, what would you say are your favorite blogs, podcasts or books?
We publish a newsletter every month, and the most-read section is the books that we recommend. We have so many amazing book recommendations, and I have two or three mentors I know that read like maniacs.
I’ll give you a couple of classics in my opinion: Never Split the Difference, Never Eat Alone, The Sales Acceleration Formula. That last one is purely fantastic. And I just read Traversing the Traction Gap, by Bruce Cleveland, one of the guys from Wildcat Ventures, about how to basically create your own category and sell this story to investors — how to create a blue ocean out of a red ocean type of thing.
And then more kind of inspirational book is the Trillion Dollar Coach. It’s a great book and an exploration of how to be a coach. And then when everything fails, you read a book about Napoleon, the guy knew how to scale.