Venture Investors Economic Forecast 2020 by InnMind is a series of interviews with well-known VCs and angel investors from Silicon Valley, Europe and Asia from which you can get first-hand information from market players on how startups can survive and grow in this crisis time.
In this video, we speak with Alexander Chachava, serial entrepreneur, investor, and managing partner at LETA Capital, a technology investment firm.
Below you can read the interview with Alexander:
The topic of our discussion is the current situation which is going on, on the global markets as everyone knows, together with the pandemic. We have the full set of “Black Swans” on the market like oil price pressure, stock market crash etc. So my first question is, what are you thinking about it?
The situation is tough indeed. A very strong crisis. Now we have this pandemic, and after the real economic crisis arrives, but as Chinese say, the crisis is not only a threat but also an opportunity. So we, as venture investors, will try to predict what will be after this heart punch, what will happen in next three, six, twelve months from now, and to help our portfolio companies to enter the market with our investments, with our impact, to help them overcome this crisis and benefit after bringing value to the people, to the companies, necessary products technologies, because life is not over. And I read a lot of analysts, hardest predictions are 12 months from today, that we will have current in all this stock of economy for 12 months, the median is three to six months. So it's not such a long period of time. It's not five years like it was during black death times so we need to not only survive during three to six months, but we need to prepare ourselves for the new world to make the remote work more effective. The new technologies for online education, remote work, remote services, remote interactions, all this robotization that we now clearly understand we need. And I speak only about my area: tech ideas software. Of course, we have even more areas regarding life science, regarding pharmacy, sports and everything.
Fully agree with you and just one small clarification here. So you mentioned that the length of this recession nowadays will take around three to six months on your application. So does it mean that it will hurt the business environment less than it was expected a week ago by a lot of forecasts mentioning that it will take around a year.
Not exactly. I mentioned that this stock of economy which I mean, pandemic and all strict rules regarding home quarantine, and so on, will last three to six months, I think, but nobody says it will last more than 12 months but I'm a little bit more optimistic, three to six months and after this when we all come to the streets, bars, restaurants and into the office. We will definitely get new troubles and we will get into a recession. But the positive thing is that companies have huge amounts of money, huge amounts of cash on their accounts. So, big companies, not small & medium business, unfortunately, seem their main victims and most governments in the developed world at least already announced huge levels of support up to $3 trillion in the US. Today we see that the UK announced an unbelievable level of support and all other European countries I think also invest a lot of money. So what we will get, we will get after quarantine, but you increase session and due to problems with unemployment, and all the rest. We will see that negative person credit, a lot of liquidity, so a lot of free cash and a lot of support, probably properties, some tax, holidays and even decrease of taxes, probably, and a lot of other things, which will stimulate an inflow of a lot of fresh blood into the economy. But I predict that the economy will change dramatically. We will step in very soon into a bright new world more remotely connected, I would say because now all European companies so as all people realize that online education could be also effective.
Yeah, I like what you think really, it means that it can bring us technological resolution much faster than we expected before. Funny thing I know, in Barcelona during quarantine, and I was talking with our accountants in the local office, and they told me that they expect from this crisis is a very good positive step - their local government will digitalize much faster, because right now, they deal a lot with offline documents, with offline meetings, with authorities to apply for any taxes or whatever. But they expect that after the pandemic time, it can adapt to and balance the digital environment, much more practically.
Yes, indeed, to the most conservative parts of our world and governments, old people and big corporations are now very open to new technologies because they just don't have another choice. And during the usual way, it takes probably even decades to come to the same point. But now they tried all these technologies because they have no choice, as I said, but they suddenly realize that it works. And it's rather effective.
And how this situation will affect the venture business? You have a venture capital fund and obviously, before the crisis, you were everyday meeting with different founders, attending events, startup pitches, competitions, demo days, and etc. So how will it affect your business?
We feel a good momentum for investments because as I already mentioned, the world needs changes, starting from life science and to tech. And so we are here just to give resources, support and ideas to the entrepreneurs, who will change this world using tech and making our world a better place.
That's a very interesting point, will you redefine your investment strategy if you are going to increase investments during this period? I mean, you are now investing in VR, AR CRM. Will the pandemic make you have a look at the new type of businesses, like artificial intelligence for drugs and vaccinations, etc.?
Yes, we will redefine a little bit our investment focus, but we will still invest only in the areas we understand. Unfortunately, we are not investing in life science or pharma, or something connected to medicine. By the way, I personally decided to make a minor in the West, but it’s not like charity, but more like social entrepreneurship. But I as a fund manager, I have to be professional and we are investing only in those areas we understand very well. And some of our areas are very needed nowadays, for example, online education and edutech, in which we invest heavily. We also continue investing in AR VR, which will also be needed in the new world because we are moving towards more virtual or augmented reality world. And I think this trend will continue with artificial intelligence for software for business processes so they help businesses increase the effectiveness of their processes, which usually means cloud Big Data, remote availability and so on.
It gives hope to many start-ups which will be watching this video. Alexander and what about redefining the stage you're investing in, because you mentioned that it's a good period to start that business. You're now investing in late seed and A stage startups, if I know it correctly. Will you also invest in the early stages?
No, I don't think we will change our stage, because we have our own strategy and we have our own focus. All our services and all our experience is focused on late seed stage and we are effective on our stage. But we are happy to help investors and early stage startups with some recommendations, advice. And according to my experience, during this very early stage show most professional founders don't need a lot of resources. it's enough to have around 100-200k to build a better version of the prototype and start some business activities. So it's not much and on the very early stage, it's better to invest your own money or the resources of your friends and family, and maybe find some advisors from the dedicated professional area because they have a network, they have experience and they will be much, much more helpful than we are on that very beginning stage. On the next stage, when you need to go from millions to millions of dollars, it's better to come to us. And we are effective in our stage and can help, but not on the early stage. And I see a lot of people and angels who also understand that now it's time to start a new business. So, I would say that there are still some opportunities to raise money and to start the business bootstrapping. For instance, for most of our portfolio companies from Eastern Europe, it's usual to start business bootstrapping, having their own resources. And maybe for half of our portfolio, we were the first investors putting our resources during their late seed stage. And we appreciate so much a high commitment of founders as it’s that time when we see that this business is very important, as the founders are ready to commit their time, to commit their savings. We also start to trust those companies much more and, and our experience suggests that such type of companies become much stronger in future and having stronger long-term values and long term vision, and it helps to build a real venture story, to build a big company and to be on the path to the unicorn. So, I think now, during hard times, it's a little bit easier to be fully committed and to burn the bridges behind you.
So, let's take this chance and explain those founders who are watching this video right now. How can they reach LETA capital if they actually match your investment interests? How can they contact you: is it better to write on Facebook or to go into an official website? We'll put the link under the video.
Yes, the easiest thing is to reach via our official website, we have a special form and yes, it works and we read all the incoming messages. If you don't like forms, we have contacts from every team member. It is better to send a personal message to our analysts because if you send directly me anyway, I resend it to analysts. So all incoming projects come via and from our analysts. So the best thing is to send your form on our website or via an analyst.
Okay, perfect. Well, I'll put all the information under the video so everyone can see the official channels on how to get in touch with Leta Capital. I also ask every guest about the advice they can give to startups regarding how to survive during these turbulent times. But in your case, I know that one of your investments is also the company called inDriver, which is a taxi application. And probably they are also a bit suffering from the current situation. What advice would you give to your portfolio companies who are in this sector, which is under the risk? What would you advise them to do to save their business?
First of all, let me comment regarding inDriver: inDriver works in already more than 35 countries, providing services to over 50 million customers, and inDriver works mostly in developing countries, such as Latin America, Africa, Asia, Eastern Europe. And just today I've got an information that inDriver is now on the second place worldwide, among other ride hailing apps, just after Uber. So, InDriver doing great despite the hard times because every transportation app company has some problems, and of course inDrive is also facing problems, but the team is very professional. They are super focused on global success, which helps them to win against all threats and not to survive, but to develop the business, despite all the problems they're facing. And I would say that yes, there are some companies that are suffering more, food retail, I mean more classic businesses like restaurants, tourists, fashion and others. They are now immediately stormed, but they have to survive because people will need their services after the crisis and they need to survive during three to six months, and they need to ask their employees, their investors, their customers to support them. And just nowadays, I personally see more positive things and more human things amongst these people, everybody tries to help everybody. Employees understand the problems of managers and founders and try to help by agreeing to reduce salaries and being open to work even more to try new approaches, new products. I know fitness centres started zooming fitness training sessions and so on, so they actually organize themselves. So for those who were hit the most, I just want to say some words of support and just be patient, be calm, be strong. Please, survive, because we will need you very soon.
Because of all of us, Alexander! Thank you very much for your message of support! Can you please just provide one additional practical advice to all startups who are watching us right now: should they cut costs, for example during this time, or should they push into all channels in order to win the competition?
Well, we all probably saw this diagram, how much resources do you need to definitely survive? So advice number one: you have to survive. So you need to understand an optimal wave or surviving. If you have enough resources and you feel you can survive and you can feel good within the next six months, maybe 12 months, go develop more features that increase marketing efforts, increase sales force. If you are not so good, if you don't have enough cash flow and if you see that your customers are not paying you anymore or will not pay, probably will not pay, maybe suspend some payments or deposit some part of salaries of your team, exchange part of salary on some options. Because yes, you can't pay real money, but you still have equity. And this is maybe something more important, more valuable in future if you survive and bring more employees as you can to your site. Make them shareholders to motivate them, fight for your company and yes, focus number one is survivor, and you, as an entrepreneur, all you need to do is to survive to save your business. And this is a focus number one.
Okay, perfect. I think everyone caught it and this advice will really help companies to survive during this crisis period. Alexander, thank you very much for your time and for your insights.