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Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Dr. Oksana Malysheva is the co-founder, Managing Partner and CEO of Sputnik ATX, an Austin-based venture capital fund and start-up accelerator.
If ever there was a road less traveled to the world of investing in start-up companies, Oksana blazed that trail. Born and raised in Ukraine, she immigrated to the US to earn her PhD in Physics from the University of Pennsylvania. Her physics training honed an ability to define problems that haven't been defined and solve them through data, experimentation and the right degree of precision.
She later learned the vital business fundamentals at the consulting firm McKinsey and the importance of the boardroom perspective. Having bulked up the right side of her brain, she leaned to the left side and moved to Motorola and developed an appreciation for the business importance of creativity and sharp, expressive language – and envisioning and describing the future.
This has all led to Sputnik’s rigorous, unbiased investment process that looks for founders with big ideas and a drive to change the world. The firm invests in fewer than 1% of the over 5,000 startups that have applied to its accelerator training program, which counts strong representation from Black, female, LGBTQ+ and non-U.S. founders.
VatorNews: Tell me what Sputnik is all about, your philosophy and methodology and where you see the firm sitting in the venture ecosystem
Oksana Malysheva: In Sputnik ATX, the “ATX” is very important: it stands for Austin, Texas, where we’re founded. We are currently in our sixth year, we have about 61 investments. Our firm takes a unique approach to early-stage venture funding, and I’m happy to say that it really works - we track about 84% IRR, and our portfolio companies have successfully grown and expanded.
When we first started this in 2015, there was almost no startup ecosystem outside of Silicon Valley. While Silicon Valley functions fantastically well and some of today’s most popular companies came to life because of early-risk bets those people took, your chances of success are considerably much more difficult if you don't happen to live within a 50 mile radius.
My business partner, Joe Merrill, is a native Californian, and when we both moved to Austin and started investing in separate ventures from different geographies, we wondered why there wasn’t as much startup success outside of Silicon Valley - and if there was something we could do about it. Joe was observing a lot of similar things in Austin in terms of the startup ecosystem of the late 90s and early 2000s in Silicon Valley, where it felt that a critical mass was beginning to assemble. Austin has spectacular engineering talent, the cost of living meant you didn’t have to starve under the bridge in your early stages, and there are really strong universities and training that come from this.
Yet, most people were not looking for super early stage breakthrough ideas, like the Silicon Valley execs or Y Combinator did in their early years. And so, in bouncing ideas off each other, Joe and I asked ourselves, “Do we truly believe that the world's smartest people will always reside within a 50 mile radius of Stanford University?” I believe, personally, that a lot of them will continue to reside there, but other epicenters will emerge.
Sputnik ATX was a response to the belief that the new startup ecosystems and epicenters will emerge and become new gravitational pools. We will learn what the Silicon Valley folks have done, but we also do it in our own way.
At Sputnik, we operate in the very early stage of the startup ecosystem and usually provide the first money after friends and family. We have an accelerator attached which is very competitive: our most recent cohort had 1,258 companies apply and we invested in five. Even our very first cohort, where people were taking a risk on us, had close to 300 applications. It's an in-person program where the founders sit with us for 13 weeks. Everyone who gets in gets a $100,000 investment, and we have the option to add up to an additional $400,000. Often we stay through some of the later rounds in Fund I.
We run the accelerator twice a year and select four to six companies each time, looking for nerds with life changing ideas. For many of them, this is their first time starting a business. Ultimately, because I'm a trained physicist and Joe's a super nerdy economist, we really know how to understand them and how to highlight them, and most importantly, how to teach them about the selling and scaling of their business, which is where we spend most of the time. But because these founders are usually really inexperienced in business, it's really helpful to explain the rules of the game.
Founding a startup is one of the most non-intuitive things in the universe and there’s so much more than just the liftoff of a business. Growing and managing a company takes different skills and they're not intuitive and most of the people don't explain about those. Founders are usually told, “go change the world but, by the way, we won’t explain to you how this game is going to be scored. Good luck.” Some of them will obviously find a way to succeed but, for most of them, it's a more difficult journey. We sit with them and explain that this is what people are looking for, that at this early stage it's mostly about growth, it's about learning to operate as a business, and setting up those high metrics.
So, in our 13 week curriculum, we go over how you market, how you do storytelling, how you use digital media, how you talk to your customers, and how you organize your business, like the basics of HR. We also talk a lot about the founder interactions because it's often very important to build in the right mental behavior habits so that when the going gets very stressful, you’re equipped to handle it without imploding. So, that's what we do and that's what it is for them.
What is in it for us is that we get to observe them for 13 weeks. So, imagine your typical fund, what's the length of their due diligence? Two hours, three hours, maybe some meetings, maybe a day? We sit next to them for 13 weeks and the really cool thing here is this office has no doors, so I get to see how they work. There’s also the structured curriculum in the accelerator that we believe everyone should learn, so we get to see them as humans, we get to understand what makes them strong, we get to understand the best way to help them, and that's really helpful.
If I had to summarize Sputnik in one line, I think about it as kindergarten for gifted and talented startups. That's what we run. And just like the kindergarten, they are full of hope, full of potential, highly imperfect, and you just have to take them as they are and help them grow together.
VN: When you were mentioning the Austin scene in 2014, I was thinking that that actually has changed quite a bit, especially because of COVID and Zoom culture. You don't have to be in Silicon Valley as much as you used to. We've had those tech hubs around the country rising up and Silicon Valley investors are now more willing to take a risk on companies that are not just in San Francisco; it used to be they wouldn't invest in Oakland, and now they'll invest anywhere. So, do you see that that's that that's changed in the last few years?
OM: We have seen a very serious migration of people to Austin and that has been a boon for our startup ecosystem. Most of those people, however, are involved with later-stage companies and write significantly bigger checks. While we love what these bigger companies have brought to Austin, there’s not a whole lot of people working with fledgling founders and smaller startups that have a product and customer.
For investors like us who do work with these smaller companies, there is a benefit to actually being local and seeing the companies, being closer to them, when it's such a small check. If you operate out of a bigger fund, you definitely would invest in the later stages, because that's where it's worth the plane trip, so I don't see a lot of competition for the people that are coming in our stage.
Frankly, there is a strong supply and demand imbalance, there are a lot more startups than investors willing to write a check here. And lots of great opportunities to invest.
VN: You said you have a lot of companies that apply to the accelerator and obviously you only can take a few. So, what's the vetting process for those companies? How do you select them? What are you looking for in those companies to make you want to have them be part of the accelerator? And then we can talk about how you choose who you invest in.
OM: The vetting process has three stages: the online application, an in-person interview, and then final selection.
Companies first apply through our electronic system. We open it up twice a year and the system is open to everyone globally. The application and terms are standard for everyone, so we're very picky and selective about where we play, and where we don't play. We play on investment selection, company support and coaching, helping them fundraise, so this will be extremely customized and very, very curated. Everything else here is the same for everyone. So, everyone will answer the same questions, everyone will sign the same safe note, we emphatically don't negotiate on it because if this is too small of a valuation for you, there are many other options, just maybe not us. So, they apply, we read them, then we narrow it down to about 30 finalists that come in person for our interview.
After we select our finalists, everyone has to come in person unless you're in Australia or somewhere where it's really, really inconvenient. Then we talk for about two hours; it's really a dialogue where we're trying to assess the founder, we're trying to show ourselves the best we can.
Finally, based on those interviews, we pick our winners who start the program a week later.
VN: Do you invest in every company that comes through the accelerator? Or when they graduate do you select a certain number that you then invest in?
OM: Every Sputnik accelerator cohort company gets a $100,000 check. Some accelerators do the opposite where it's a little bit like the Hunger Games: you jump through hoops, and then you get funded. I respect that business model but that is not ours; our companies jump through hoops before we pick them. Once we pick them, we are working with them. That's our selection. Any additional funding usually goes to the companies that grow the fastest.
VN: Is there like traction that you're looking for? I guess it'd be probably too early for them to actually have any number of customers or ARR or anything like that?
OM: We absolutely are looking for traction. One of the really core, non-negotiable conditions for us is companies that have a product and a customer. It could be one customer - your family doesn’t count - but it's very important to ask because when we focus on selling and scaling, they're going to be wasting their time with us if they don’t have a product they can sell and scale.
Most companies come with some revenue, but successful startups that have no problem raising money grow at 10% week over week over a significant period of time. You might have started with three customers, but we're going to need you to project what 10% week over week looks like and how to achieve that. That is a magical metric, because it forces you automatically to do things that are right for your stage of the company in the right order.
VN: And you have 13 weeks to see them grow.
OM: We have 13 weeks to see them grow, and we understand that growth might not be linear. If you're a B2B with a longer cycle, you might focus on growing your outreach first, and then focusing on revenue growth. We introduce them to other auxiliary key metrics, like OKRs and traction.
If you check out Sputnik’s social channels, you will see that we have an award called the “traction horse.” Whoever of the company's portfolio companies grew the strongest in that week after we review their traction wins the traction horse that week. It’s a silly little sculpture but has become one of the most hotly contested things I've ever seen, and participants really are determined to have it on their desk. That's a fun little way of showing who's growing. Ultimately, being a startup is about traction, and if you're still in product discovery, that's not our customer.
VN: So, you want to have some traction, you want to see the product but I’ve talked to so many early stage VCs for this column, and they always tell me that the most important thing is the team. So, what are you looking for when it comes to the entrepreneur or founder? What experience do you want to see them have? And what are the intangibles of that person, more than what's on the page, that you want to see?
OM: The founder is everything. We're looking for gritty founders. A lot of them are first time founders so we're looking for people who are a hustler and a hacker, but we need to see that they are willing to learn the skills they don't have and appreciate the gaps in their development.
A successful startup founder to us is this unique yin and yang of simultaneously being super confident because they're changing the world, but also not knowing how to take the right steps to get there. They don't know what they don't know yet, so you have to have this balance of confidence and humility. Without those two attributes they're going to waste their time with us; if they have nothing to learn because they already know everything then god bless and good luck, they’re the wrong person to sit in that cohort.
We also consider the group dynamic - we want people who want to learn. We make sure to carefully speak to each founder to uncover their grit and true behaviors. We have ways to say things like, "Are you listening to all the questions? Are you respectful to our staff?” Just like kindergarten, there are these basic human building blocks that we would like to see for the person to be the right fit. So, that's a softer factor.
The harder factor is not intuition: it’s basic market dynamics. Joe is an economist, so we pay close attention to whether the product itself will have market demand. We might love the founder, but if they operate in a space that will never be big, will never be fast growing, or it is super competitive and they have tangential expertise, that also probably is a bad bet for us. Both are important and trying to balance the two, in our conclusions, that's where most of the mental wrestling comes about.
VN: You invest $100,000, which every company gets, but then obviously you're investing more into certain companies. What's the size of your fund? How much are you investing on top of that $100,000?
OM: The size of all our fund is $20 million and it’s probably evergreen. Because of that, we're raising our second fund, which will be $150 million, to stay with the winners and to build on our track record.
We're going to have a lot more liberty to double down given the size of the fund. I don't think we've invested in everyone we wished to invest in, and what it usually means is that after $30 to $50 million we would disengage because the new $100,000 we could add is more valuable for us in a new company as opposed to supporting the existing investment. If we've done our job well, our companies would have networks, either through us all by themselves, to other VCs that operate in that arena.
With Fund II we absolutely will play in that arena because we believe we understand these founders really well. We understand what will make them successful at that next stage and we know them inside and out. Having that trust and seeing them in action gives us unprecedented insight that other people will not have, and we would like to capitalize on that.
VN: Do you have certain categories or verticals for your accelerator? Are you more of a generalist?
OM: We’re more generalists, but we don’t invest in your typical “vice” investments that deal with sex, drugs, alcohol, etc. We also don’t work with franchises. Other than that, we've done everything from blockchain to nutritious doughnuts
We do have deep expertise in edtech, fintech and agtech, and we've done niche technology companies such as a fuel cell technology and a nanoparticle additive to fuel - it’s where my science background comes in handy! But really, anything goes as long as we feel that the founders have potential; we have to see that if everything goes right that the company could be a unicorn. So, that goes for the space they play in, the innovation they bring to the space, and the composition of the founding team and their propensity to grow with the company.
VN: I know that diversity and inclusion is something that's very important to you, so I wanted to make sure that you got a chance to talk about that, both as part of your accelerator and your firm.
OM: I believe my primary duty is to deliver the best returns to my shareholders, and I want to be very clear on that intention. So across our 61 investments, we have 84% IRR and great companies. We publish a diversity scorecard twice a year, and more than 40% of our companies are women-led, meaning a woman in a C position, and we are close to a 10 times national VC average in investing in Black founders and we're twice the national census. Pretty much any other diversity metric you might throw at me, we likely eat it for breakfast. But not once have I mentioned diversity and inclusion as part of our investment philosophy. That’s on purpose.
DEI is not our focus; it’s a corollary. Our investment criteria finds the best of the best, and it just so happens that, so far, it’s been a fantastically diverse group of founders. We're super proud of this, but I have always maintained that if the best five companies are all founded by young, white men wearing black hoodies who have degrees from Stanford, and they are truly the winners, that's who’s going to get funding. But that has not happened, not even once.
We think it’s important that our diversity achievement shows that the focus unequivocally is on who is the best of this cohort. The standards are all equal; no one gets extra points because they're women or minority led, because it's unfair to anyone. As a former physicist, I remember I was invited to speak at the super prestigious national lab and I was so proud, it was so great. And then they said, “we just were short on women speakers.” It actually was really insulting; you either invite me because I'm good or don't invite me, I need no discounts. And we take that approach. I have a lot of respect for people who are making diversity and inclusion their core feature but our focus is unicorns with the best startups at the stage. If you look broad enough you'll find them.
VN: Let's talk about the current state of the market and valuations. Things have definitely slowed down after the last couple of years, where there was a huge amount of investment and huge valuations. So, what do you see happening now? Do you see valuations coming down? And what happens to the companies that raised money during that peak period that now have to go and raise follow-on rounds?
OM: The environment is harder and what we tell to all our startup founders is you're going to live through one or two armageddon level crises that have nothing to do with you, and if you were to pick a time when to live through that I'd rather live it earlier. When is a good time to have a financial meltdown? Is it when you're going to IPO? Or is it when you're going with your first big customer and you just worked for a year and then they're gonna cancel it? There’s never a good time to have a crisis, but it will affect the stage I invest in the least.
We're going to see some reckoning at the later stages, those are the big companies that are going to make the news. From where we sit, the world did not change dramatically from a year ago; there was some unreasonable frostiness about a year ago, and we kind of fell back to normal. So, if you were valued then, it seems like the sky is falling, but for most people, particularly earlier, they’re not yet here, and it's normal. So, from the perspective of an investor, valuations are coming back to reasonable. Particularly working with early stages, yes, it's going to get harder, and it's not because the economic environment has gotten a lot harder, it's just because the headline perception has skewed things. You're going to see a lot of reckoning at the later stage, but at the early stage folks have raised big funds when this was frothy, and they have to deploy it, so there is money, you're just going to have more pressure on valuations, and more pressure on performance, but I don't think it's unreasonable pressure.
Also, for many companies, it will be a lovely excuse to get out of business, because it's gotten hard and they have not found the product market fit and the universe has given them this great excuse. The SVB failure is a different story, that's not good for our industry, and I'm glad that the government propped it up so that we did not destroy the tech sector. The belief that your money is safe in your bank is fundamental to many things that have to do with capitalism.
VN: It sounds like what you're saying is that it's too early for you in the early early stages like you're investing in because it's such a long cycle. It's a 10 year plus cycle, so it doesn't affect the way you invest, because who knows what the market is going to be like in 2033?
OM: Our behavior has not changed, what we teach startups has not changed. And, honestly, sitting in Austin, raising money had always been hard, it had always been harder than anyplace else. People who live and operate out of the flyover country never have lived in the environment where people could have nonstop coffees for a week and come up with a stack full of $50,000 to $200,000 checks on an idea that barely left the PowerPoint. That has never been the environment here. I frankly think it never should be an environment anywhere, that's unhealthy the other way, but that’s just one woman's opinion.
VN: That's a very interesting perspective, that it hasn't affected Austin because it's always been like that for you.
OM: I wouldn't say it hasn't affected it, it probably affected some people, but I think I just think it affected Austin as a whole less because it just always has been very hard for most companies to get there. It takes longer, it takes more meetings, investors are more bargainy, and so that's just what it has always been. And so, yes, it's gotten harder, but here's an analogy for you: I play tennis, so I'm really well equipped to handle a one hour competitive match, and I'm going to get tired. But sometimes matches go to two and a half hours, and it's harder. I'm sure I'm going to need to recover more but it's nothing unusual, it’s nothing I cannot handle. If you always run five miles in mild weather, if you have a heat wave, most of the time, if you're smart about this and drink water, and you maybe wake up and run a little bit earlier, you would be fine as well. Would it be harder on that day? Yeah, but would it be impossibly hard if you've trained for that? Not really. Our startup founders, they’re elite athletes. The people that we deal with, we train them for that, they have the network support because of their cohort and alumni, and so, yes, it's gotten harder, but not so that they could not handle it.
VN: Let's talk about your differentiation as a firm, starting with your LPs. There's a lot of early stage funds out there, especially in the last 10 years or so a lot of them have sprung up. So, how do you differentiate yourself? And how do you go to LPs and say, “we're the right ones to deploy your money”?
OM: Three things set us apart: our unique geography, our unique and repeatable and reproducible process, and outcomes to back that it works.
It's like if everyone fishes in the overcrowded lake, but we’ve discovered a beautiful new one right here, with beautiful fish and not enough fishermen yet. When you fish in the new lake you're going to get a better look and better value. Our number one differentiation is our geography and where we target because we invest globally. For instance, our best performing company is out in Bangladesh. They're spectacular, but most people would not return their phone calls because they're people from Bangladesh. Where and how we look matters, but the fact that we were not located in the Valley is a major differentiation.
Number two is our process. It resonates with founders that we take the first risk with our check, and we sit with them and teach them the rules of the game. Your odds of success increase greatly when you understand the startup and VC environment.
Now, with Fund II, our track record speaks for itself and is a strong statement to the fact that the process works. Some LPs love our founder composition but, for most people, we have a process that we could improve and differentiate. That process is dramatically different from most people's, so when we bring in VC level performance with a risk that is somewhat uncorrelated to other things, and they love the fact that we see them.
VN: What about from the point of view of the founders? What are you offering them that other firms don't, because the best companies can take money from anybody, they have a lot of options. So, what's your differentiation to them to say, “I'm a good partner for you”?
OM: We are clear about who we are and why we come to work. As a Ukrainian I have argued with my American partner, Joe Merrill, about the name Sputnik, and he said, “no, Sputnik is something that transcended and showed humankind what's possible.” Our number one mission is to get people to a trajectory that was unavailable to them before us. Sputnik also means “partner,” and not many people know that that's a direct translation of that word. We do both, we help them gain traction while being a true partner to them.
When we interview people, we're very clear about what we do and what we don't do. For first time founders with huge ideas, it's daunting to navigate it all by themselves. We put a lot of work into our founders early on that truly helps them navigate the jungle of startups a lot better. Other accelerators take equity just for joining their cohort and then on top of that charge for co-working, consulting, and more. This isn’t a judgment, that is a good business model, but we consciously did not want to set up our accelerator like that and I think that makes us stick out to founders.
One of the first things I say to founders is, “Listen, it's very important when you deal with people to see how they make money,” because we only make money when our founders make a lot of money. This is where my intention is coming from. So, I may give them feedback that may seem harsh, or they may disagree, however they need to understand that the only reason I'm giving them this feedback is because I want them to succeed. That really lands well with the founder. And we are also very clear about this, because we're never going to say we are something we aren’t. It's self selection: they have a choice and we have a choice and it's a little bit like dating, like the best choice is because both people are choosing to show up.
VN: Talk about some of the companies that you've invested in. Highlight maybe two or three of them. What was it about those companies that made you want to invest? What made you excited about them?
OM: The first company that comes to mind is Growth Channel. The founder, Maryna Burushkina, is one of the gutsiest women I've ever met. So, that combination was just spectacularly appealing and she's growing wonderfully. She’s a fellow Ukrainian, and in the summer of 2020, before the Ukrainian War, her and her husband came to the US with their baby and got stuck when the borders were closed because of COVID. She didn’t let that stop her from working on her startup.
Growth Channel is everything that goes into a marketing program, starting with the persona generation, and puts it all in one dashboard. I was blown away by the idea, and she already had a great first take on the product that had customers.It was clear to my team that every small business would want this product because if you could have an AI marketing agent in your pocket, I would want every startup that I work with to use it. For many small businesses, marketing is not what they’re trained to do; but everyone has to do it, so the market is huge. The sky is really the limit.
Also, talking about grit and perseverance, she was a repeat founder. The world gave her a lot of lemons, but what do they do? They keep building a business, they find the gigs, they get their green cards. She sees no boundaries when it comes to growing the product, but she’s also the nicest human being you would ever meet, not one iota of arrogance.
Another company is called Funder. Regina Gwynn, the CEO of the Black Women Talk Tech, came to us with an idea for the selection process that will highlight the founders of color and give investors an AI algorithm to help select which ones are good ones or not. Because when investors don't invest in the founders of color, and all kinds of underrepresented founders, they know none of them and they don't know how to pick. Well, here's the tool.
There’s also FuelGems, where the technology was developed in Kyiv, my hometown, and actually had something to do with what I learned in my PhD. It’s a really cool nanoparticle additive, where you add them to fuel and certain emissions are reduced and the engine is more efficient. So, that's an example of the things that break through to our radar.
To give you an example from this cohort, Sebastien Hilaire, a former professional soccer player from Panama, who also played soccer at Drexel. This is one of the world's highest grossing sports and what he said is, “Every single professional player who plays in LATAM is way better than any of the people you usually see in the US, but because those players don't get financial backing, proper nutrition or physical training, their longevity does not last.” He is launching Prospect1 to allow the players in the developing world to evolve as players equally, allowing the Western clubs and universities to identify the best of the best, regardless of where they are from. So, that's an example of an unequivocally huge opportunity.
VN: What's the part of being a VC that really excites you the most, that you really love? When you come to work every day doing this, what really motivates you?
MO: I wish people were asking this question more often, thank you for asking that. It's being surrounded by these people that are here to change the world. Surrounding myself with people like this every single day lets me live 10 years in the future. It's a privilege to be a part of them building this better future. The founders we bring into our cohort range from blockchain to nutritious doughnuts, so it is just the most exhilarating journey that in the day to dayI get to explore these new areas, all while watching them grow; I’ll tell you, I know a lot more about soccer recruiting right now than I did half a year ago!
When I have our alumni come and speak to our current portfolio companies, and they say in their words how those lessons landed on them, and how that helped them grow, I mean, that's the best. I'm probably a teacher at heart, my grandparents were teachers, my dad was a university professor in Kiev before he retired, so being part of the journey and being part of that growth is the best part of my job.
VN: Is there anything else that I should know about you or about Sputnik or anything else you want people to get across from this?
OM: It’s wonderful that we are starting to see more and more new VCs coming up. Having new VCs is a crucial part in ensuring that founders from different places can succeed.It will take VCs who look broader and think differently to recruit and find talented nontraditional founders. The only way the industry will evolve is if new VCS who look at the world differently get the chance to tell their stories and influence the market. When that happens, that's how we create these new ecosystems, it happens when we look broader than 10 miles from Sand Hill Road.
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