In early 2018 Leta Capital launched its second fund to invest in promising software technologies. As much as $50 million were contributed by Alexander Chachava, the founder and CEO of IT security solution provider Leta Group, and a few family offices, told us fund partner Sergey Toporov.
Among the investors are also the founders of BrightBox, a portfolio company of the first Leta fund, which was acquired in 2017 by Zurich Insurance Group.
Without much publicity, Leta Capital II has started investing in companies with Russian or Eastern European roots as well as in Israeli companies, in an expected proportion of 70% and 30%, respectively.
Russian opportunities
“Investing in Russian teams is still a good option, especially at the early stage,” Toporov explained, citing the relatively low cost of talented development teams remaining in Russian-speaking countries.
These costs allow startups to hire “larger teams of bright engineers” who will still receive motivating remunerations by local standards. “So, for the same amount of investments, our companies can build better technologies or products,” said Toporov.
Meanwhile, however, sales and marketing must be global, which explains Leta Capital’s interest in what Toporov calls “globalized Russian-speaking founders.”
“If a startup does business only in Russia, the valuation game is unlikely to go very far because of the small numbers of potential acquirers.” These are a few local players like Mail.Ru Group, Yandex and a few others, while international buyers will show “no interest in the Russian IT market,” according to Toporov.
Thus, Leta Capital likes to invest Russian-founded startups which have relocated or may relocate at least a part of their activities in another country — typically the United States or Western Europe.
This practice is common among other funds with a Russian management, as exemplified by Almaz Capital, AltaIR Capital, iTech Capital, Runa Capital and a few others.
Kiev-based AVentures Capital also puts much effort in facilitating the relocation of its Ukrainian portfolio startups in Silicon Valley, while a handful of western investors — from serial business angels Bas Godska, Fabrice Grinda and Jose Marin, to Mangrove Capital Partners’ David Waroquier — are known to be attentive to investment opportunities with Russian-speaking IT entrepreneurs.
Global software appetite
In terms of industries, Leta Capital II follows the same software-focused strategy as the previous fund: “Software is still eating up the world, and there is still a lot to be eaten”, said Toporov, citing US venture capitalist Mark Andreessen.
“We believe that the penetration and actual use of excellent and effective IT solutions in the world is far from saturation, despite the rapid spread of new information technologies and a greater focus on users. Complex legacy systems and generic solutions like Excel still dominate in many spheres of business and life; moreover, ‘pen-and-paper’ solutions hold their ground as in the past,” Toporov notes.
Chachava says he is especially interested in business intelligence, Big Data analysis and AI when these are used to “optimize or replace traditional business processes or perform business robotization.”
The new fund invests $2 million on average at the late seed stage, rounds A and B, explained Stoporov. To be eligible, companies should already generate sales revenues on the global market.
Leta Capital II already has 8 companies in its portfolio. One of them is inDriver, an international passenger service in which the fund invested twice, in 2017 and 2018. This Siberian startup claims to be active in more than 140 cities in nine countries already.
The fund’s portfolio also includes Devar, which develops AR solutions for the printing industry; and Bllush, a social content delivery system for the European fashion and interior design retail industries.
The debut of the first Leta fund, in 2012, was marked by a failure. The fund invested significant amounts in hardware startup Displair, whose highs, lows and final bankruptcy one year later drew much attention in Russia. The fund did better in its next investments, with no other failures and three exits recorded so far. Thus, Leta Capital’s portofolio companies RedHelper, Unomy and BrightBox were acquired by LiveTex, WeWork and Zurich Insurance Group, respectively.
