The €15M Pre-Seed Fund Innovation Capital: Back On Track After The False Start And Going On A Tour In 5 Cities in Bulgaria

After the turbulent several months at the beginning of 2020 related to internal managerial decisions, separation with one of the key partners, and a rebranding, Innovation Capital formerly known as Innovation Accelerator Bulgaria, is finally on the market and open for business. The €15.6M fund, backed by the governmental Fund of Funds, that also features an acceleration program, is heading on a roadshow across Bulgaria to look for very early-stage ventures.

“We are generally looking at all verticals, but of course, there will be more focus on Enterprise software, e-Commerce, Financial services, Education, Automotive, Logistics, Healthcare, Media, Food and FMCG, Cybersecurity. We expect to back up to 50 companies by the end of the year and have so far reviewed over 400 projects,” tells us managing partner Angel Angelov.

In June, the team of Innovation Capital will host events in Sofia, Plovdiv, Burgas, Varna and Veliko Tarnovo, to meet local pre-seed stage founders and introduce its programs. For years, this is the first fund to make a roadshow outside the capital city Sofia. Innovation Capital has an investment capacity of €15.6M and will back 220+ very early-stage ventures in the next three and a half years. This is an opportunity for many entrepreneurs, but it comes also with conditions (10-15% equity for the first €25K investment) that should be thought through.

Accelerator on the road

The fund officially starts operations launching its first initiative – XL Radar, a nation-wide startup competition that will be held in different cities – Sofia, Plovdiv, Burgas, Varna and Veliko Tarnovo throughout June. Startups can apply to meet the Innovation Capital team and pitch their business models. The best performers from each city will be invited to pitch at the final demo days and compete for a guaranteed €25K equity investment and a spot in the acceleration program XL Radar.

Selected teams will have the opportunity to be part of a three-months-long acceleration program that will test the ability of the companies to deliver, gain traction, and get established as sustainable businesses. Fundraising, Marketing, Lean Startup, Productivity are some of the topics that will be covered. Among the mentors are: Dimitar Karaivanov the founder of Kanbanize, edtech entrepreneur Neven Boyanov, the founder of coworking space Work&Share and Founder Institute director Bozhidar Georgiev, and Alexander Terziyski, one of the partners at the seed stage fund New Vision 3. Alongside the program and the funding, Innovation Capital will provide also assistance with services like software development, design digital marketing, financial planning and accounting, legal advice and office space. 

Upon finishing the program, startups will have the opportunity to receive a second investment of up to €25K against another, between 5% and 10%, equity. 

Important to note here is that although the offering sounds appealing the math is also important – for a young entrepreneur the conditions mean to give away up to 25% of the company in half a year and receive up to €50K. As a comparison, back in the days, Eleven Accelerator asked for around 7% for the first €25K. Founders developing scalable tech products, who are considering VC funding also at a later stage, should be careful in their negotiations and consider that a capable with 25% share of one fund might result in challenges with fundraising efforts later on. “At the pre-seed stage, it’s friends and family in most of the cases, so I guess not more than 10%. The standard for seed is between 10 and 25% but it’s usually a group of investors. […]What we see quite often and the local founders have not understood yet, is the practice of giving your first investors too much equity. We’ve seen companies that come to us and they have almost no equity for themselves left, so their motivation and compensation are not the same anymore,” explained in her interview Elina Halatcheva from BrightCap Ventres, who run both acceleration and seed/Series A tracks (the comment is not related to the structure of Innovation Capital – ed.n.).

Pre-seed, seed, and the structure

“We expect to accelerate at least 130 companies in the next three and a half years and to make pre-seed investment in 70 companies that haven’t been through the accelerator. The total amount of funding for these around 200 deals is €10M,” says Angelov. There are another €5.5M dedicated to seed-stage companies and the team expects to be able to close around 20 deals in this segment.

The acceleration phase (€25K + €25K) is for companies at idea stage or recently founded companies with revenue below €10K. In the pre-seed segment Innovation Capital aims to invest up to €50K in companies with annual revenue of over €10K. The seed-stage features investments of up to €1M and the fund managers are looking for businesses with revenue above €100K. The equity required at the pre-seed and seed stage will be tailored to the specific case of each company, tells us Angel Angelov.

The fund is open to all kinds of business models – SaaS, Marketplace, Social Media, Hardware/IoT, Processional services, B2B, B2C, B2G, we read on the website. The investment criteria are rather standard – Innovation Capital is on the lookout for motivated teams, businesses with global scalability potential, and potential to add value to the local economy. “Opportunities for quick exits (2 to 5 years)” is also featured among the criteria, which is rather atypical. Because: the typical investment cycle of a fund in the acceleration phase, which is also the main focus of Innovation Capital, may reach up to 13-14 years, told us Daniel Tomov several months ago. Of course, the mentioned criterion may also be a result of not well-preceded website copy.

Restart: new name, new management

Innovation Accelerator Bulgaria, a fund founded by innovation consultant Leona Aslanova, first appeared in 2017 as one of the two applicants for a public tender aimed at choosing a pre-seed investment company that would manage €14.1M of public resources, and attract another around €2M private capital. Back then Cleantech Bulgaria was chosen to manage the capital but later withdrew its application. One of the suggestions we’ve heard from the ecosystems is the structure of the fund and the close to an impossible task – to invest in 220+ companies in three years. 

So, at the end of 2018 Aslanova’s fund was the chosen contractor. In spring 2019, an official contract was signed. At the time, the partners of the fund were Aslanova, former president counselor Anna-Maria Vilamovska, entrepreneur Alexander Dzhoganov, and Borislav Stefanov, who’s a business consultant by background. In late 2019, Vilamovska and Dzhoganov left the fund, and two new partners joined –  Vassil Christov and Dimitar Kostov. Both come from a banking background and have previously worked at the Bulgarian First Investment Bank. In February, it was not clear whether the fund will actually launch as Aslanova first accused her new partners of a hostile takeover, then stayed as a shareholder and eventually decided to leave the fund receiving compensation for all her expenses since 2017 (read the whole story here). With her left also her partner Venetsia Netsova, So the current management team consists of bankers and business angels Vassil Christov, Dimitar Kostov, Borislav Stefanov, and Angel Angelov, who has been with the fund since 2017 as an investment manager at the beginning. Dzhoganov and Vilamovska are also back to the fund – this time in the role of Advisory Board members, after the previous advisory board consisting of Momchil Vassilev from Endeavor Bulgaria, Svetlin Nakov from Softuni, and Alexander Durchev from All Channels left too (edited – 23rd of June, 10:34). The governmental Fund of Funds, which is the major limited partner providing 90% of the capital of the fund, has accepted the new setup and strategy.

Given the rather corporate background of the managing partners, we asked them whether they feel ready to invest in companies at such an early stage of investment. “We are confident that we have the expertise and capacity to successfully deal with the mandate and the structuring of the acceleration program,” tells us Angelov, who has been dealing with early-stage transactions (Seed-Series A) for almost 10 years, five of which also in the acceleration phase. Christov and Kostov are also angel investors in a number of companies at different stages of their development, tells us the team, and Stefanov, has managed and structured a number of equity investments and knows closely the processes in most of the funds on the Bulgarian market.

*We’ve asked for an interview with the new management team who will share more about their vision and investment thesis in the next weeks.