It’s been a record setting quarter for the VC industry with more than 127 billion USD being raised globally, 21 billion USD of which raised by European companies. The old continent by itself has seen 27 freshly minted unicorns in the first three months of 2021 alone. Exits in the first three months In Europe have reached 21 billion euro, which surpasses the total exit value for the region for the entire year of 2020, due to the favourable global market valuations and, arguably, the emergence of SPACs. Locally, the owner of Bulgaria’s SMSBump has also joined the exclusive unicorn club with it’s recent $230m round. We’ve seen a couple of substantial funding rounds, like Payhawk’s 20 million USD series A, and FintechOS’ 60 million SD series B to name a few, and some exits, like FITE – the sports streaming scale-up.
The quarter has been quite exciting and eventful for us at Vitosha as well with our first four deals and our acceleration programme being announced. Moreover, we have very much enjoyed assessing close to 100 projects and getting to know so many great entrepreneurs and companies. Hopefully, we have helped them along the way and will continue to do so regardless of our investment decisions and the difficult choices we have to make as to achieve our investment thesis and mandate. On the positive such choices, stay tuned for a while longer, we have quite a few updates to share in the coming weeks.
Transparency and passing along what we have been able to learn through our experiences is of key importance for us here at Vitosha. Through this publication and others like it we aim to shed some light on what we have uncovered about our deal flow and the ecosystem as a whole and share some of our team’s observations. We hope the lines that follow will be interesting and helpful. Do contact us with any questions, additional observations, or general comments you might have, we’d be happy to talk to you.
As observed in the last quarter of 2020, e-commerce has been the most popular focus area for start-ups that we have assessed. With a gradual vaccination roll-out and increased infection rates of the covid 19 virus, people have remained restricted to their homes and online shopping trends have remained steady. Globally, digital commerce has grown by 58% year-over-year for Q1 2021 and shows no signs of a slow down as of yet, although Q2 is expected to show a come back of brick-and-mortar sales, as good weather and vaccines hopefully tame down the pandemic. Interestingly, in percentage terms, e-commerce has almost doubled in percentage terms (out of the total startups assessed for the period), representing close to a quarter of all applications. We also came across some interesting examples of re-commerce for a multitude of products from apparel to consumer electronics. As exemplified by last week’s 20M pound round of Music Magpie as a precursor to their IPO, the sector is receiving global attention from users as well as investors, and we hope to see such success stories from our region soon enough.
Artificial intelligence and innovation leveraged through it’s implementation has remained a popular theme amongst the founders in our deal flow, across almost all industries that we’ve looked at, not just deep fakes and GANs. Companies utilising such technologies have also doubled in percentage terms for the current quarter compared to the last quarter of 2020. Unsurprisingly, such an increase has also been noted in healthcare start-ups. With 20% of all digital healthcare start-ups have emerged during the pandemic start of last year the global trend is not showing signs of a slow-down, which is represented in our deal flow as well.
Interestingly, we’ve seen a come back of more traditional businesses into our pipeline, represented by the large number of applications within the industries of food, beverages, and manufacturing. With consumers’ increased focus on health and well-being, food and beverages have been under industry pressure to provide solutions that fit that focus. We’ve seen all aspects of the value chain challenged from the production of food, it’s transformation and processing, and it’s distribution, with the global food tech market size expected to reach 340 billion USD by 2027. Locally, we’ve seen quite interesting solutions within the aggrotech and food science field where new whole grain and plan-based products and innovative production processes and technologies are placing the supply-side of the industry at a highlight. The demand-side of the equation has not gone untapped, however, with delivery, waste solutions, and packaging being of high interest in our region, reflecting the global trends of the past year. We’ve seen a spree of funding rounds and initial public offerings with the likes of Gorillas becoming Europe’s fastest unicorn to date, Glovo’s 528 MUSD funding round, Just Eat Takeaway’s 1.1 BUER convertible bond offering and Delivero’s infamous IPO just to name a few highlights in the first three months of 2021, indicating the heat in the sector.
As in previous assessments, the founders in our deal flow are increasingly uninterested in B2G target paying customers, as only 17% have included the segment in their focus. Their distribution across B2B and B2C channels has remained fairly similar with medium-sized businesses in the lead with 71% of companies indicating them as their main target customer. 64 percent of companies have identified consumers as their target customer, followed by small businesses and enterprise business with 62 and 56 percent respectively.
About half of companies this quarter have identified their scalability and ambitions as global, followed by a third seeking European expansion, and a quarter focused on the national market.
With a problem worth solving and many people or organisations in need of the product offering the solution, all that remains is the mechanism for monetisation of that large market, right? It is highly debated how relevant a business model choice is for an early stage start-up. Regardless of one’s position on the matter, undoubtedly a choice of a business model can differentiate a start-up, turn a modest idea into a great venture, or represent innovation in and of itself. For most companies, the monetization of off-the-shelve options are more than sufficient for companies to plug into for monetizing their audience, given they have one to monetize. Subscription models and the great joys of recurring revenue are still the top choice for the founders in our deal flow. The percentage of start-ups using subscription, direct sales, or marketplace models have each more than doubled in percentage terms since the previous quarter, with direct sales close to three times as popular.
We found that the highest number of founders have identified their competitive landscape as moderate, followed by quite a few of them indicating it as being low (30%) or non-existent (14%). Globally, founders have tended to understate their competition, often because they believe that would make their company look better to investors. However counterintuitive it may be, having competition for a market and highlighting that fact can be beneficial. Competitors provide for market validation, as if no competitors exist, the problem a company is solving might not need solving. Alternatively, it may be experienced by a very low number of people, thus a low number of potential customers and a small potential market. Moreover, a worst-case scenario is possible - one could assume either directed hiding of information, or lack of sufficient research. In summary, founders would be well suited to provide an elaborate and informative landscape of their direct and indirect competition and present their secret sauce differentiating them in that landscape.
Development costs and technological innovation are predominantly the factors that founders find are the source of competitive advantage to their projects. IP protection has remained an unpopular option for competitive advantage among the founders in Vitosha’s deal flow.
Being one of the core characteristics of a start-up, we at Vitosha are very much focused on the founding team. A perfect product with a large market and a lucrative business model can have limited success, given that the founding team lacks execution capabilities or energy, or get’s side-tracked by team politics or drama. Alternatively, an unrefined product, undefined market and a questionable business model can provide a fertile ground for success for a lean team willing and capable of putting in the effort, learning from the market feedback and pivoting when need be.
Most companies’ founding team in our Q1 deal flow was comprised by 2 founders, followed by 3, 1, and 4 respectively. A magical number has been calculated as 2.09 as the perfect number of cofounders, which is represented in the companies in our deal flow with 2 and 3 being the most popular number of founders. One founder is regarded as too little, as a jack-of-all-trades is close to impossible in such circumstance, although research has pointed towards solo founders being twice as likely to have an ongoing profitable venture. Four founders are regarded as a bit too many, as now the team can, at this point, be considered a committee entrenched in politics and back-channelling. Management and sales experience are the ones most find in the companies we have gotten to know with 85% and 72% of founding teams respectively having them. Additionally, technical expertise in the relevant subject matter of the company is found in 69% of companies. The hustler-hacker-visionary super pack seems quite prevalent in our deal flow.
The founding teams of the start-ups in our recent deal flow have an average of 29 years of combined experience. Founders in the healthcare industry have the highest average combined experience, as well as individual experience per founder. We were surprised to find that an increase of self-reported combined years of experience did not correlate with a higher probability of having prior funding, as international standards dictate. Once our dataset gets larger, we would further investigate this phenomenon.
About 40% of companies have reported having revenue at the point of our assessment of their company and about 80% of companies have had some form of a minimum viable product developed. Companies that have reported as having AI in some form or another in their products or services have indicated the highest level of traction, as measured by revenue for the past 12 months. Food and drinks and manufacturing have once more shined in terms of performance as well. E-commerce has dropped to the lowest ranks as per this criterion, as opposed to the last quarter of 2020, when the sector was leading the chart with 260k of average revenue for the past year, indicating potential fresh new entrants in the sector.
As a perfect example of the difference across industries, we can observe how the two leading sectors in terms of traction in our Q1 2021 deal flow stack up against one another in terms of human capital resource-intensiveness. As a more traditional business that often requires a tangible product, the food and beverages startups on average have had 3 founders and close to 8 employees. That is compared to 2.4 founders and 2.5 employees on average for AI-enabled startups.
Contrary to other observations, two-founder start-ups have shown the least amount of traction in our Q1 2021 deal flow, should past 12-month revenue be used as a proxy for traction. The ranking is led by start-ups having 3 founders, followed by four-member teams, then solo entrepreneurs, and lastly the two-founder combo, which is generally considered as the most successful one.
Founders we talk to have continuously identified sales and business development needs as the main added value they’re looking for from an investor, aside from capital. 40 percent of founders we’ve been talking to have identified business expertise as something they also need help with, followed by approximately the same percentage needing fundraising contacts for their current round, or planned follow-ons.
About 30 percent of companies we’ve talked to this quarter have received some form of previous external funding. Angels continue to be the most represented source of capital, followed by VCs and friends and family with less than 10 percent of observed cases each. Companies that have received angel investments have also received the highest amount of prior funding (close to 300k EUR), with VCs and friends and family matched for the second place (close to 250K EUR).
Hopefully this post has been as useful and interesting to go through, as it has been for us to compile the various touch points that we have had with great companies and founders in our region. As temperatures and vaccination rates rise, we aim to collect and share such insights in a more in-person manner and host more of our deal flow meetings and events physically. Until then, we remain available digitally for discussions or notes on our activities .
As our activities expand along with our datasets, we’ll continue to regularly give these updates and we welcome any collaboration or idea exchange on the topics discussed above, or any topics in this field. Do stay in touch, we have a lot to unveil in the coming weeks.