SID Venture Partners co-founder: ‘The number of Ukrainian-founded startups is decreasing. We're checking what's available in the Valley’
Dmytro Vartanian on his most failed investment, new funds, syndicate deals, and leaving Elai.io
The SID Venture Partners venture fund was launched at a very ‘right’ time: in late 2021. Nevertheless, it managed not to curtail funding. Over three years, the fund has invested $5.5 million in 29 companies. The team usually seeks early-stage startups. They plan to invest the remaining funds and raise two more funds. One of them will be from $50 million for late-stage startups. What projects do they want to invest in? When is the exit boom planned? What is the value of their portfolio? Why does the fund raise thousands of dollars from small investors? Dmytro Vartanian, Managing General Partner at SID Venture Partners, told Mind about this and many other things.
The speaker previously shared with Mind the fund's first steps and trends in both the global and Ukrainian venture capital markets.
On the volatile market and portfolio growth
– What is the starting condition of the market this year and what are the key trends for its recovery?
– We are starting from the point of expecting some positive changes. The market has been falling for the last three years. This is true not only for venture capital investments. The number of new IPOs has dropped dramatically, affecting other investment rounds: pre-seed, series A-D. No one is in a hurry to go public now, because the markets are at a low level. Although some large companies, such as Apple and Meta, are doing great.
There is a lack of liquidity in the market as the US and Europe are struggling with pandemic-induced inflation. They are raising government bank rates. It is now more profitable for large players to purchase government bonds, as their yields are higher than inflation and there are virtually no risks. Investors are therefore in no hurry to invest in the stock market, let alone in venture capital. It makes more sense to wait for the markets to recover and for interest rates to fall.
There are few IPOs, and M&A deals are mainly life-saving rather than profitable. Startups often carry out bridge rounds. If a project has already attracted pre-seed or seed investment but cannot reach Series A due to a lack of investors or insufficient valuation, this allows it to raise an additional $100,000-200,000 to wait for the market to grow.
The US economy is stable, the only reason for stagnation is high risk-free asset rates. Investors withhold funds, waiting for a better time to invest. Sooner or later, the market is going to recover, and we will see a new wave of activity. At the moment, it is more profitable for startups to delay the next rounds than to raise funds at a low valuation. According to our observations, the time between investment rounds has increased significantly. And this is absolutely logical.
– What do you expect from Trump's policies?
– It is hard to predict exactly how Trump is going to affect the situation. It is likely that he could even make it worse in the near future. Since he has time to fight inflation, he may not cut rates, and the market will remain in this state for some time. This is not only about investments, but also about the IT sector in general.
The situation is challenging – this is not the growth we saw in 2021–2022. The market is now slowly recovering. If IPOs come, new investments will follow, boosting the expansion of companies. Start-ups will have to develop something, and that will impact positively both the labour market in terms of IT specialists and investments.
Cryptocurrencies and blockchain are worth a separate mention. With Trump's arrival, this sector may receive more liquidity. We have invested in blockchain projects. We expect a revival here, especially this year.
– How does your portfolio grow in such a market? Share your fund's performance.
– It is difficult to show significant growth in such a market. Our fund is only three years old, and we started active operations in January 2022. The declared investment period is five years, and we plan to spend another five years on exits. That is, we have not yet reached the stage where we expect massive deals. However, we have already had one successful exit.
Now we have two crypto investments from which we also expect positive outcomes: NEAR Protocol and Orderly. We will soon be able to fully dispose of the tokens at NEAR, and the process with Orderly is underway. These are potential blockchain exits that are likely to take place.
Altogether, we invested $5.5 million, which is about 60% of our portfolio. We had 31 deals. Twice we made follow-on investments in startups that showed good results.
As for the market situation, investors are increasingly focusing on more stable projects that are already showing growth. Such investments may be more expensive to enter, but they are less risky. Our approach includes both investments in risky startups and support for already thriving projects.
– What are the growth dynamics of your portfolio?
– Around 30% of our portfolio showed an increase in valuation, which is conditional growth: companies attracting the next round at a higher valuation. It's, however, hard to draw precise conclusions as we haven't had a significant number of exits yet. This is logical – more than 90% of the funds that were launched in the same period as us have not yet distributed profits to their investors, i.e. have not had significant ‘cash’ exits. We expect to get a clearer picture of real growth when deals start.
Now we are focusing on internal metrics. With $5.5 million invested so far, we can add 20-30% to this amount to estimate the current value of the portfolio.
– Which of your startups has shown the highest growth?
– You can't compare them all equally, but I definitely like the way some of our startups perform.
Liki24 is a great case of a Ukrainian startup becoming an international player. They have fantastic growth in Western markets, now operating in 8 EU countries. We also have Jome (formerly NewHomesMate), which successfully operates in the US new property market. Awesomic has always been a great startup, partneting with Y Combinator and growing steadily.
Another startup is Altris AI. It's a team from Ukraine that develops AI analytics for eye examination devices. They have great potential. On the one hand, this is a niche technology, and on the other hand, the market is huge, because the problem is only gaining momentum every year. I like how our projects The Breakfast and aviation startup InputSoft are developing. Their metrics improve every month. And we have got a lot of such startups.
Virtually all of our projects are making progress, even in tough market conditions. Of course, there are those who have just completed a round and are now working on the engineering content, so they don't have significant growth metrics at the moment. But this is absolutely normal.
– Which startup fell short of your expectations?
– There was one startup in the insurance sector, SPOKK, which has now been put on hold. We invested there with a minimal cheque. It was a sort of test to see whether the idea would take off. It didn't work out, but it didn't significantly affect the general portfolio.
– Why did they fail?
– Creating a startup is always hard, and it's even harder during a war. Constant stress, dealing with other tasks. Something went wrong at the hypothesis testing stage. Today, the startup can be considered closed. I would be happy if they resumed their work, but I have not received any updates from them so far, so I cannot say anything specific.
– Speaking of the ideal startup for your fund, how has its profile changed from the beginning of your investment efforts to the present day?
– Our focus has not changed much. We are looking for Ukrainian founders around the world who create global startups with a focus on international markets. We are interested in technology projects. We can help founders with resources, clients, and technology.
However, today, for objective reasons, the situation has changed somewhat. We see a reduction in the number of grants, which affects the total number of startups. This is not only a problem in Ukraine but also a global trend. Although there are programmes such as Google for Startups, and we are their official partners, they do not solve everything. To boost the market, we need support at the early stages, as it used to be before, when grants were distributed to a wide range of startups.
The number of start-ups with Ukrainian funders is decreasing, and we are refining our focus. Now we want to see what is available in Silicon Valley. There is a large Ukrainian community there, which makes it easier to interact and communicate with our teams. We also looked at European startups, but most of them are too focused on local markets: Polish startups for Poland, Czech for Czechia, and German for Germany. Therefore, such projects are of less interest to us.
With this in mind, we are going to expand our presence in the US. We are quite well known in Ukraine – in the top by the number of deals – and were named the 2023 Best Investor by USF. Now we want to achieve the same in the US, and specifically in the Silicon Valley. Some of our partners are based or spend a lot of time there, which is a big help.
– How many foreign teams have you invested in?
– We have about 20-25% of foreign startups in our portfolio. Though, even if there is only one Ukrainian founder in the team, we consider it a Ukrainian startup.
As for the US portfolio, we primarily invest in startups from Y Combinator. We watch their demo-days, and now they release new teams every quarter. The main challenge is to be quick, as Y Combinator startups go off like hotcakes. This also makes it difficult to analyse.
– What is the difference between our teams and foreign ones?
– There is a general observation: our professionals are technically stronger, but weaker in sales and self-presentation. It is well known in the world that if a Ukrainian team takes on a project, they will technically implement it at a high level. However, there is no certainty that they will be able to effectively sell themselves and their startup. We have a less developed business culture, so it's ideal when a team is complemented by a marketing or sales specialist.
On syndicate deals
– You have launched syndicate deals, where people with small cheques can join the investment. Could you tell us about the current stage of this area?
– We have announced syndicate deals and have already successfully closed one with Jome, but not the other. We are planning to continue in this area should we find attractive and promising start-ups. There are, however, a few nuances: to be economically viable, we need to raise between $100,000 and $200,000 to make it worthwhile, given the costs of organisation.
There are certain difficulties in Ukraine: the problem with withdrawing funds abroad complicates the process for potential investors, and the unstable situation in the country makes them more cautious about investing in startups. Despite this, we managed to raise funds for our first deal. I can't disclose the amount we raised, but I can say that it is economically unreasonable to organise a syndicate for under $100,000 to $200,000. About 50 people invested in Jome. This was as part of the latest $9.8 million round they raised recently.
– Why did you fail to raise funds for another startup?
– The money for the startup was raised, but it was not enough to make it cost-effective. The startup itself is wonderful – one of the most successful in our portfolio – and the pitching was successful, but there were many questions about the transfer of funds at the onboarding stage.
Given the deadlines we had to meet, some investors refused as early as the final stage. Now it is really problematic: transferring funds to a foreign account via IBAN is theoretically possible, but with restrictions. You can pay in crypto, but you need to have certain skills and trust in this technology, and not all investors know how to use it. Training 100 people is a big challenge.
– Why do you do this from the fund's perspective?
– First, we support portfolio startups that we have already invested in. When they raise the next round, we invest again and help them raise more money. This is beneficial for the startup, as it gets an additional 100 new investors to support the project. We have an obligation to invest some of the money. In this round, hundreds of thousands of dollars were invested in Jome.
Second, for people who want to invest but don't have much money, this is an opportunity to become part of an interesting project with minimal amounts. The venture capital fund entry threshold is often high, and through syndicate deals, you can invest as little as a few thousand dollars. And third, for us, this is part of the venture capital business, enabling us to attract new investors and support startups on their way to growth.
– Are you planning another syndicate deal?
– It is important that the startup is interesting and raises money. But there are no active Series A rounds at the moment, so we can't even ask a startup for an allocation for this. However, we are not limited to our portfolio companies – it can be any startup we meet.
We organise meetings with founders, where about 300 potential investors can listen to a startup present its project. A useful experience that gives you the opportunity to see how startups pitch at this level.
Such cases can be done serially, every week, but it requires focus. We are currently committed to the work of the fund. Syndicate deals are an additional area that we implement when the opportunity arises. At the moment, there is no suitable start-up.
On fundraising two new funds
– You have invested 60% of the fund. How many deals do you want to close in 2025?
– We are already in the fourth year of the fund's operation, and there is a chance that we will invest more by the end of the year or early next year. We have been working on launching a new fund.
Therefore, we plan to invest in about 10-15 startups in 2025. The pace may be faster or slower sometimes. It all depends on the situation. At times, we can't find interesting projects for several months, and then suddenly we get a few investments in a short time. This is all non-linear.
– What is the stage of the fund's launch?
– We are actively looking for interested investors and demonstrating our results: the way we work, our metrics and approaches. We are considering launching two funds.
The first fund will have the same focus, with a size of $10 million or more for early stages. We are going to launch it as soon as we close this one, so that there is no conflict of interest. The second fund will invest in growth-stage companies that have good performance or even stable net income. Such investments require much larger amounts – $2 to 5 million instead of $100,000 to 200,000. To be effective, the fund needs to be larger. The optimal size is at least $50 million.
This requires a different approach, as investors at this stage expect consistency. Although activities in such funds are more structured, they are less risky, as growth-stage startups already have stable and predictable performance. This is interesting for investors with large capital.
Therefore, we are slowly starting fundraising, discussing our plans with potential partners and looking for those who are ready to support us.
On exiting Elai.io
– At the beginning of the conversation, you mentioned that you were exiting Elai.io. Did you support this deal?
– The deal was the right one, given the situation on the market. They had a great niche, but the number of competitors has grown so much now that even the technological potential that was promising has become risky amid the rapid development of AI technologies. There are plenty of projects that solve very similar problems.
It was necessary to do this in such a market. There was a whole family of startups that were only generating video avatars. Despite this, they managed to cope with the competition. We simply weighed the risks: to continue on our own or to join a large company, and chose the latter.
– Did you view them as a company that could go public?
– I see them all as a company that can go public. They were technologically and technically stronger than their competitors. But the competitors marketed themselves better and raised much more money than the guys from Elai.io did in their round. Synthesia, for example, raised $180 million in the last round alone. How can you compete with that?
And they did. If the stars had aligned at some point, they would have been able to develop further. There is a market for this, and they were bought for a reason. Most likely, it will be the buyer, a serious company, who will go public.
In fact, every business or every businessman can afford to make an exit. This is a success story because they sold well. They were students when they launched this product. It took them three years to develop the startup. The guys will now see how a large company works, learn organisational and business skills, and then raise investment for their new startup in two days.
– How was Elai.io growing at the time of the sale?
– They were growing, but it wasn't at the pace you'd expect in the early stages. If the growth is 50% per month, investors are actively entering the project because it attracts a lot of attention. But if the growth is smoother (and many startups are experiencing this now), then attracting investors becomes increasingly difficult. Rapid take-offs are exceptionally rare.