By Ruslan Islamov
Runa Capital is an international venture capital firm headquartered in Palo Alto, California, United States that invests in deep tech (AI, machine learning, middleware, open source), cloud business software, fintech, edutech and digital health startups at early stages. From 2010 through 2019, Runa Capital raised 3 funds and invested in over 60 companies in Europe and North America including Nginx, MariaDB, Zopa, Brainly, DrChrono, Smava and Mambu. Runa Capital invests early with typical investment size between $1m and $10m. It currently has $350m+ under management and is actively investing out of its third fund.
Konstantin, let me thank you for agreeing to share your opinion on venture capital. It is my pleasure to hear about the VC industry from a professional. Can you please share your educational background and professional development story?
I studied at the chemistry department of Moscow State University. In my third year of study, I realized that I needed to expand my financial knowledge. I decided to apply to a financial management program in another faculty. As a result, I graduated from Moscow State University with two diplomas. In my final year of university, I became interested in entrepreneurship and started a project with fellow students from the financial program. At that moment, I realized that if I started working in chemistry, I would not necessarily be able to pursue entrepreneurship. I was just getting acquainted with the success stories of well-known entrepreneurs and this seemed like the best moment to take a risk. I decided to find a place where I could develop and grow in chemistry while devoting more time to our project. I found a great university which supported entrepreneurs: Skoltech. This is a new university, established in 2011 in collaboration with MIT. I spent two amazing years studying oil & gas engineering while working hard on a startup. After university, I was lucky enough to be hired by Runa Capital where I still work.
Based on your educational background, you could have sought a career in business development in oil & gas – you also interned in an American oil & gas company NGT Synthesis. What is the motivation behind choosing VC over all other options?
I think it’s because I had the chance to explore entrepreneurship. It was an incredible time, I learned a lot about business, and I also met a lot of very smart, motivated people. I enjoyed being among these people, and I decided to stay in this industry longer.
Before joining Runa Capital you founded two companies. Can you tell us a bit more about your experience as an entrepreneur?
In those years, the global internet community saw the rise of a new trend, which can best be summarized with the word “challenge”. The most popular and viral challenges, such as the Ice Bucket challenge or the Harlem shake, were able to connect and entertain people all over the world for a long period of time. We were building a platform that allowed users to discover, create, perform and share challenges. I think that it would have eventually transformed into the current TikTok. We won several startup competitions, participated in an acceleration program and found several enterprise customers for promo-challenges. I even pitched in the ice hole at the Polar Bear Competition. It was a crazy experience…. then we struggled to raise a round. For these kinds of businesses, you need access to almost unlimited capital. Therefore, we decided to shut down the project. But it was definitely an amazing journey.
I was also building a more traditional, very operational company. I travel a lot and I always become acquainted with a new place by going on a free tour. Once, I went on such a tour at Harvard and immediately came up with the idea of launching free walking tours of Moscow State University. Half a year later, we launched another free tour across Moscow city center. And yes, we made money on this. Guides received all the tips from the free tours, and most of the money from the paid tours went to us. As a result, we entered the list of the top 40 tours of Moscow on TripAdvisor.
There is a trend in digitalization of the oil & gas business. Do you see at this moment any feasible opportunity for VC in SaaS within the oil & gas industry or possibly, as the global community is switching towards sustainable energy, within the renewables industry?
According to several reports, crude oil & gas deposits could run out in 30-50 years, if we carry on as we are. Therefore, there is enough time to build a $1B company. As for interesting opportunities in the oil & gas industry, there could be hundreds of applications of recent technological trends, starting from industry-focus CRMs and ending with AI-driven solutions for oil recovery optimization. Quick research on CrunchBase allows us to see that companies continue to raise venture capital from successful VC funds: Tachyus, a platform for energy production optimization for the oil and gas industry ($39m raised from Founder Fund, Streamlined Ventures, etc) or Ambyint, an AI automation and analytics solution for the oil and gas industry ($14m raised from GE ventures, Mercury fund, etc) and many more examples. It is not only software startups in this industry. For example, recently I heard about a device that allows you to measure the thickness of paraffin deposits in a pipe without needing to disassemble it. Of course, the renewable energy industry is growing rapidly. There are already a huge number of start-ups here, which will only increase with time.
You are a mentor in Google Launchpad (a startup accelerator that invests up to $100k per venture, mostly as non-equity assistance or grants). Google is also a limited partner in GV fund. Do you think that there is a prominent synergy between these two entities for Google as a limited partner in GV? More precisely, does Launchpad become less of a pro-bono activity for keeping Google’s digital innovator profile and more of a selection tool?
First of all, its important to underline that GV operates independently from Alphabet (Google) as a return-driven fund. The investments that the fund makes, or the companies that the accelerator supports, do not necessarily have to be integrated into Google’s ecosystem. Take Impossible Foods as an example (GV invested at Series C). In any case, having a venture capital fund, accelerator and other entrepreneurs-support programs is very useful for Google. Firstly, it allows Google to track the latest technology trends. Secondly, it’s easier for Google to acquire companies with which it is already somehow connected, whether it’s GV being in the company’s cap table or whether the company has gone through an acceleration program. Let’s take a look at GV portfolio: Nest, Milk, Makani, LaunchKit, Divide, BufferBox, Appurify, etc – all of them were acquired by Google. Thirdly, Google can launch pilots with these startups, provide free credits to its services (Google cloud, G Suite, etc) and then convert these startups to paying customers as companies grow.
Did your mentorship in Google Launchpad prove useful for Runa Capital in terms of business development?
It is probably too early to say whether my participation as a mentor in the accelerator is useful for Runa or not. We haven’t invested in any companies that I worked with since they all were at too early a stage for Runa. But I can say for sure that the program is definitely useful for me, as it allows me to expand my network with incredibly smart people (both experts and startups founders). And I’m also sure that all these connections will be useful for Runa one day. You never know who will introduce you to the next unicorn.
One of the hottest topics today is WeWork’s IPO failure, the cornerstone of which became the market’s concern about corporate governance, and in particular, dual-class share company structures (this once gave Adam Neumann 20 times the voting power of other shareholders). SoftBank is in turn scrutinizing the governance of startups in its portfolio at the moment. New standards are being imposed to check startup founders. Can you tell us about how VC funds deal with the corporate governance of the startups in their portfolios, and what are the main instruments of startups’ control?
The governing conditions are always written in the “protective provisions” section of the startup’s legal documents at the deal-structuring stage. Thus, the deal-structuring stage is the most important for future corporate governance. These provisions cover such questions as fundraising, acquisitions of new companies that can dilute existing shareholders or drain existing cash, selling the company, etc. We also always try to have a seat on the board, as we love to lead deals. This allows us to vote on key considerations including budgets, financings, legal issues, strategy, review progress (also works with “information rights”), manage the compensation of key team members and make adjustments when necessary. I think that the main job of VCs is to invest in the right people. No matter how strong the instruments of a startup’s control investor has, if you have invested in the wrong team, in most cases the company is doomed to fail.
Dream jobs for many finance students (IB, consulting being the main “targets”) involve long working hours, so employees frequently lack free time. What can you say about work-life balance in VC?
I recently heard one US VC answer this question. “No balance, it’s just life. I’ve literally made deals on basketball courts and in night clubs. If you’re not in it 24/7 you will lose”. I think that this answer describes our work pretty well.
Thank you very much for your time!
Editor: Eric Peghini
Author: Ruslan Islamov