It’s been another record-breaking quarter for venture capital globally, as 150 billion USD have been deployed in Q2 2021 alone, which is more than 90% of the total of last year and up 157% year-over-year. Crunchbase indicates a total of $288 billion invested for H2 2021, breaking the previous half-year record set by H2 2020. We’ve had our fair share of excitement in Bulgaria and the region as well with $1.2 billion being raised in the first half of 2021 in South Eastern Europe and with exits like the recent Remix acquisition by ThredUp, and FITE’s acquisition by TrillerNet. For us at Vitosha, another quarter, another 13 companies in the portfolio, as they say. We are extremely excited and fortunate to work with such great teams and companies, which we are happy to show through the portfolio section of our website. We have to make many difficult choices when assessing companies and we hope that even when a positive investment decision has not been reached, we add value and direction to the start-ups and the teams we’re privileged to meet and get to know better. 

Industry 

E-commerce continues to be most represented focus area of the companies we’ve assessed this quarter, as was the case in our previous quarter. Moreover, the sector now accounts for more than 30% of our entire deal flow, up by 6 percentage points and more than doubled compared to the last quarter of 2020. With warm weather and the increased roll-out of vaccines internationally, brick-and-mortar has been expected to take back some ground due to the loosened restrictions, improved pandemic environment, and people returning to the physical world all together. However, with Shopify’s $1.12 billion in revenue for the second quarter of 2020, up 57% year-over-year and Amazon’s sales increasing 27% to $113.1 billion, the global e-commerce market doesn’t show signs of a slowdown. 

Enterprise software companies and companies leveraging artificial intelligence technologies for their offerings have also grown proportionally this quarter, now representing close to a fifth and a quarter of our deal flow respectively. Traditional industries like physical product brands, manufacturing, and food and drinks companies have been the ones to give way, now accounting for just a quarter of the startups we’ve assessed, compared to a more than a third in the previous quarter. 

Market

Medium-sized business and consumers proceed to be the most sought-after customers within our deal flow. Interestingly, public institutions have increased by 126% and are now close to 40% of the companies we’ve assessed. Additionally, Bulgarian companies have been increasingly global in their ambition, as more than 60% of them have indicated having a global go-to-market and scalability ambition, compared to less than 46% in the previous quarter. The European and regional markets have remained steady percentage wise in founders’ plans. 

Business Model

Subscription business models have remained the most popular choice for founders trying to monetize their offerings. In fact, the popularity has increased by more than 20 percentage points to 66.7% from 45.9% in the previous quarter. With high and fixed customer acquisition costs, the recurring revenue and increased customer lifetime value through subscription models is a must have for companies whose offerings are subjectable to such a business model. Direct sales and, especially, direct to consumer models are remaining quite popular in our deal flow as well, regardless of the go-to-market challenges and the high customer acquisition costs that come with this approach. The allure of marketplaces and commission per transaction goodness have not escaped the founders we talk to, resulting in 38.5% of them having selected this model. In such cases, we find that the technology or idea are overshadowed in importance for success by the difficulty of bringing in users to the marketplace on both sides of the transaction. As in the ever-potent chicken or egg question, the user acquisition is most problematic and difficult for start-ups leveraging this model. Focusing on the holy grail of high network effects and two-sided markets, founders often underestimate the journey of reaching the sought after critical mass of users that make marketplaces sustainable.

Competition

As in previous quarters, a high number of founders report non-existent or low competitive intensity (15.4% and 28.2% respectively). In terms of competition, as noted in previous assessments, there seems to be a mismatch between what investors want to hear and what founders think investors want to hear. Entrepreneurs often believe that investors want to hear that competition is either inadequate or completely absent, and the large TAM or total addressable market is just ripe for the taking. That, however, is seldom the case and, yes, we do research it. What we would rather hear is a good and in-depth understanding of the industry dynamics and of how the company is uniquely positioned within the competitive landscape and how it is different, not necessarily better in every way. 

Development costs and innovation together account for close to 90 % of the total reported competitive advantage, as measured by self-reported replication difficulty. When we talk to founders, we seldom see a go-to-market capability as an identified competitive advantage, which is quite often more important than the technological potency of a product or service. 

Team & Traction

As we often discuss and see in practice at Vitosha, the founding team is often more important than the product itself. Moreover, a founder’s personal and professional traits are, indeed, quite important, but no trait is more important than the ability to find and motivate a group of people that are perhaps smarter and more experienced. Whether that applies to the founding team or early and later employees, the importance of this trait can’t be overstated. 

We’ve seen a fairly equal distribution of start-ups, as per their stage of development and product readiness. As in our previous quarter, more than 40 % of start-ups have reported to have revenue at the point of their application with us. The highest amounts of reported revenue for the past year has been made by companies in education, enterprise software, manufacturing, and e-commerce. For start-ups in those verticals, it’s interesting to see the disparity between the number of founders and the number of employees. Logic dictates that e-commerce would have a higher revenue per employee than, say, a manufacturing business, due to lower margins and higher human capital intensity in manufacturing. Interestingly, however, we have seen the largest average amount of employees in the enterprise software and education sectors, which is largely due to the much later stage of the companies that we’ve assessed which are tacking these industries. 

This quarter we have observed that the single-founder start-up is ranked highest in terms of past one-year revenue. We see quite the disparity between the current and previous quarter with 3 founders leading the ranks in Q1, followed by 4, 1, and 2 respectively, 

Fundraise 

The majority of entrepreneurs we’ve spoken to have listed fundraising contacts as the most important thing investors can bring to the table, aside from capital. Sales and business development, along with business expertise are also thought after by 43.6% and 35.9% respectively.  

Out of the companies we’ve spoken to, close to half have reported to have received some form of funding before their current fund-raising efforts. The most represented investor group within our data sets are angels – in 15.4% of observed cases, followed by friends and family with 12.8%, and tailed by VCs with just 7.7%. Aside from being the most popular previous investors in our deal flow, angels proceed to lead the rating of highest average amount of previous investments – more than 290,000 EUR, compared to VCs’ close to 90,000 EUR. This indicates the early stage representation within our deal flow, as the more a company matures and grows, the more, and higher funding rounds it achieves, angels playing a decreasing role in subsequent fund raises. 

We are impressed to see so many great teams and companies in our country and region, each having a great contribution to our assessments, as to our ecosystem. Understanding as much as we can about them is not only extremely interesting for us but also pivotal to our mission and desire to add value to the local start-up environment. 

Please, do contact us through our various communication channels for any questions or collaboration opportunities on the topics listed above or anything relevant in this sector.