Giuseppe Curatolo (Partner at Pioneer Point Partners, Advisor at European Bank of Reconstruction and Development)
- How did you enter the tech sector?
- I went to Stanford Business School in 1994. It was the years the Internet happened. So, I was In Silicon Valley from 1994-1996, when Yahoo and Netscape went public. It was almost impossible to not be involved in the tech sector if you were there at that time. When I finished school, I wanted to know more about the massive world of internet and technology. I remained in the Valley for another 3 years and worked for a strategy consulting firm called Bain. All of our clients from the San Francisco office were in technology. In 1998, at Morgan Stanley, where I worked before business school took me back into the private equity group where the following year, I become responsible for their venture capital operations in Europe. So I started my investing career at Morgan Stanley in 1998 after spending 5 years in Silicon Valley.
- Why are you in Ukraine now?
- I have been following developments in the region for many years as, at Pioneer Point Partners, we are always interested in emerging areas of growth in our sectors of focus. I am also an advisor of the new venture capital program of the EBRD. That’s why I come here maybe 2 or 4 times a year.
- Have you witnessed any development of projects and ecosystem here from year to year?
- From year to year, there is clear improvement in the quality of the people. I see much better investors, better management, and better content. The ecosystem is developing nicely. It doesn’t take one year. It usually takes 5-7 years to become really mature. It’s nice to see that Russian investors are here. Still, the quality of projects is varies widely. And a lot of them are very early. It would be nice to see more mature products.
- What was your most successful project as an investor?
- There are many of them, but one that I always remember is company called Immobilien Scout, in which I invested in Germany in 2000-2001. It is a real estate web-service and was a company which seemed at that time to take on the very large companies, because the market at that time was owned by newspapers and advertisers. And it proved that the internet is such a powerful medium. For certain categories of services, it is so much better than alternatives. It completely displaced the existing old methodologies much quicker than we could think. We invested in it in 2000-2001 and sold in 2007. It was very large exit at almost 600 mln. euros.
- What is the percentage of failed investments in your career?
- In my particular case, it’s probably 20% of failures. But it is uncharacteristically low, because I’ve tended to invest in projects at much later stages. I’ve been quite lucky and I’m quite conservative as an investor. But I think the average failure rate in Silicon Valley is 30% really fail, 30% don’t fail, but don’t succeed, either (you only get your investments back), 30% succeed, and 10% really, really, really succeed.
- Paul Graham recently wrote that the correct strategy for an early-stage fund is to take as many projects as possible and one of them, in case of success, will cover all the costs. Is this the right strategy?
- Yes, it’s proven and is not a matter of opinion. If you look at any VC fund at Silicon Valley, and look back at their returns, 90% of returns had been given by 2 or 3 companies from their portfolio.
- So it means that more startups will get investments.
- It means that funds will have a strategy to invest in lot of them. And they perfectly understand that they take a lot of risks and that their returns will come out of this.
I was involved in a fund in 2001-2002. That fund ended 3 investments out of 60-70 others. That were Skype, Focus Media and Baidu. These three investments have probably returned the fund’s size multiple times. And even if no other company performs (but I’m not sure in this particular case, I think they will), it still will be a very successful fund. That proves that venture investor should invest in very large set of companies, each one of them having a very big upside, and the only thing that really matters is how big the winners are. Not how many.
- What about big funds? Are they going to come into the CIS Region now?
- Yes, of course. Whether they open an office or work through their headquarters, or they back a local VC, depends on their strategy. But the opportunity in CIS is now better than it is in Europe for venture. There is more growth and there are less established projects. In Western Europe and in the US, you have to innovate a lot, but here you can start with a much lower level of innovation. It means lower risks.
- Which spheres are trendy right now?
- For me, any project that is looking at Russia and Ukraine as a domestic market. So it is any type of internet service or any type of consumer and business internet service. There is a language barrier here. And there is a lot of space to do things that are already done and are proven. I also believe that there will be some good global technology firms, but it’s a high level of risk.
- How many executive summaries do you get every day?
- A typical VC gets around 3,000 projects a year but, in Silicon Valley, it can be as high as 20,000.
- Very big number. And personally you are a later-stage investor, right?
- In EBRD, we do both, early and later stage investments. Pioneer is a buyout firm.
- What are some typical mistakes that entrepreneurs make in meetings with investors?
- A lot of them. Most times, these projects are not really suited to venture capital. There is misunderstanding that every technology company is a prospect for a venture capital. This is a fallacy. 99,9% of technology companies (they could be perfectly good companies) are not suited to venture capital as a form of finance. Venture capital is only suited to companies, that require a large amount of capital (venture capitalists won’t invest $50,000), for companies that can become very big home runs. A lot of projects that we see are companies that basically can be good firms, but they will not be big enough. They will generate 20-30 mln. in revenue and maybe 2-3 mln. in profit, which for entrepreneurs is a fantastic outcome. I wish I had a company like that. But it’s not suitable for the VC. The ecosystem is not really able to educate the entrepreneur as to what form of financing will work. Venture capital is not the only form of finance, as you have government, angels, friends and family, customers, bootstrapping etc. Venture is just a small portion that only works for a very unique set of companies. It needs a very large market, an incredible team, and a very big opportunity which requires capital, as well as a very clear plan to go after a very big opportunity. Maybe 1 of 100 projects coming to us have those characteristics.
- And what about pitches?
- Yes, often arguments are not well taught and the pitches are long, as they talk about a lot of irrelevant stuff and avoid the 5 things that are really important. Some other mistakes are that they don’t know what the particular VC does. The main problem is that the project doesn’t fit to the strategy of that certain VC.
- There is a well-known idea of the elevator pitch. Have you ever talked with startups in elevator?
- Never. What’s true is that, in the presentation, in the first few minutes, you probably form a view of whether or not it is something that is in your field of interest. The concept of the elevator pitch is that if you cannot explain in a simple way why you think you have a big opportunity, you won’t be able to explain it in a very complicated way. Normally, something that needs 1 hour to be explained, can be a symptom of confusion. My recommendation is to think about 2 questions (in elevator pitch):
1. What is the market opportunity and why is it big.
2. Why are you the best vehicle to go after this market opportunity.
If you don’t articulate those 2 things, you have do not have an elevator pitch.
- Let’s talk about investors. Are there differences between our investors and European?
- In general, European VCs are not very successful as a class. We see a relatively young industry in Europe, but people have been trying to understand this market for 14-15 years. So there is some experience. There are differences, but it’s just a market at the early stages of development. I don’t think that there is something completely different between a Ukrainian consumer or Italian consumer or French consumer. Of course, there are some differences, but I think they will change over time.
In 1999, we thought that the internet wouldn’t work in Germany, France or Italy, cause it wasn’t a Silicon Valley. It sounds ridiculous now. And it will sound ridiculous about the Ukrainian market. People here are intelligent, educated, and they want to do things better and they will. It’s just the matter of time.
- I heard that Berlin is rapidly growing in venture capital now. Which countries are now the leaders in this sphere in Europe?
- It’s the UK, of course. It’s Germany. There are some pockets in other regions, like the Nordics.
- Did you mention some startups here?
- I’ve seen some interesting projects, but they are very early. So time will tell.
- Too early for you?
- In general, not just for me. You really don’t know, as you do not have enough elements to discern the level of risk you are taking.
- Are you doing angel investments?
- No. I’ve done it in the past, but not now. That particular risk return profile is not one I am comfortable with.
- Denis Dovhopolyy said that one of the biggest problems of our ecosystem is the lack of angel investors. Do you think that it can really cause a problem in the region?
- Yes. But ultimately, that’s a “chicken and egg” problem because you need some winners before the angels will come into the market. Once you get some success stories, the people of these companies will make a lot of money. And some of them will reinvest in early-stage companies. People make money and invest them in their friends or companies they like. You really have to create some success story to jump fast and create the angel ecosystem.
- Almost everyone I talked with told me that the entrepreneurs all over the world are the same. Do you agree with this statement?
- I agree. Each one of them is different, but I wouldn’t think that there is some kind of genetic cultural differences in entrepreneurs. I just met with one of the biggest Russian entrepreneurs and he is just as good, brilliant, and intelligent as Silicon Valley entrepreneurs.
- The last question. What is your advice to entrepreneurs and investors in this region?
- For entrepreneurs, is to be very thoughtful about what they do. It’s true that entrepreneurship is about emotions, instincts, and enthusiasm. You need that. But you also need to be very thoughtful and very structured about how you do it. Seek advice – be a good listener. Talk to people and listen. And ask them to criticize you. To tell you what you can do better. Your enemy in entrepreneurship is defensiveness. You need to be clever and motivated to be an entrepreneur. Because you can listen to everybody but at the end of the day you have to make your own decisions. But you have to be open to some learning and suggestions from the people who have more experience than you can have. So it’s important to be motivated and aggressive, but, at the same time, thoughtful. Think about your business, the weak, as well as the strong, aspects. Think about the risks and think about how to position your company to be in the best risk/return area.
For investors, it’s different. They know their job as well as I do. Be patient, be very disciplined, invest your time in few projects, select them for the quality of the people, more than any other thing. And make sure you can bring to these guys as much support as you can, because they need it.
It will be a very good market here. You have to wait some time.
- Can you recommend some books?
- Steve Jobs’ books. The book by journalist Jeff Jarvis called “What Would Google Do?”. The book by Benchmark founders called “eBoys”.
But, at the end of the day, I think that your network will be very important. Spending the time with people, who have learned something over the years. And also, never ever give up!