SID Venture Partners сo-founder: "The only requirement for investing in a Ukrainian startup, nowadays, is having clients from other countries"

The SID Venture Partners venture fund was created at a very 'good' time: at the end of 2021. However, it hasn't sunk: it has already invested in 16 Ukrainian startups and is now looking for more than 30 more projects to fund.

The fund was founded by 12 general partners. Among the managing partners are the founders of Sigma Software, Ideasoft, and Datrics. Before the outbreak of the Great War, SID Venture Partners had managed to invest in only a few startups. Weren't the founders going to curtail funding in the future? What is happening now in the global and Ukrainian venture capital markets? Which startups is SID Venture Partners ready to invest in? What are the total budget of the fund and the average check? Dmytro Vartanian, co-founder and managing partner of Sigma Software Group, answered Mind these and many other questions.

– Global venture capital funding reached $415.1 billion in 2022, down 35% from the record-breaking year of 2021. What do you think are the key reasons for the decline, and what are your predictions for future dynamics?

– First, I think we need to look at the longer term. The amount of investment in 2022 was higher than in 2020. I also have other statistics, for example, for Central and Eastern Europe. There, venture capital investment in 2021 was at the same level as in 2022. Another factor to consider is the stability of investment. In 2021, there were many IPOs with very high valuations. However, in 2022, there was a downturn in the stock market, and companies that wanted to go public slowed down the process. They are waiting for a better market for themselves. I'm not sure that we'll see that this year: the markets are still stagnant, and it's unclear what will happen to them. They are very turbulent.

– So we can expect an improvement in a year?

– I would expect the recovery to start in late 2023.

– What are the dynamics of Ukrainian venture capital?

– At the end of last year, there were many reports that Ukraine-oriented venture capital funds had been established. These were both Polish and Ukrainian funds. We have managed to raise the money that we are investing in now. In some ways, it has become more difficult for startups to raise money. Anyway, the funds that have already raised money have to invest for 3–5 years, regardless of the situation in the financial markets.

This situation is better for these funds: investing during a period of market weakness leads to the success of the fund itself. It is how you get start-ups that survive in such conditions. There is the IPO market, which is volatile over the years. There is an upswing of 3–5 years, followed by the decline we are seeing now. If funds invest now, we can expect that they will receive additional profit from the fact that the life cycle of a startup coincides with the growth of the overall economy.

But it's hard to say about the Ukrainian market right now. Start-ups, at least those invested in by venture investors in the early or later stages, are focused on global markets. Few investors are interested in purely Ukrainian stories. So if they do invest, it's in global projects. These can be Europe-oriented markets, or global markets, including the United States. So everyone has the same problems. Moreover, the funds themselves are registered and find investors not only in Ukraine. Take our fund, for example. Both Ukrainian, American and Swedish investors have invested in it.

– So the main reason is the economic situation, not the war in Ukraine?

– Not the war at all, especially for start-ups. However, it should be noted that we are talking about global markets. If a startup is purely Ukrainian and has customers only here, it has problems. Yet they can be solved. For example, Liki24, which had only a domestic market, started developing in Europe in early 2022. Now the team is reaching excellent numbers, with a growing share of sales in the EU market. And it changes everything. When they raise the next round in the future, investors will look at this story not as a Ukrainian story, but as a European one.

It applies to other startups as well.

The Ukrainian market has not been and will not become one soon. The entire Europe is doing better. But it is even better when it is both Europe and America. Sometimes the products sold in Ukraine may not be interesting in other markets. Therefore, investors assess such risks.

– A few months before the war, you founded a venture capital fund. Weren't you going to curtail it after the start of the full-scale invasion? Why did you decide to continue investing?

– When the war started, I had a certain feeling that this story was over for us. The fund was registered at the end of 2021. In January and February, we collected commitments – agreements from investors who agreed to give us money. In late 2021 and early 2022, the fund made three investments. We used our own money then, but it was not the full amount of our fund.

And when the war started in March, everyone was relocated. We had no time or desire to think about anything. A little later, I started calling investors who had previously committed to some money. They confirmed that their plans had not changed. We also visited our partners in Sweden. They agreed on new amounts. Thus, no one cancelled the old agreements, plus new ones were made. We did the same: we gave start-ups commissions. This process started before the war and ended with funding during the invasion.

– Do you invest only in startups with Ukrainian founders? Why? There are certain risks.

– Yes, there are certain risks. However, we took Israeli history as a model. In Israel, they also started with an IT service that they provided for big brands. Over time, they accumulated expertise and began to create their own startups. Then the government helped venture investors enter. It compensated them for certain risks. Then this story took off so that they have a unicorn every month.  We see that Ukraine is following the same path. Experts are already appearing. These are the same people who work in the IT service sector, but they have business ambitions. Working with global clients, they understood the niche and the problem and found a solution. There are still few venture capitalists in this market, and even if there are, they are foreign. They do not understand the Ukrainian mentality very well. But we know how to have a dialogue with our guys and girls.

In my understanding, we became the first venture fund in Ukraine to make this story open, attracting specialist IT investors and supporting startups with Ukrainian founders. A venture fund is the same as a startup, in fact. We go to conferences, pitch, and tell them about our team and portfolio. Every week I talk to potential investors. The only difference is the amount: a startup is looking for $1 million in the early stages, while we are looking for $15 million.

– How much do you have already?

– We have already found $10 million. We are now negotiating with other investors. I think we will raise $15 million.

– When is it expected?

– We still have the second quarter. Then we will close, as the current amount is enough. Several startups have already started growing. So we can't stay open for long, we have to close. Those investors who came earlier should be on a level playing field with those who came later.

– Which startups did you fund first? How did you find them?

– V-Art and Awesomic. It was a networking event. We invested in these startups with our own funds before we received external funding. The general partners, who are the founders of the fund, also invest money, but this amount is about 15-20% of the total fund. It is about $2 million.

–  How many startups have you invested in totally?

– There are 16 now. Last year, it was 13. Almost all investments were made at the seed stage. At pre-seed, when a startup has only a prototype or an idea, we rarely invest. But if we come across fascinating ideas, we are ready to consider cooperation. Like Numo. It is already an interesting project. We see that they are growing rapidly.

– What is the average cheque?

– On average, we expect $300,000. So far, it is $210,000 among the startups we have invested in. The amount depends on the stage: at pre-seed, when there are many risks, we invest in small cheques. For example, $50,000. There is another story, for example, Awesomic. When we entered, they already had a profitable business. Under such conditions, our risks are much lower, so we can invest a larger amount.

– Which deal do you consider the most successful?

– One doesn't have to say it like that (laughs), because I love them all. Only time will tell which one is the most successful. More precisely, which one will be the first to become a unicorn.

– Have the criteria for selecting startups changed during the war?

– No, they haven't. We are looking for Ukrainian teams or teams with Ukrainian founders. However, this is not the most important thing for us. We can invest in any team. But it happens that very interesting Ukrainian teams come to us. And so far, we are supporting this story: 100% of our investments are in fully Ukrainian teams or teams with several of our compatriots.

– And how are pitchings going now? Have you had to talk to funders in bomb shelters?

– Of course, there are times when interviews are postponed due to power outages or alarms, but everything is stable now. Many people were able to relocate or hire at least some of their people abroad. Because sometimes it is important to be present in that market in order to meet someone offline.

– What are your plans for the 23rd year of the foundation's activities?

– They are unchanged. We have money that we have already raised. It needs to be invested. So we are in constant search for new startups. We can't invest in all of them for various reasons: we don't see how we can help, or we're not sure about the project's prospects. However, we constantly communicate, sometimes pay attention to development, connect with other partners, and look at the startup together. One head is good, but two are even better. We also promote the Ukrainian brand worldwide. We explain why it is important to support domestic startups.

– How many deals would you like to close?

– If we raise $15 million in the fund, we should have 50 startups with an average check of $300,000. We currently have 16. And we will have a few more years, let's say 3–4. We will probably invest these funds for three years. Although there are no restrictions on the speed of investment, it is very difficult to find worthy startups.

– In which niches are you looking for startups to invest in?

– We are mostly looking for AI, deep tech, blockchain, and fintech, but we also invest in other niches.

– When would you like to hold the first exits?

– We cannot plan them. It depends entirely on the startup itself. This path must be taken by the team itself. They will tell us, for example, that they have found a large company that is ready for acquisition, or are aiming for an IPO.