Kamen Bankovski, Principal
Most of us are eager to put 2020 behind us and look forward to 2021 and to a return of normality of our daily lives. The elapsed year has seen many challenges for humanity as a whole and for our individual lives, having to restrict ourselves to our homes and to move our personal and professional lives online with a pace not comfortable for many of us.
As in the mantra of our industry, however, with great challenges come great solutions and achievements. With the official launch in October, we have had our first full quarter of operational activity and, although constrained to digital meetings, we have ventured on towards building a strong deal flow and getting to know as many founders, companies, and ideas as we can during a period of social distancing and zoom deal-making.
We have had the pleasure of going through more than 200 applications through our personal networks and the application form of our website (click here to apply) and have seen a lot of great companies and ideas. We have also had to make quite difficult choices in our decision-making, in order to follow the mandate, entrusted to us, our investment strategy and vision. With this post, we would like to share some insights from the deals we have seen so far through our pipeline. We will aim to do this regularly, as to share our glance of the ecosystem and our participation in it. We will also share stories and highlights of the companies we include in our portfolio or, generally, on things we find interesting and worth sharing about and through the ecosystem, but on that, stay tuned for a while longer.
In alignment with global trends, all industries dealing with solving the issues of remote communication or services provision have seen quite a lot of interest from founders. The highest represented industry among the companies we‘ve seen has been e-commerce. This has been one of the fastest growing industries even before the pandemic disturbed the regular brick and mortar retail sales channels and reaching close to 4 trillion GBP in 2020 globally. With the global lockdown forcing a faster transition to online sales, we have seen founders take advantage of this megatrend in our region as well, ranging from drop shipping businesses to B2B marketplaces. The effects of PSD2 proceed to resonate with the Bulgarian startup ecosystem and we have seen FinTech solutions remain in prominence in the region as well. We have assessed interesting takes on the remote learning and education sectors with solutions leveraging gamification, AI-enablement, and immersive learning. Globally, the sector has enjoyed a fair amount of time under the spotlight during the pandemic, and has seen quite a few large deals last quarter, exemplified by the Asian showdown with Yuanfudao’s 2.2 billion dollar fund raise in October and their main competitor Zuoyebang’s 1.6 billion dollar raise in December of last year. After the first round of excitement through the sector with companies offering e-learning opportunities like Coursera, EDX, udemy, and pluralsight, it is interesting to see a revised interest in the sector and solutions going beyond traditional video lectures and MOOC models. A great example is MEL Science, which closed a funding round in December, which combines hands on learning through live lessons, immersive VR simulations with educational kits. We’re excited to see what new ideas and solutions will arise in our region. If anyone has a tip on the next unicorn in the field that is seeking early stage funding, there is a free Vitosha mug and a printed t-shirt in it for them.
Healthcare funding has also seen a record high in Q3 2020 in both deal and funding amount terms and the sector is also quite prominently featured in our list of assessed companies. The pandemic has provided incentives for start-ups to consider creative solutions to lower people’s exposure to Covid-19, which alone has caused a surge in telemedicine and virtual healthcare solutions. Solutions in the field have also leveraged the use of machine learning and AI implementations for operational, as well as diagnostic purposes. Advances in BioTech and 3d printing technologies have also seen representation in our pipeline. Mental health has been making quite a lot of noise internationally with deals like Spring Health’s, Koa Health, Psyomics, just in Q4 and we have examined quite interesting takes of the industry locally.
Markets and business models
The most sought-after target customer for start-ups that we have encountered is the small businesses on a global scale. Around 62% of companies have identified their scalability targets as global, whereas 38% of companies have decided to tackle the Bulgarian market.
The most popular business model that we’ve seen the companies in our application process use is the subscription model. We’ve seen applications of it move beyond the low hanging fruit of access to content and towards meal kits, cars, shaving razors, and clothing, as prominent examples. With the benefits of stable and more predictable cash flow and retention being the default customer behavior, it is a good choice for young companies, should their offerings be suitable for it. Moreover, it reflects the more general societal shift away from ownership towards access, sharing, leasing, and subscribing in both B2C and B2B contexts. We have encountered quite a few companies aiming to tackle direct sales for their product offerings, developing their own channels and retaining their higher margins. With the higher customer acquisition costs associated with such a business model, such strategies can be a drain on cash flow and can curb the customer outreach and the customer base growth of companies. If done successfully, however, companies, and brands, end up taking the spoils of larger margins, own distribution and supply chains, a larger control of their branding and marketing at their point-of-sale, and a better understanding of their customers, as a result (as opposed to through some retailers, both offline and online).
We have found that most companies we’ve talked with find their highest protection from competition as the development costs of their solution, and their competitive advantage as the technological innovation they’ve achieved, generally focusing on technology and feature-rich solutions. Only a quarter of companies have listed IP protection as their main barrier against competition.
The majority of companies that we’ve examined have two founders. Mapping the results of global trends, the 2-founder combo also yields the highest traction, as measured by revenue for the past 12 months, followed by 3, 4, and 1 founder respectively. Moreover, angels and VCs as shareholders have tended to invest in companies with more than 1 founder with a higher prevalence in companies with 2 or 3 founders.
We’ve seen that while the average number of founders per startup remains fairly constant across industries, the number of employees has varied substantially. In our talks, marketplaces, especially product fulfilment ones, have tended to need quite a few operational team members for multiple supporting and administrative functions. Finance, robotics, and cybersecurity companies have tended to exhibit a higher number of team members in their early stages generally caused by larger R&D efforts and longer MVP creation cycles, as opposed to e-commerce businesses, for example.
More than half of companies we’ve talked to have reported having revenue, some at their market expansion phase, others at their early MVP with revenue phase. Quite a few companies have reached out to us at the point of having an MVP with some users and no or limited revenue, looking for funding and support in looking for their product market fit and to monetize their user base and defining their revenue streams. In terms of traction, as measured by reported (self-reported) revenues for the past 12 months (at the point of application submission), the lead is once more taken by e-commerce businesses, which, however, have also tended to show slower scalability.
Funding & Exiting
Out of all companies through our pipeline, slightly less than 50% have received some form of external funding prior to their current investment round. Angels seem the more pronounced source of funding for startups we’ve talked to, followed by VCs. Both angels and venture capitalists have favoured subscription-based, marketplace, and freemium business models with e-commerce, education, and FinTech solutions being favoured among these types of investors. Friends and family have not been too supportive of the founders we’ve encountered, as only 10% of startups report that they’ve received financing from that source.
Most companies we have encountered have identified sales, business development and an expanded network in general as something that they would like to receive help with from their investors, which is something we are eager and keen to work with our portfolio companies on. Moreover, 65 % of companies have identified their desire to receive some form of business expertise and operational know how as a byproduct of their funding round. The international nature and the broad business experience of our team helps us target these needs and try to add as much value as we can aside from the capital itself.
We’ve experienced an expected high popularity of the exit strategy of founders towards a trade sale. Few companies have dared to pinpoint the holy grail of exits – an IPO as their exit strategy. Interestingly, just about a third of founders have indicated that they do not want to exit their companies.
It has been exciting for us to learn more about so many companies and founders and are very much looking forward to continuing doing so for the years to come. We have been entrusted with the responsibility to foster innovation and societal change in Bulgaria and, hopefully, add as much value as we can. As we collect more data, we’ll be bringing you our insights and understanding of the market and ecosystem, we hope this and our similar future posts has been and will give you a better angle in your regional endeavours. If you do have any questions or would like to exchange ideas on the paragraphs touched upon above, or any topics for that matter, please do contact us. If you are seeking funding and would like to join one of our unicorn-status announcements to come, do fill out our application form.