Launched seven years ago in Silicon Valley with support from Sberbank, Fort Ross has made its Russian roots an advantage in the eyes of US startups seeking global development opportunities. The venture firm now aims to enlarge its coverage to Europe, with two new funds announced in the past months. Its General Partner Victor Orlovski told East-West Digital News about the challenges of doing venture business in Silicon Valley, unveiled the details of his new funds, and shared his bold vision of startup innovation.
Your investment firm has been working on the US market for nearly seven years. What have been its main achievements?
We made our first investment six years ago putting a few million dollars in such companies as NetGuardians and Moven — but our active investment period started in 2015. That year, we moved full speed with our first fund before raising our second fund in 2018.
Since their launch, our two funds have backed nearly 30 companies in total from which the most companies are in the US and Israel. These are usually established startups that generate revenue ($7m ARR or more) and grow 50% annually. Our average check of $7-8 million.
We had quite a few exits. One of our portfolio companies was sold to Apple, another to McDonalds; there were a few other M&A deals while two companies went public.
Beyond these figures, I believe we have achieved two important milestones. First, we formed a very talented, internationally-blended team of professionals. For example, Anurag Chandra, who has been a member of the Silicon Valley technology community for nearly 30 years, serves as Senior Partner. As for Sharin Fisher, she managed the 8200 Entrepreneurship & Innovation Support Program unit in Israel [the country’s first startup accelerator, primarily intended for the alumni of a top intelligence unit — editor’s note].
Another key achievement is the trustful relationship we have built with our partners and the local community. Trust matters; and those whom we convinced to trust us received a lot more than just money. We provided them with introductions, helped them enter new markets with a positive image, etc. This is how we started gaining more and more traction.
What is your positioning in Silicon Valley’s competitive field among other investors?
We came with a very simple message: while money is not a problem in the Valley (for good but even for not-so-good companies which can always pivot and improve), Fort Ross Ventures is connected to Eastern Europe and thus can help startups reach enlarged global goals. Eastern Europe is not a low-hanging fruit; even though it is not a top-priority destination for most US startups, its commercial potential can be very substantial.
Thus, we established our brand not only as an investor, but as a bridge with the ecosystems of Central and Eastern Europe. This does not only include Russia, which is home to the largest Internet community in Europe [nearly 110 million users], but also other CEE countries (going as far west as Austria and Germany) and CIS countries, going as far East as Kazakhstan.
Sber, which is one of our largest partners, has a variety of interests in these countries. We also work closely with other large Russian corporations: X5 Retail Group, Sistema, MegaFon, Lanit and many others.
Our portfolio companies are amazed by how efficient we are in helping them sourcing talent in the CEE region and helping with sales and localisation of their products and services. Many times we act faster in our markets than in their home countries.
Certainly, we’re far from being among the top tier VCs in the Valley. This is unreachable in just 5-10 years. But we are becoming better known by the local community and we are well known now in Israel. We try to be more proactive than many “one-mile funds” in the Valley. We don’t wait until startups notice and approach us: I’m happy to take the plane if needed to meet them, and we’re persistent when I target an interesting company.
Given the sharp deterioration of the US-Russian relations in recent years, how is it possible for Russians to do venture business in the US?
Of course, we are not immune to this context. This created some pressure — something like the atmospheric pressure that you know is there but you don’t really feel. I must say it was difficult to deal with some US banks.
Note that all foreign investors in the US — from Russia or anywhere else — are subject to special regulation known as CFIUS. [The Committee on Foreign Investment in the United States reviews the national security implications of foreign investments in US companies or operations.]
This being said, the startup and VC sphere is far from politics, and not regulated by government bodies. Startups are opportunistic by nature, they often often work in grey zones (Uber, blockchain…), care less about perceptions — unlike big corps that are more risk averse.
From this perspective, there haven’t been that many challenges working here. I remember only one deal where we weren’t accepted as an investor because of our Russian roots. This was not even the decision of the founder or the company (actually the CEO was advocating us heavily), the issue came from the lead investor in the round, which was the VC arm of a big US financial institution.
And this was one in several hundreds cases of investment discussions. If we lose deals, like any other fund, it is much more due to the competitive situation than to our Russian roots.
Two months ago you announced a new fund to invest in Russia and neighbouring countries.
Indeed, we are willing to support Eastern-European startups in both financial and business development terms, just as we did with US and Israeli companies. We will help startups to go global. We will extend our team for this, partner with accelerators and incubators across Eastern Europe.
Which countries will be covered?
Among our targets are Russian founders abroad, wherever they started (Singapore, US…) as long as the companies have employees or customers in Russia and the CEE region. But we will also target companies that target this region as a potential market.
We also aim to cover such countries as Poland, Hungary, Czechia, etc. — typically targeting startups like UI Path [an internationally-successful startup from Romania]. We don’t have connections there yet, but Sberbank’s accelerators, including the one run jointly with 500 Startups, attract startups from several of these countries as well even as from some Western EU countries. For example, a Czech startup doing machine learning, targeting banks, could potentially apply to Sber because it is dreaming to work with such a big corporation.
Megafon, MTS, X5, etc. also have their internationally-oriented acceleration programs. And, needless to say, we’ll seek to develop direct partnerships with meaningful players across our target countries.
Is Ukraine included in the target countries?
Of course! We’ve had plenty of discussions with Ukrainian-founded startups in the Valley — very far from politics. Recently I was invited to Kiev by a prominent Ukrainian businessman, who actively invests in the local ecosystem. The meeting was cancelled because of Covid, not politics. Under plans, my schedule was filled with meetings with local startups.
For this fund, you’re aiming to raise $100 million, of which Sber has already committed nearly $27 million. Which types of other LPs are you approaching?
We welcome any LPs (subject to KYC process of course). But this fund will be primarily for corporations, and many Russian corporations have already expressed interest in joining. As corporations, they might not always be in such a good position for venture investment in a startup. As you know, direct relationships between corporations and startups may be complicated: startups should stand neither too far nor too close to their potential customers from the investment standpoint.
Note that Sber committed not only money, but also data, their business development support, and more.
Additionally, you’ve just announced a new, $200 million late-stage fund targeting the USA, Europe and Asia. Please tell us more.
Yes, we are moving in this direction as well. We have access to the vast number of US-based and global companies which have already won or are about to win a unicorn status and who are one or a few years away from going public. And we believe that investing in these companies is a wise strategy.
It has become increasingly easy to go public (with alternatives to IPO such as SPACs or private placements), but M&A activity is also expected to rise dramatically. Historically we passed this type of investment, but now we are set to seize them. There is a high demand for this from high net worth individuals and family offices.
This fund will have a six-year lifetime, which is relatively short. We will leverage our deep relations on the market and hope to bring new value to our existing and new investors.
What do you feel is the impact of Covid on startup investment?
Startups are all about tech disruption — and the pandemic has brought a lot of opportunities here. Challenges require new solutions, and that’s what startups are often good at. Airbnb wouldn’t have become Airbnb without the financial crisis of 2008-2010, as people were ready to accept strangers in their house because they desperately needed money.
In the next 10 years we will see new episodes of instability, from epidemics, to economic crises, to politics. Amid this in stability, breakthrough technologies will flourish and disrupt a growing number of industries and segments. There are early signs of this in such industries like banking, insurance but there is a lot more to come in food, agriculture, medicine, education and space.
Entrepreneurs need to adapt and pivot: they are the ones who can solve problems using innovative technologies and new business models. Note that launching a startup up has never been easier due to the commoditization of infrastructure, algorithms and open source technologies.
What I’m saying might seem optimistic — but if you’re not an optimist you can be neither an entrepreneur nor a venture capitalist!