We Take Risks With Startups, Because We Know How to Make Our Investments Work

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This article was originally published on http://innmind.com/

Swiss investor from the Philippines Frederic Joye speaks about problems and solutions in tech startups, analyses differences in European and Asian startup scenes describes new funding opportunities for startups and shares important advice for tech founders.

"We take risks with startups because we know how to make our investments work."
~ Fred Joye Tech investor & Arcanys co-founder

Frederic Joye is co-founder of Arcanys, a software development company from the Philippines, and Arcanys Ventures, a new venture which goes beyond incubators and accelerators and supports tech startups with funding and technological execution.

Being a technology entrepreneur with over 10 years of experience, working with startups and growing companies from over 150 countries, Fred is also a bright representative of a new generation of investors. Those who tend to overcome the limits of traditional conservative VC strategy and implement innovative models of smart investment in startups, combining the ability to take high risks while investing in seed-stage startups with a tailor-made approach of supporting technological execution.

We met with Fred in Switzerland and had an interesting discussion about startup infrastructures in Europe and Asia, technological execution, and smart investments in startups.

"The main mistake of startup founders is not thinking enough about the product and making it as simple as possible to start. The second mistake is not talking enough to potential customers to understand their needs and building something that doesn’t match their real needs."

The Arcanys structure is unusual for a venture capital market: it combines investments in startups with an acceleration and development outsourcing model. Could you please clarify what exactly Arcanys provides startups with?

Arcanys is a company that provides software development services for startups as well as for established companies. And we have set up a program called “Arcanys Ventures” (formerly Arcanys Labs) which helps startups with technology development while also investing funding for startups. This is all possible because we have a partnership with a venture capitalist called PolytechEcosystem Ventures – a Swiss venture fund based in EPFL, Switzerland. They provide the cash part for the deal. Together with them, we select the companies we want to support, and then we provide the smart money investments, which means the technological part of the execution together with funding.

Do you only work with seed-stage startups?

Our program is designed for the seed/ incubation phase, but we can also go along with the existing product to add new additional features or simply by helping them work faster.

So it is like the synergy between the development support and venture funding: you invest in the development of services, and your partners from PolytechEcosystem Ventures invest in cash, who is an investor in this case?

You know, just to be clear: all the help we provide within the development services also has its monetary value. Like for 3,000 hours we provide for the development support, it has a value of 100,000 USD– it’s real value, but that’s not money per se.

Surely it has value! I know lots of startups who would kill for the opportunity to get high-quality development support/ technological execution as an investment instead of cash.

Yes, it’s true. In this case, startups don’t have the headache of hiring developers, manage the technical team, and so on. We receive tons of requests for such kind of support from the startups.

As far as I know, you started your investment activities in Switzerland, how did it happen that you moved to the Philippines and launched this complex program for startups?

Arcanys was founded in the Philippines in 2010 and has a subsidiary in Switzerland, which makes sense: we have a lot of clients and a lot of startups in Switzerland–and in Australia. These are two of our main markets.

We started to do our software development outsourcing services from the Philippines for those Swiss and Australian startups and established companies, and then we decided that we could also help a lot more startups that we were seeing, because we can make the development many times cheaper than what they could get in Switzerland, with the same quality and additional funding. You know, we saw so many startups trying to get their products done, but they spent so much money on development that they don’t have enough money for marketing or even finishing their products. And then we said: Ok, we already help them a lot with the development outsourcing, but it would be even greater to find a partner who would co-invest with us and together we could provide them not just execution, but also money and connections to different cash investors.

Arcanys, as a software outsourcing company, was established in 2010, so you have already over 6 years of experience in technological execution support for startups and over 2.5 years of experience investing and co-investing in startups. When did you launch your partnership officially?

The Arcanys Ventures program was launched late last year when we partnered with this venture capital firm. We tried to find a VC firm that would work with us for many years, it was difficult to find a partner who would be interested to work for the business model which we proposed. Until finally, we found a relevant partner who works with us now.

During this time, how many startups have you already invested in with this business model?

We have invested in 6 startups so far and we’re planning to accelerate from 5 to 10 other startups in 2017, depending on the quality of the projects we receive and the opportunities we see in them.

What regions are these 6 startups from?

We have three startups from Switzerland, one from Portugal (they are based in Portugal but the founders are English), one in Australia and one in Thailand.

"I think there should be a lot of conditions considered before investing in a startup at the idea stage: many founders have very good ideas, so then you need to know that the team will be able to execute the idea because the idea without execution is worth zero."

Do you have any regional limitations?

No, we’re open to startups from any region. It all depends on the idea and the team.

Some accelerators charge startups for their programs. Do you do it in Arcanys Labs?

No, we don’t, because we choose startups for accelerations in which we’re willing to invest. So, we don’t charge anything. Instead of this, we provide technological execution VS shares in the company.

Arcanys labs is based in the Philippines – is it necessary for a startup to come and work there?

Within this program, we encourage them to come to the Philippines to collaborate closely and work together with the development team if we see that it would be beneficial for the startup. But if it is not necessary – we don’t insist on it.

And what are the main criteria and focus?

I think that we have a pretty wide look at different industries. To work with us, the startups need to rely heavily on software because that’s how we can really help them, so we’re looking for companies where we can make a huge difference in the development of their product.

We also like startups where there is a technical co-founder on board because it guarantees better execution versus companies that have absolutely no technical skills.

But what about founders who have no technical skills and no developers in their team – do you also work with such startups?

Yes, we do. And we even have the so-called “CTO on-demand” services to help teams that don’t have technical founders on board. We can really help them with it at an early stage to build and facilitate the development of the product. In this case, they don’t need to hire a guy who would probably cost a lot of money and he doesn’t have to be full-time either at the very beginning. But in the long term, depending on how technological their company is, they will probably need to hire a CTO in their team later down the road.

We also make due diligence to check the existing CTO’s skills and capability to manage the product development.

And what about the other criteria that you consider in startups: motivation, founders, team, etc?

Yes, we prefer to invest in startups that already have even small self-funding, like $20K-30K because we want to see that founders have invested in their own success. It’s the question of the motivation of the founders and their willingness to take the risk for their business–it’s important for the startup and for the investors.

And the final criteria is the potential of the idea and the team: one of the important questions before investing is to know the team and how it is set up.

How do you evaluate the idea – is it some subjective opinion or do you have some special map or methodology?

We don’t have a magic formula, we see so many startups which are very different from each other, so we analyze them case by case, evaluate the market potential, the opportunities they have and what they are trying to build, how they approach business and things like that. We’re also going to provide them with some business insights.

Who does the startup evaluation: you do it yourself or use resources from your venture partner or maybe hire external experts?

When it comes to cash investments together with our tech development support, our venture partner analyses projects, but when he is not involved, we do it ourselves.

"Many founders say: “I'll just hire a developer and tell him what to do and that’s it.” He’ll go for months and even years without shipping their product if they don’t do the requirements! So we really help them with this part and say: you need to work on this until you get it right and then you can test it with customers, because if you do it before it is well-thought - then it’s going to be a product that sucks."

And what are the differences between these markets? How do the startups from Switzerland differ from Australian or Asian startups? What is the most significant difference between them?

I think the main difference is the ideas that come out of startups. For example, if we consider Europe versus Asia: they have many differences in market size, customer needs, etc.

If we take for example a fintech startup from Switzerland, they probably will be focused on services that people in their market would be interested in, like robot advisors, security KYC, and things like that. When you look at fintech startups in Asia, they will probably be more focused on retail, payment facilitation, etc.

What we see is that most of the startups are focused on solutions for the local problem which will maybe find a market elsewhere. And then in Asia, there are many startups that are trying to replicate models which are working already in the US or Europe and are not yet developed in their region. There is one company that is very active in this market – it’s Rocket Internet – they’re trying to launch such products with more or less success.

And if we speak about the founder’s mindset: do you see any differences between startup entrepreneurs in Europe and in Asia?

I think in Asia people are very quick-minded, but at least in the Philippines and Thailand, we see that there is a huge lack of experience. It may be so because technology is scaling later and the internet was slower to spread, and there are not so many people with experience as there are in the US or the western world. This means that maybe startup founders from Asia have lots of energy and passion, but they really lack technical knowledge, which becomes problematic for their execution. They simply have more problems when it comes to how to execute.

And I do understand why it is so: they don’t have local experienced people who could share and distribute knowledge to the startup scene in comparison, for example, with the US where there are many people with over 20 years of experience in web businesses who give advice and coach young startup founders.

Does it mean that in Asia in general there is a lack of acceleration and educational opportunities for startups?

It depends on the countries. For example, in the Philippines obviously, there is a lack of it, but if you look at Singapore and Hong Kong – they invest heavily in startups. There is a lot of money, even more than in Switzerland, that has been thrown in as startups’ incentives. I would say that there is a huge difference between governments that are well-managed versus growing economies with lots of corruption where there is mostly private initiative that takes over what the public sector is doing in more advanced economies.

What do you think about investing in the idea stage startup? It’s a huge risk and most of the investors stay away from it.

I think there should be a lot of conditions considered before investing in a startup at the idea stage: many founders have very good ideas, so then you need to know that the team will be able to execute the idea, because the idea without execution is worth zero. I would say: yes, the outside is much bigger and the capital is much cheaper, but the difference there is that it has a much higher risk. If you invest $1 in an idea stage startup, it can be a lot more than when it is invested in a later stage, but the risk of failure is over 90%. That’s why you need to invest in a lot of idea-stage startups to get a return that might be interesting.

This means it all depends on the investment strategy of the investor. And how about yourself: do you prefer to make high-risk investments, or do you have a more conservative strategy?

I think that we prefer to take a risk because we know that with our execution support we can lower that risk significantly. One of the main risks besides not having enough demand on the market is shipping a product not soon enough or faster than the competition. It may be faster than competitors but not good enough or cheap enough to work with. So, we considered that if we help startup companies execute their product very quickly and with great work quality–make better products than the competitors and be quicker on the market, there’s a higher chance for us to get a better return on what we’re doing and increase the valuation of the company when other investors come in.

Do you think acceleration programs can really help startups to succeed? What is the real value given to startups that participate in such programs?

Well, there are some good acceleration and bad acceleration programs. There are founders who want to listen to advice and those who don’t. I think that sometimes acceleration programs can work really well for some companies, and be useless for some others. I would tend to say that it is better than nothing, but I see that there is a lot of acceleration programs for startups that make a lot of BS themselves, like people who say they are entrepreneurs and they are experts in whatever field and they just teach lessons to people but they have never done anything themselves. So it really depends on the different kinds of programs which are out there.

What acceleration programs do you trust?

If there is a startup that is interested in getting investments and who came out of Y-combinator, we would probably invest in them because y-combinator has a very good track record. But I also think that the valuation of the startup would also be very high if they pass through this program.

Regarding others – we don’t have enough experience working with other acceleration programs but of course, if there is a startup where 500 Startups venture funds invest in and they pass through their acceleration program – it would also be interesting to get involved (which we have done with one that got 2 rounds of 500 Startups investment).

And what about your own acceleration program which you launched in 2017 – is it your first experience?

We’ve been helping startups already both for funding and also with companies we decided to invest in with product development, even before launching the Arcanys Labs program. So we already used to accelerate startups to provide fast execution.

It is not a program that would be organized and led during 6 weeks or 6 months as is usually the case in accelerators. It’s really a tailor-made program approach where we identify how we can help them and where else they need help, and then redirect them to other partners once needed. Marketing for example, because we only do the product/ technology, we then redirect them for support to our relevant and trusted partners.

So you don’t plan to make a general acceleration, where you mostly educate startup founders in a variety of business questions – it would be a precisely targeted approach?

When we see an opportunity that the startup has already a good product or a good idea and we see the potential which the founders didn’t see – then we obviously will help them with it. But we don’t endorse them to a program which has “one-two-three must-learn steps”, like marketing – finances – etc. We would give them some advice of course, but we’re not experts in this field especially in their local industries, so we’d try to find relevant partners.

And how about support for business management, do you coach on how to manage a startup?

We give them advice where we see they can improve on, but it’s not a structured sector.

"We consider that if we help startups to execute their product very quickly and well, make a better product than the competitors and be quicker on the market - it’s a higher chance for us to get a better return on what we’re doing and increase the valuation of the company when other investors come in."

You communicated with so many startups, so share your insight: what do you consider as the main most common mistake made by startup founders?

At least for the product side, the main mistake is not thinking enough about your product and making it as simple as possible to start. It’s all about building the requirements, explaining, and making sure what complex product you’d like to build. Many founders say: I’ll just hire a developer and tell him what to do and that’s it. He’ll go for months and even years without shipping their product if they don’t do the requirements! So we really help them with this part and say: you need to work on this until you get it right and then you can test it with customers because if you do it before it is well-thought-of then it’s going to be a product that sucks.

And the second mistake is not talking enough to potential customers to understand their needs and building something that doesn’t match their real needs. I mean that too many startups forget to do their market research and just talk to their customers to explore their real pain points and needs. Instead of this, many founders just build a product that they think would match customer needs without getting approval from the customers. And that is where they fail.

Fred, accumulating your wide experience and knowledge of technological startups, what would be your number one advice for the startups on InnMind and all the rest?

I think that they should focus on a few main features of their product and not build something that is too complicated. They have to go straight to the one problem of their target, and then when it’s working, they can add new features. But they should be really proactive and quick in shipping their product and testing the market and the end-user response.

Thanks a lot for your time, InnMind team wishes you and Arcanys tons of successful investments!

My pleasure as always!

This way if you want to apply for Arcanys Ventures support in funding for your startup or technological execution for your product – we're looking forward to connecting with you! Please keep in mind that before contacting an investor you should fill in your startup profile and describe your project. A well-designed profile description will save your time and the investors' and may increase the chances to fundraise.