"Development should be in Eastern Europe, Manufacturing in China and Business in San Francisco" - Part 1

The serial entrepreneur and venture investor Vitaly Golomb moved with his parents from Odessa to the US at the age of 8. He started working in technology companies in his youth and started venture investments in 2010. As Managing Director of the IEG Investment Banking Group in California, Golomb knows the venture market on both sides of the Atlantic first hand. He invests in startups from Russia, Ukraine and other CIS countries, helping them to move to Silicon Valley and complete the Series A (often several tens of millions of dollars).

Vitaly Golomb told Inc. which markets (apart from the obvious industries such as AI, medtech and blockchain) expect explosive growth, what is to be feared if a corporate venture fund wants to invest in you and why the ideal startup lives in three countries.

The Markets (waiting for a breakthrough)

The growth rate of the market the startup is targeting is more important than its size today. If this is a new market that is growing by 50% or 100% per year - the startup just needs to be a good player and it will grow at least with the growth rate of this market. It is much better than a large shrinking market. This happened in my former company Keen Systems.

We have built an online platform for the printing industry; it seems this is a $700 billion market a year - but it's consolidating, and for every customer we had to fight against large companies that have strong connections and a well-established product.

You shouldn’t be afraid of new markets, even if there are many competitors in them. The founder who thinks he has no competitors is probably the foolish one. If there is a real opportunity, many smart people will see it. And then the race begins. The winner is the one who enters the market first and makes the best decisions.

The hottest areas for investment in the Valley are AI, healthcare, transportation and logistics, industry 4.0 (robots, 3D printing, Internet of Things), and of course blockchain. There is a lot of hype around the topic of blockchain, but you can compare it with the first wave of Internet companies: 98% of them died, but they created the infrastructure on which the second wave was built - and then already quite successfully.

Another large, fast-growing market is food. People have already learned how to culture cells and grow artificial meat. Currently cultured meat is twelve times more expensive than naturally grown. The cultivation of natural meat requires a large amount of land and water and produces a large amount of greenhouse gases. Innovations in this industry can drastically change the entire industry.

The media market is waiting for transformation as soon as Apple launches an online subscription for publications - they know how to make such things convenient. At the time when the first iPod was released, people simply stole music, although there were already programs that allowed them to buy it online - but Apple was able to make the purchase convenient, and people started to buy. Now Apple has the opportunity to do the same with paid media - it controls a large number of users who buy significantly more paid apps than Android users. People go to Starbucks and spend $5 a day on coffee - why not spend $5 a month on news? If it were easy and convenient, they would do it.

About technology and products

From the point of view of business and investment, technology is secondary, the main factors for a startup are: team, product and sales. There is a saying - sales solves all problems. A startup is not a hobby, research or an academic process. It's about sales and profits and how to achieve them as quickly as possible. This is why you must focus on product and sales. A developed product is much more valuable than just a technical IP behind it. If you develop an interesting technology, you will get much more value out of it by building a product that somebody wants to buy rather than just licensing the technology. People who know how to promote, sell and develop the product are invaluable.

It is not necessary to invent technology, but rather intelligently apply others’ innovations. This is called recombinant innovation. For example, Apple didn’t invent much. They have always used others’ approaches and technologies and combined them in a way that delight customers. You have to understand what the market demands from a product based on this technology.

Don’t rush patenting – it may not be worth it. A startup usually won’t have enough money to protect the patent from a large company anyway. It is better to focus on building and selling a product and getting a patent after the business is working. Getting a patent costs a lot of money and resources - don't waste it prematurely. Without customers and income, it is unlikely that anybody cares about your intellectual property.

You need to communicate with customers and experiment with the product as early as possible to understand what the market needs. People from the Soviet Union often think they're the smartest: They say this is how it’s done - and my idiot customer should use my product. In my former company Keen Systems we made a big mistake - we built too complicated of a product for our audience. I knew the printing industry from the inside and I made an e-commerce platform that would help make the business grow faster and more efficiently, but it didn't take our target audience into consideration - people almost 60 years old who think about growing their business only by attracting more customers. We could have been much more successful if we just gave them what they wanted. A successful product can only be developed in partnership with its customers.

Every successful company, especially if its servicing consumers must iterate the product endlessly. Starts with a minimum viable product, experiments, gets feedback, improves, releases the next version, etc. Iteration is also important in b2b, but there is a longer development cycle. In b2c sector it is usually faster - otherwise people just lose interest in the product. Compare Facebook versions today, a year ago and 10 years ago - if they had stopped, someone would have overtaken them a long time ago. But it is still number one - because they continuously improve the product and follow the market.

Virality is not a business plan. If something accidentally becomes viral, then we as investors are already counting on growth. But the virality is secondary to technology and product, and there are lots of experienced marketers in Silicon Valley who can drive growth if the product is good.

When you are pitching your company, you have to talk about an interesting market, your unique technology, the experience of your team, etc. as a story with a beginning, a middle and an end.  It is very important to reach your listener on an emotional level. When I was mentoring at 500 Startups, there was one particular company from Brazil. Their business was not that exciting- fashion e-commerce, but I’ll remember the pitch forever. The founder began with the words: "First I met a woman..." and told a story about his wife, who was a fashion blogger and gave him the idea to start the company. Then he said with a theatrical, deep voice, with a Portuguese accent: "Then I met another woman..." It turned out that she was a partner from 500 Startups who invited him to participate in the San Francisco accelerator program. It was very funny, everyone laughed. I don't know what happened to the company since then, but the pitch made a huge impact at the demo day.

Vitaly Golomb, Managing Director at IEG USA, talked to Inc Russia in May 2018. The interview iwth Vitaly Golomb was originally posted here. This article is the first part of the translation of said content. Stay tuned for the second part which will be posted here soon!