29. October 2018
Václav Pavlečka: What the CEO of an Investment Fund Thinks about the Startup Bubble
There have been fewer unicorns (startups with a valuation of 1 billion USD) in the American market since 2015. And even the ones that exist are not very strong. Nearly half do not even have the value of 1 billion USD, states the National Bureau of Economic Research. Still, many startups would die to become the next Facebook and many investors cannot resist a magic business opportunity. But isn’t the unicorn story just a fairy-tale? We asked Václav Pavlečka, managing partner of venture capital fund Air Ventures, what he thinks about the current state of affairs.
Why is there so much obsession with startups?
One of the reasons why we see so many young, tech-oriented entrepreneurs rising to the stars lately is that there are niches of the market that aren't penetrated by corporates. Some industries are still waiting for disruption – like the car industry. I think in the near future we’ll see a transition to a “mobility industry”. Ownership is outdated, old types of engines are obsolete and car makers must quickly adapt. The corporate structures are too rigid to do a reality check, which means that changes will be brought from outside. I’m a fan of startups because I personally believe in the omnipresent power of change.
What do you think about unicorns?
I think they are the outcome of the constant pressure of seeking the next new thing. The media is hungry for stories of new Edisons. They often lapse on critical thinking and cast the startups as celebrities instead of bringing something more balanced. When investors also jump on the bandwagon, the multiples can be sky high. Eventually it might end up that companies have crazy valuations and there’s a new tech bubble.
Speaking of tech bubbles, what’s your stand on famed startups like Airbnb or Uber?
I love the story of Airbnb. I think the founders created a platform in which people from different backgrounds can truly meet and mingle. No more dull, standardised hotel environment, but explorers visiting real people. Airbnb got caught up in the hype a bit but I still see that they are offering new services (concerts, experiences with locals) to return to the original mission. Uber is a result of poor quality taxi service worldwide. The problem of these unicorns is their ignorance for local regulations and regulators – they are not able to react swiftly enough and this results in bans and late-coming regulations.
There’s also one thing that people rarely notice about unicorns and that is their negligible profits. How come venture capital investors don’t mind that these companies don’t make profit and instead create loss?
Venture investors are constantly looking for the future performance, for the potential – not so much for the current figures. Sometimes startups don’t make money on purpose, and the reason for their losses is super-dynamic growth. If you take a look at Airbnb, the profit of the company was almost 100 million USD last year but the potential lies well above that. If Airbnb becomes a portal for independent travelers through which they purchase any service and experience, you can talk about much higher figures in the future. As for Twitter, they finally made it to the black numbers last quarter… VC investors are just patient.
Still, Twitter becoming profitable after 12 years of existence isn’t such a great result. What do you think of the current model in which a startup grows fast, burns a lot of money and then goes for an IPO (offers shares for the first time on stock)?
It's all about supply and demand. If the market (investors) believe that the company is not showing black numbers only because it sacrifices the financial results for dynamic growth, then it makes sense. Going public isn't easy and as soon as you do it, you might end up under big pressure. Take Tesla, for example. The people from the company were almost tweeted out from their business (I know I am exaggerating) after Elon's post. If they weren’t public, such information wouldn’t hurt anyone. And personally, I understand Elon's notion behind this. He is under constant pressure, everyone expects a combination of Thomas Edison and Jesus from him.
In the current model, 9 out of 10 startups die before they make it on the cruel road toward profitability. Why doesn’t anybody care?
We talk about 9 out of 10 but in all stages, including the angel round when projects often fall from a small height, so to say. If it fails in the pre-MVP mode or in the stage, it's quite understandable. But among all those deaths you have resurrections, too! People make mistakes, learn from them and then prevent the 10th startup from failing. If every startup was a success, I would be out of business (laughter). Nobody would ever need project scouting, due diligence, marketing analyses…
As a managing partner in a venture capital fund, how do you choose those to whom you will and will not give an investment?
The later in the investment phase we are, the more rigorous we get. We need to make sure that the bigger tickets won't end up in the 9 out of 10 probability ratio. So we work with the startup before we invest in them – we need to know the team, we set them up with potential customers and with experts, we try to find weak spots and address them in order to prevent a future failure.
Besides working in the fund, you also co-organize the Startup World Cup & Summit with UP21. What is it about?
We strive to connect investors from the whole continent and to inspire local startups to see where the actual quality bar is when mentioning unicorns… We are creating a movement. We need more than a display of successful startups, we need to spark a change within Europe.
The motto is „What’s Next, Europe?“ What’s your answer to the question?
I believe Europe should make entrepreneurs’ lives much easier! Company registration within few clicks online, VAT payments automated from the bank account, taxes automated from the bank account, tax paradises for small entrepreneurs at the start as a support and much tighter cooperation among all the state-run investment associations. Bureaucracy only helps the bigger players who can afford a team of lawyers and experts on subsidies. We don’t live in the 19th century anymore, and the system needs to reflect that soon – otherwise we’ll soon be “disrupted” by entrepreneurs from rising economies.
Václav Pavlečka is a managing director of innovation fund and incubator Air Ventures, which focuses on supporting early-stage and angel stage projects and talented dedicated teams in the region of CEE. With 9 years of experience in marketing communication, he has been helping both corporate and startup clients to innovate their brands and businesses in the EU, US and China. Václav is also a university lecturer and mentor.