The era of cheap capital has ended

Startups need more than just a good idea and seed funding to succeed. Their survival also depends on things like a quality business plan, sound financial management, and more. Last spring, Michal Menšík, owner and CEO of the logistics startup DoDo, and entrepreneur Zdeněk Šoustal therefore launched V-Sharp Venture Studio to help new companies with their experience and contacts.

Sharing experiences with startup founders will be useful. A year ago, everyone was mainly preoccupied with the pandemic, today the uncertain economic outlook has been added to it. However, the attractiveness of some sectors remains high despite a possible economic slowdown. Therefore, V-Sharp Venture Studio is focusing on new companies in the fields of e-commerce, logistics, and financial technologies. Matej Zabadal, Managing Partner of Studia, believes in their long-term potential.

How has the studio evolved during its time in operation? How does V-Sharp Venture Studio's relationship with startups work? Read the interview with Matej Zabadal.

How many startups do you have in your portfolio at the moment? Do you have any target final number set?

We currently have three companies in our portfolio – Ydistri, Advanto, and Aimful. In all cases, these are start-ups that have developed their own unique product and, at the same time, fit our investment criteria from the initial meeting and discussions.

The first investment was in the startup Ydistri, which is developing software for the redistribution of „dead“ warehouse stock. Using sophisticated predictive models and algorithms, Ydistri can analyse a chain's stock across individual branches and effectively balance inventory. The startup successfully identifies stock that is unsellable in one location and efficiently relocates it to where it will sell quickly, and crucially, at full price. With Ydistri's help, retail chains can effectively tackle the problem of waste and unnecessary discounts, as well as the opposite problem of empty shelves.

Advanto is a fintech startup that allows employees to withdraw their earned wages at any time during the month. It was again a project ahead of its time, the idea of which, we believe, will become standard in Czech society over the years. Advanto now collaborates with a number of prominent companies, including, for example, the popular online store Notino, the fast-food chain Bageterie Boulevard, or the logistics company Hopi.

Aimful is a project that found a significant gap in the market during the Covid pandemic and managed to find a meaningful solution for it. It ensures that people spend their time in work meetings as efficiently as possible and only attend where they are genuinely needed.

We plan to maintain a similar pace of investment in the coming years, not least because we invest our own financial resources into startups. Consequently, we are not under any pressure and can therefore afford to enter only those projects where we see a unique opportunity and, above all, mutual synergy. We do not have a specific number of companies we wish to invest in. We would like to have around ten early-stage companies. It is precisely during the period when these startups are establishing relationships with their first customers, up to the point where they successfully expand abroad, for example, that we see the greatest added value in our presence and support.

In any case, for us, the priority will always be quality over quantity. Therefore, we would rather have fewer companies in our portfolio, but in areas where we can really offer value to the founders and at the same time feel the right „drive“ from their side.

How long do you intend to hold a particular company in your portfolio? What kind of exit do you anticipate?

We don't have a fixed horizon in this regard. We are aware that building a successful company can take varying amounts of time and that there isn't a direct, obstacle-free path to achieving it. Companies like UiPath and Klarna, which are very successful today, serve as proof of this. Even they had a phase of searching for the right product, trying different products and services, or periods of slower growth before their rapid acceleration phase. This is also something that is part of the business journey and shapes a company into its „final“ form. While there are well-known companies globally that shot to the elite right from the start of their operations, these are rare cases. It's important to realise that the vast majority of others spend some time searching for the right product or market fit, and often change their overall strategy, before finding the right direction.

Regarding exits, these are largely dictated by the market. In Europe, the vast majority take the form of M&A; the proportion of IPOs here is smaller than in America. We would be very satisfied if we managed to have one or two companies in our portfolio that make it all the way to the stock exchange. For us, this represents a kind of imaginary peak of our collective endeavour and operation. However, for now, we can only speak in theoretical terms, and more concrete ideas will only take shape as the individual companies develop.

We primarily support new businesses in the e-commerce, logistics and fintech sectors. Why these specific ones?

Primarily, these are all areas that have enormous potential for the future, and at the same time, within the team as a whole, we have long-term experience and know-how in them.

Almost everyone is involved in e-commerce these days – in the Czech Republic, 9 out of 10 people shop online at least once a year. Despite this, however, its overall share of retail sales in our region remains low (around 20 %). Although we are currently seeing a certain slowdown, partly due to high inflation and the uncertainties associated with the Russian invasion, we expect it to gradually pick up again in the future. China provides a good example, where, according to various estimates, the share of e-commerce is two to three times that of Europe and the US. Furthermore, there are still segments that are only just beginning their transition to the online environment. These include, for example, food and other everyday consumer goods, car sales and leasing, and B2B e-commerce. Last but not least, it is worth noting that e-commerce is precisely the area in which we at V-Sharp have many years of expertise. Not only through DODO – which Michal Menšík, founder of V-Sharp Venture Studio, recently secured a 1.5-billion investment for and makes no secret of his ambition to conquer Europe logistically – but also in the period prior to that, when we had been building e-commerce projects for more than ten years.

E-commerce goes hand in hand with fintech, which facilitates e-commerce through increasingly popular deferred payments, smart „embedded“ insurance products, or even entirely new payment methods. At the same time, we live in a time when the entire process of digitalisation of financial services and products is only just beginning, and fintech therefore has a very promising future, its importance continuing to grow and the scope for new ideas is vast. Furthermore, our long-term thesis is that practically every service or product can also contain an element of financial service – whether in the form of a loan, insurance, deferred payment, or payment based on the extent of use of the given product (i.e. so-called usage-based pricing).

Logistics may seem to be in the background, but it's important to realise that nothing would function without it – e-commerce, mentioned above, is just one example. We expect the entire field of logistics to become more complex and sophisticated in the coming years. This is precisely because every logistical problem, no matter how small, ultimately has a global impact. We saw this during the height of the COVID crisis, when we witnessed, quite literally, global chaos throughout the supply chain. We also see significant scope for wider use of artificial intelligence and various data-driven solutions in logistics for the future. And technology is what interests us most about logistics.

Do you already see any future stars in your portfolio? Can you name a specific company or companies?

We believe that every startup we invest in has the potential to become a star. However, if we had to say who is closest to their global ambitions, it would probably be the startup Ydistri. As I mentioned above, Ydistri solves the problem of dead stock for retailers and already works with multinational chains around the world. This is also because it offers a solution to a global problem that is accompanied by high financial and environmental costs, and yet no one had systematically addressed it before. Furthermore, for global retail chains, the issue of sustainable optimisation of stock and logistics is becoming increasingly important, both from the perspective of financial management and social responsibility. Retailers were already able to plan stock purchases quite sophisticatedly, but demand can never be predicted with 100% certainty, and therefore a solution is needed that will balance stock levels even afterwards. And such a solution was missing from the market.

How does the relationship between your studio and the company practically work? Do you, for example, have a say in day-to-day operational matters?

We always strive to bring added value to startups in the form of our own know-how and continuous assistance. For all our projects, cooperation naturally expands. We are often their primary point of contact in the role of mentors. Once we have a good grasp of how a startup thinks and operates, we can support them with operational matters too. We then gladly help them with selecting suitable candidates for individual positions, acquiring new clients, or even product development. However, our primary goal is never to reshape a startup in our own image. For company founders, we are more of a helping hand, intervening only when they themselves wish for it. Management responsibility always remains in their hands.

Are there any sectors you would not invest in? If so, which ones and why?

Our primary criterion when selecting a suitable investment is whether we understand the relevant sector or not. It is difficult, if not impossible, to be an add-on value investor without a deep knowledge of the problem. We always start from a fundamental knowledge of the industry, the building of which requires a considerable amount of time; we are practically learning throughout our lives. We never merely try to superficially grasp „trends“; we simply don't see the point in that.

Naturally, there are quite a few extremely interesting areas where we don't yet have sufficient knowledge to proudly invest – for example, healthcare, biotech, or certain segments of hardware. Therefore, one of our main challenges remains primarily to stick to our craft and not get caught up in what is currently „fashionable“ in the venture capital world. At the same time, we believe there are still plenty of opportunities in our three main areas of interest – especially throughout the Central and Eastern European region, so there's no need to look elsewhere. If we were to enter another segment, we would need to possess some specific and unique insight that would convince us of the correctness of such a decision.

How did you combine your own business with V-Sharp Venture Studio?

V-Sharp Venture Studio was co-founded by Michal Menšík, CEO of the logistics group DODO, and Zdeněk Šoustal, CEO of Reticulum, which primarily invests long-term in industrial real estate, agriculture, and technology companies. I am responsible for ensuring that our businesses can be best combined with investments. At V-Sharp Venture Studio, I hold the position of Managing Partner, meaning I oversee the entire investment process. Our team analyses new investment opportunities daily in the areas we have identified.

Michal and Zdeněk are then part of the investment committee, which jointly decides whether a specific investment is actually realised, and then they are available to the founders as mentors. In this regard, I think V-Sharp is quite unique – the startup founder has access to entrepreneurs who have already built billion-dollar businesses. They know how to build a service so that it can be scaled, how to find product-market fit, etc. In addition, as they themselves say, in their careers, besides a number of successes, they have also made countless mistakes. They are therefore aware of what to avoid in business.

What impact do current uncertainties such as war, high inflation, or the pandemic have on startup financing?

These factors also have a different impact on startups with varied focuses. Generally, the availability of capital is decreasing, as is investors' willingness to fund models with high capital requirements. At the same time, the appetite for investing in companies that are not long-term sustainable is also diminishing. In this context, we are talking about, for example, ultra-fast grocery delivery (Gorillas, Jokr), BNPL (Klarna), or certain segments of crypto.

On the other hand, great and promising startups don't need to despair, as they will always find investors. Investing, especially in the venture capital space, is a long-term affair. Many investors have already experienced similar crises (remember the year 2000 or the period of 2007-2009) and can therefore think on a significantly longer timescale than the current turbulence will persist in the world.

What is unlikely to return anytime soon (and perhaps never) is the era of cheap capital and extreme valuations. We saw this, for example, with some unicorns in the crypto segment, which didn't even have a clearly defined business model, or in fact, mostly had none at all. We saw the same approach with some hyper-express delivery services – while they had a business model, it was clear from the outset that it could never be profitable. Such companies were driven by persistently low interest rates and an excess of capital, but these factors will now be significantly weakened and could even disappear entirely from the economy. On the contrary, there is a stronger focus on „value creation“ startups that solve clearly defined problems over the long term with innovative solutions.