NEVEQ will allocate further €10 million in venture capital investments in 2015
Pavel Ezekiev is a managing partner of NEVEQ II and a co-founder of NEVEQ. He graduated with a finance degree in the US. Between 2002 and 2004 he served as executive director of InvestBulgaria Agency. Before and after that he worked as an investment banker with Deutsche Bank, originally in its business based in London and as a founding chief country officer in Bulgaria in 2006. He left the bank to start NEVEQ in 2007.
NEVEQ II is a venture capital fund launched last spring with EUR 20 m in capital commitments. The partners of the fund are considering raising additional capital of €10 million in a second closing. 70% of these funds would be contributed by fEU's JEREMIE program, with the European Investment Fund (EIF) acting as a limited partner; private investors would subscribe the remaining 30%.
NEVEQ II already selected the first five companies to invest in. They operate in various sectors such as digital property marketplace, Internet, nano-satellites, enterprise software targeting the M&A and private equity market professionals and others. NEVEQ I, the first of the two funds, manages capital commitments of $40 m and has already been entirely invested. It also targeted technology companies, but unlike NEVEQ II, there was no funding committed under EU programmes.
At what stage is the raising of new capital for your second fund NEVEQ II?
- We have investment pipeline capacity for further €10 million. We expect 70% of this amount to come from our existing anchor investor, the European Investment Fund (EIF) and we will try to raise further €3 m from private investors within the second quarter of this year.
What are you going to use the new capital for?
- We are seeing more and more companies seeking late stage funding, rather than only seed and startup stage companies. Most of them have not sought actively capital in Bulgaria and regionally until now, as they have not considered Bulgaria as a serious source of a major capital raising, between €5 million and €10 million. Currently, there is no single investment institution in Bulgaria that can commit such equity capital. However, our practice shows that strong demand always creates supply. Although NEVEQ cannot invest €10 million by itself, we can source such financial commitment from its partners, including our own investors, co-investors such other equity funds, as well as banks. A company that can absorb such an investment can sometimes aim at the debt capital market. At present, we are reviewing three or four potential investments together with Bulgarian banks, which is a precedent in the startup sector in Bulgaria. NEVEQ is interested in raising new capital precisely because with the help of our co-investment partners we are entering the €1 m to €10 m funding segment.
Can you name the companies you are going to invest in?
- On the one hand, we are working on additional investments in companies from the portfolio of NEVEQ I. On the other hand, together with banks we are now looking at a couple of new investments. As an example, I can say we are considering online retailing with strong regional presence.
Does that mean that the money will be used to fund later stage firms but not startups?
- Yes, mostly. Of course, we will not disregard companies, which are at seed stage of funding, provided they have the potential to become "unicorn" companies. In other words, we have not put all our efforts exclusively on supporting growth stage companies but they are our primary target. After all, our main goal is to ensure a sound return on invested capital to our investors and everything else is secondary to this goal.
Another of your new investments has now been announced – Breaktime, a vending operator. Does that mean that you are embarking on a new course and seeking both investments in companies outside the technology sector, as well as technology companies?
- Both yes and no. In order for a company like Breaktime to be successful, you need extensive real-time information as well as precision automation technology. For instance, you need to know the precise moment a certain product will run out or be obsolete. Currently there are 20,000 vending machines installed in Bulgaria and most of them are in recycling stage. These numbers are not describing a small marketplace. We believe that these vending machines can compete against the conventional retail networks and get the upper hand, if they offer a better service to the customer. We have no ambitions of becoming innovators in a fairy established technology, we just want to help the end-user know better what to look for and what to buy. We have a platform to build innovative solutions and expect a 200% turnover growth for this year alone; the market is very fragmented and we are yet to grow.
How much from the first closing of the second fund do you still have unallocated?
- A large proportion of the capital has already been allocated to several investments. The investment process was somewhat delayed because we were a small team of only five people and this is why we are now hiring a sixth team member.
When do you expect to complete the allocation of the new EUR 10 m to the selected companies?
- We plan to allocate this amount by the end of this year. As far as actual disbursement of the funds is concerned, this process may continue well into the next year.
What are your observations on the development of seed funds like LaunchHub and Еleven? Do you think that they are going to receive new funding after the end of the current funding period?
- I sincerely hope they will. They are an important source of deal flow for co-investors like us. On the other hand, they have targets they need to meet. All is going well with regard to EIF – there should be a new round of funding in Bulgaria next year. It is now of high importance to what extent Bulgaria will be perceived as a good place for launching start-ups in Europe, in terms of political stability, macroeconomic framework, etc. In other words, what does an investor in Bulgaria receive more in comparison to, let’s say, Latvia or Estonia? Also, the business results to date of the seed/accelerator funds are another factor that shall be taken into consideration. It is my personal experience that taught me on how difficult it is to raise venture equity as a fund manager, before you have actually delivered a good return on the investment in your existing fund. It is necessary for the companies you have already invested in to attract new funding at higher valuations. I really hope that EIF will take into account the short timeframe that has passed and will interview the companies as per the impact of working with the funds.
Can we talk about startup success stories yet?
- "Telerik" is an example for such significant success story. If we do not talk about successful exits but rather about securing additional funding, we can point out companies like Flipps, Vayant and others. Overall, there are about five follow on deals in the start-up universe here in Bulgaria.However, this is a very small number considering the more than 100 start-ups that have received funding since the launch of the accelerator funds. As far as NEVEQ is concerned, we expect to double the number of success stories as a result exits and co-investments. What we should keep in mind, however, is that attracting new capital is only possible if we have a first-class pipeline and investment portfolio.