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Earlybird Digital East Fund - VC fund of the month
14 July 2020·8 min read

Magdalena Balcerzak

Manager, Vestbee

VC Of The Month - Earlybird Digital East Fund

About Earlybird Digital East Fund

Earlybird Digital East Fund invests in ambitious technology ventures hailing from Emerging Europe. With over $300m in committed capital, the firm has so far invested in 18 companies, including some of the most successful startups in the region such as UiPath. 

Fund Strategy Overview

Geography: Central and Eastern Europe and Turkey
Preferred industries: Sector agnostic. We invest in B2B and B2C businesses that use technology in their core value offering
Investment ticket: Typical first checks of €2-5m, with follow-on reserves up to €15m
Company stage: Our sweet spot is Series A, but we also selectively invest in Seed and Series B opportunities
Product type: Primarily enterprise IT, SaaS and tech-driven consumer-facing businesses
Product stage: All stages are considered
Revenues: Pre-revenue companies are also considered, but we typically prefer to see revenues as a sign of commercial validation

Q&A with Cem Sertoglu, Managing Partner at Earlybird Digital East Fund

What are the 5 main things you look for in a startup?

  1. Market: our portfolio companies should go after sizeable, growing and unaddressed markets which could help them become multi-hundred-million-dollar businesses within 5-10 years.
  2. Team: we try to be a partner with founders that are in an exceptional position to transform their respective sectors with a unique market vision, relevant entrepreneurial and corporate backgrounds, as well as an ambition to guide them to turn businesses into long-term successes.
  3. Competitive advantage: the product, value proposition and strategy of our portfolio companies should help us build a strong conviction that they will be the one to solve the targeted problem better than any of the existing solutions or potential future market entrants.
  4. Our understanding of the business: we want to be present at every step of the founders’ difficult journey of building their companies, and along the way contribute to the process by offering them value-added guidance and support. Therefore, we prefer to invest in businesses we truly understand and are experienced in, so that our inputs can be beneficial to them.
  5. Risk/return profile: we should see the possibility of our portfolio companies creating desirable returns for a fund of our size, without having to take on any unwarranted risks concerning the team, business model, or capital intensity on our part.

What disqualifies a startup as your potential investment target?

As a VC fund which only makes 3 to 4 investments a year, it would be fair to say that we are looking for the perfect confluence of various aspects listed above while making an investment decision. We thus have the possibility to choose not to invest, if there are factors that keep us from building a strong conviction around an investment.

What, in your opinion, differentiates the best founders from the rest?

We appreciate that it is always possible for great founders to come from various backgrounds, and have different strengths, weaknesses, and approaches. We thus prefer to keep an open mind about the desired qualities of our founders, and evaluate them case by case. However, our experience has also shown that there are some regularities about what makes great founders truly great. First of all, they generally have a unique understanding of the current state of their markets, and an exciting vision of how to transform them soon. It is also important that they have strong entrepreneurial, corporate, or educational backgrounds that put them in a special position to execute this vision. While doing that, the founders must have the focus, ambition, and commitment to play the long game, and never go after quick prizes at the expense of building sustainable value. What’s more, it is always helpful that founders can share their excitement with others, to attract and retain top-quality talent, customers, business partners, and investors.

What startups should take into account before making a deal with a VC fund?

First of all, they should consider whether they want to take any VC money at all, when bootstrapping is almost always an option. Being funded by a VC is not for the faint-hearted, since it requires startups and founders to live up to, and commit to the high expectations of their investors. But, if they are convinced about partnering with an investor, it is also vital to choose which one to become a partner with. A VC fund should be a committed founders’ partner while increasing their startups’ chances of success. With this objective in mind, VCs should provide continuous support for founders, both through their formal duties as board members, but also in an informal manner on a daily basis. To make this help more effective and relevant, founders should opt for funds which are run by investors who “have been there and have done that before”. However, as the least experienced party in the relationship, founders should prefer reputable investors who never optimize their commercial outcomes at the expense of the founders, but rather make all their resources available to increase the size of the ultimate outcome of both parties, including strategic guidance, operational support, and exit facilitation.

What is your approach to startup valuation and preferable share in the company?

Entry valuations in the early stage are more art than science, based on the dilution appetite and the reasonable amount needed to be raised. We are a high conviction investor, preferring to hold relatively sizeable positions in portfolio companies, typically with 10 to 20% ownership.

How do you support your portfolio companies?

Apart from financial support, we try to be close allies to our teams in building their companies into remarkable successes in every possible way. That includes providing strategic support when it comes to their product development, sales, and marketing efforts; making customer, partner, and investor introductions; and also helping them attract world-class talent in various functions.

What are the best-performing companies in your portfolio?

UiPath, the Romanian startup that has risen to become the global leader of the Robotic Process Automation market, is the clear outlier in our portfolio, valued at $7b in its 2019 round. We are very proud to have met them when they were a team of 10 and to have become their first institutional investor. Winners of our portfolio, among others, also include Hazelcast, the Turkish in-memory computing startup poised to become a leading infrastructure provider for information-intensive enterprises.

What are your notable lessons learned from investments that didn’t work out as expected?

Building a great company is a long process which requires hard work of all those involved, primarily the founders but also the VCs. The difficult nature of this journey continuously tests the relationships between these parties, magnifying any problems that were ignored early on, and creating new problems along the way. So everybody around the table must start this journey with a clear and mutual understanding of the common objectives. Besides, it is also very critical that VCs and the founders maintain a close relationship that allows them to mollify any of the misalignments that emerge along the way. From our experience, if this relationship is carefully maintained, facing other challenges which the market or the competition throws at our companies, becomes considerably easier.

What are the hottest markets you currently look at as a VC and where do you see the biggest hype?

We are a sector agnostic investor that considers opportunities from all sectors of the tech scene. Naturally, there may be some hotter or more hyped markets within this landscape, as a result of their positions in innovation and funding cycles. But as a fund which builds its investment thesis on the tech potential of Central and Eastern Europe, we try to keep an open mind about the sectors in which we can find the next global champion of the region, and consider all companies with a fresh look, in a case-by-case manner.

In your view, what are the key trends that will shape the European VC scene in the coming years?

Although they have shown substantial growth over the last couple of decades, European early-stage tech and VC markets are still underserved, as compared to their counterparts in the US. We expect the next decade to witness a convergence in this respect, strengthening Europe’s position at the forefront of the global tech scene, with a better supply of exciting startups, more VC money flowing in, and bigger success stories emerging from the region. Within this larger European story, we are especially optimistic about the outlook of the Central and Eastern European tech scene. With the first wave of champions already hailing from our region, CEE high-quality tech talent will find ever greater encouragement to build great startups serving customers all over the world. Sure enough, this trend will attract a larger share of global VC money to CEE, with new funds entering the market and Western funds chasing founders from the region. From this perspective, we feel privileged to contribute to CEE’s growth into a vibrant tech scene, and we are also excited to see what the future holds for this part of the world.

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