Startup

How to grow a startup? Strategic and operational support is key

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How to grow a startup? Strategic and operational support is key

Adam Rudowski and Piotr Pawłowski, General Partners at Level2 Ventures, talk about the ins and outs of venture capital, how to find your feet as a Founder, and discuss effective support in growing and scaling startups.

Wiktor Doktór, Pro Progressio: Level2 Ventures entered the venture capital market in the CEE region almost a year ago. Where did you get the idea to set up a VC fund and what made you decide to start now?

Adam Rudowski, Level2 Ventures: Back in the 90's I founded Veracomp, a value-added distributor. I developed the company for nearly 30 years – up until 2020, when we were present in more than 20 markets and our revenues exceeded PLN 1.5 bn. That’s when I decided to sell Veracomp to Exclusive Networks, a global industry player, which supported the company to continue on an upward path.

Building and growing companies always fascinated me, so getting involved in a new venture allowing me to pursue my passion was a natural step to make. By 2021 I already invested in several startups as a Business Angel, and a keen interest in the VC market lead me to the conclusion that there is not enough funds created by experienced managers who share their experience with Founders and support young companies – not only by way of capital. Therefore, a VC fund was my top priority.

I invited Piotr Pawłowski to join me in making it happen. At the time, Piotr was the President and CEO of the 3S Group, and a manager with over 30 years of experience in developing IT and Telco companies. Our professional paths had crossed numerous times, and his experience was a perfect match for the operational model I had in mind. This is how Level2 Ventures came to be. We see capital as the first support level – the real value we offer to Founders and startup boards is strategic and operational support in business development and scaling.

Piotr Pawłowski, Level2 Ventures:  Capital does play its part, too. Level2 has PLN 130 m of seed capital, which is not something you often come across in Poland where majority of VCs found their operations on public funds. We earmark between EUR 0.25 –1.5 m per investment. We’ve been on the market for just under twelve months and we’ve already understood that a fund offering real smart money in the areas of strategy, sales, and marketing was severely missing from the VC landscape. In a short space of time we have completed ten investments in sectors as diverse as Industry 4.0, Blockchain, PetTech, and Sustainability.

The Founders of our portfolio companies are recommending us to other startups already because they clearly see the real, multidimensional support we provide them with. We’ve also launched the Development4Startups Program, which is our own way to address the proces of continuous competence development. We are working with recognized experts – such as Wojciech Herra, Zyta Machnicka, and Mirella Piwiszkis – which means our Founders and Managers learn from the very best. This, in turn, quickly translates into the development of their companies.

You operate in a high-risk investments industry that is really responsive to market changes, while offering an opportunity for above-average profits. How are you finding your feet in such market realities?

A.R.: Venture capital is indeed a rapidly growing and multidimensional ecosystem. It forces you to change the way you look at business. A startup cannot be viewed as a smaller version of a large enterprise. Startups are temporary organizations that develop innovative products or business models, while constantly adjusting to the market. They operate in a specific model that requires continuous fundraising, i.e. securing funding for further development, as more than 90% of them do not achieve BEP (break-even point – ed.) in the first 3 years. However, this approach – commonly known as the VC Way – allows to utilize the fund capital to quickly scale the company, increase its market share, generate significant revenue growth, as well as drive valuation up – that is, create a mythical unicorn, which stands for a company valued at USD 1 bn or more. In return, the fund gets an above-average, in some cases even a hundredfold return on investment. More than 60% of the companies listed on Nasdaq have VC Way roots.

P.P: It goes without saying that not every startup will become a unicorn. Actually, almost 90% of them fail, a few percent yield a severalfold ROI, and only one percent is approaching the almost mythical valuation of USD 1 bn. However, such stats do not scare investors away. Data shows that the VC landscape remains attractive despite being a highrisk environment. In Q4 2021 alone the global VC investments amounted to nearly USD 172 bn, half of those in the US (USD 88 bn), with USD 28 bn invested in Europe, and USD 46 bn invested in Asia.

Our role is to pick the right startups, show them how to scale faster, identify risks, and constantly develop their competences. Quite often we also assume the mantle of sparring partners for Founders who can confront their vision of running and scaling a business with our experience. We believe that this approach can significantly improve your win ratio.

What is the VC Way? What are the things Founders should brace themselves for on their path? What are the risks and challenges they need to be aware of?

A.R.: The VC Way is certainly not for everyone. Each Founder must be prepared to work in a rapidly changing and under-resourced environment, prove the value of their project over and over again, and achieve demanding milestones. It is essential to know how to create workable business models, validate products, and plan thoroughly and precisely in order to secure funding rounds on time. An equally important element is building comprehensive and competent teams, that will enable company growth accordance with investors’ expectations.

The idea and the team are not enough on their own – you need to execute on those. And execution requires efficient sales, effective marketing, product management, customer success, and many, many other things. Additionally, one needs to network and forge relationships within the VC community as this unlocks capital. Growing a startup is a marathon, not a sprint. And it’s very hard work.

P.P.: On top of all the skills Adam already mentioned there is the business aspect, too – an innovation or an idea for a product or service. Many Founders do not realize how many factors do VCs consider before investing. The solution must be disruptive – i.e. be part of a market trend – and preferably a Market Maker, too, which means that it sets a new approach for product or services development. It must also have the potential for fast, global scaling, and solve a serious market problem – we often refer to this quality as being ‘more of a painkiller, rather than a vitamin’. The very market a startup wants to operate in must be large enough to offer scaling opportunities.

Does this mean there’s a discrepancy between a Founder's perspective and that of the fund?

P.P.: We often come across situations whereby Founders believe in their projects to the point they lose the ability to objectively analyze the market and data. They live in a bubble, a certain representation of reality, and their decisions are not grounded in hard data. VCs looks at startups from a number of different angles, where three are of utmost importance: market size, the product itself, and the business model. If the market is too small, the project will not scale and hence will be undervalued. If a product does not fit in with current market trends and is not groundbreaking in some way or shape, it probably won’t secure further funding. Thirdly, VCs will refrain from investing in case the business model does not assume recurring revenues and multiple monetization sources.

A.R.: You have to bear in mind that venture capital is governed by certain unified, global rules and principles. The fact we operate in a high-risk environment does not mean we do not try to minimize risk wherever possible. Most funds follow similar evaluation criteria when it comes to investments, which means projects that fall short have problems securing long term funding. And quite often startups need to secure funding across several rounds, with dozen or even several dozen VC funds from all round the world participating. It works a treat when Founders know what venture capital cares about and thus build their businesses in a flexible way. This allows to cut down on resources and achieve a break-even point even when they’re facing difficulties in securing another funding round.

 Every Founder must, in your own words, be an extremely resilient and driven ‘doer’. How to build a startup and avoid burnout?

A.R.: Growing a business involves stress and working under pressure, which is why knowing how to ‘recharge your batteries’ is so crucial. Both Piotr and I have hobbies that allow us to break away from the everyday hustle, clear our minds, and gain new perspectives. For 15 years now I have been offroad driving to places hidden away from regular tourists. Together with my wife we’ve traveled across Tibet, Mongolia, Siberia, and parts of Africa this way. I also fly planes which I use to travel around Europe. I’m also passionate about lifelong learning – Goethe once said that you shall not achieve more in life unless you become more yourself.

 P.P: Being the ex-CEO that I am, I can safely say that apart from recharging your batteries, the ability to be present – to be genuinely here and now, therefore concentrate effectively – is an important skill. For nearly 30 years I’ve been windsurfing and snowboarding, and I also play table tennis. All these activities are fairly high octane and thus help relieve stress – and on top of that, they’re also pretty good at helping you practice your focus. A daily routine that helps cope with everyday challenges is something I can recommend, too. Regular training or workouts, reading books, or any other way to keep a healthy balance can help us stay genuinely effective and motivated even when the going gets really tough.

You talk extensively about effectiveness, adaptability, but also about maintaining one’s balance. We know you operate differently from most VC funds. In addition to business support and developing competences, what else do you focus on?

P.P.: We try to be as involved as possible in fostering the startup environment in Poland. We want to bolster the connections between startups and mature business – on the one hand, this is designed to enable the validation of ideas at early stages of development; and, on the other hand, the adoption of innovative solutions that may help optimize processes or increase efficiency. That’s how the Caspen4Startups venture – ran jointly with Pro Progressio and aimed at startups – came about. Level2 Ventures provides mentoring sessions and strategic consultancy, and Pro Progressio offers upgrading one’s networking capabilities, wide-ranging promotional activities, and the opportunity to work with industry leaders.

How about we close our conversation with this one – what piece of advice would you give to Founders about to start on their journey?

A.R.: Never give up. Be innovative, courageous, and proactive. As you’re fighting to make your dreams come true, make sure success depends entirely on you.

P.P.: Remember to properly define your mission and vision. Invest time in thinking about your company culture. Build organizations that will be a joy to invest in as well as a joy to work for.

Thank you for the interview.

This article comes from magazine:
FOCUS ON Business #5 July-August (4/2022)

FOCUS ON Business #5 July-August (4/2022) Check the issue