VC Of The Month – Flashpoint

Flashpoint is an international tech investment manager with approx. $400 million AUM focused on international tech companies originating out of Europe and Israel. Flashpoint manages five venture funds across 3 products: Venture Capital, Venture Debt, and Direct Secondary. The firm is headquartered in London and has offices in New York, Tel Aviv, Budapest, Warsaw, Riga, and Nicosia.

Investors in Flashpoint’s funds include Széchenyi Funds, a Hungarian fund manager, and more than 130 major family offices and HNWIs. Overall, Flashpoint funds have made investments in 62 companies including names such as Guesty, Chili Piper, and Office RnD. Flashpoint has completed 15 exits.

Flashpoint Venture Debt fund was launched in early 2020 with the goal of supporting post-Series A growth technology companies with non-dilutive capital. Since then, Flashpoint Venture Debt invested in 8 successful companies including Welcome Pickups, Dispelix, Mercaux, Clausematch, Omnipack, ByNext, Spotawheel, and BobW. The fund continues to actively invest in new companies.

Fund Strategy Overview

Geography: Global with a key focus on Nordics, Baltics, Central and Eastern Europe, and Israel

Preferred industries: Industry agnostic, with deeper experience in HospitalityTech, TravelTech, PropTech, and  EdTech

Investment ticket: $5m-$15m, and open to smaller tickets. 

Company stage: post-Series A 

Product type: key focus on software products

Product stage: post product-market-fit / growth

Revenues: sweet spot is between $3m and $10m annual revenues

Q&A with Donatella Callegaris, Managing Partner at Flashpoint Venture Debt

What are the 5 main things you look for in a startup?

• We are looking for companies that are already generating at least $3m in annual revenues. Venture debt is a credit instrument and naturally requires existing cash flow to manage the credit risk.
• Equally important for us is for the companies to have good quality and supportive institutional VC investors onboard, who, among other things, bring sound corporate governance which is important for us as the lender.
• We do not necessarily need to see profitability at the time of investing, but it is critical for us that companies are operating fundamentally profitable business models, which can be seen from healthy unit economics.
• While we do not necessarily need to see triple-digit percentage growth, we remain a growth investor and prefer to see companies growing north of 50% YoY.
• It is important to remember that venture debt is growth capital and not “capital of last resort”. Therefore, we invest in companies that have a runway for at least the next 12 months and are looking for additional funding to either extend the runway or accelerate growth.

What disqualifies a startup as your potential investment target?

As a matter of policy, Flashpoint does not invest in companies operating in industries related to gambling, CBD, tobacco or fossil fuels. We also tend to not invest in biotech and life science companies. Otherwise, the most common scenario for rejection that we come across is in cases where companies are looking to raise venture debt, as capital of last resort, having only a couple of months of cash runway remaining and not being able to raise equity funding. In other cases, we like to see ourselves as a flexible investor and partner and look to find solutions to bridge across other possible needs that the companies may have as primarily we are focusing on financing growth. Furthermore, we do not take “product risk” as this is an equity risk.

What in your opinion differentiates the best founders from the rest?

I am convinced that the best founders are those who are genuinely passionate about the business that they are building, with a laser focus on delivering a product that solves genuine problems. Such founders, most often, have deep prior experience in the industry that they operate in. As a result, these founders have a clear strategic vision for their business, they can distinctly articulate it to their teams and investors and ultimately grow their startups into large and successful companies.

Additionally, as a debt investor, I have a special admiration for founders who are financially savvy and very well understand the optimal capital structure for their business. Such founders are not only good at fundraising and generally maintaining healthy financials in their business, but also deliver the highest value for themselves and their shareholders over the long run.   

What startups should take into account before making a deal with a Venture Debt fund?

First and foremost, companies looking to take venture debt need to feel comfortable with their preferred lender. They should look for a lender that listens and understands the business’s funding requirements and can be flexible enough to adjust the facility to meet the company’ needs as closely as possible.

Secondly, the companies need to understand that venture debt funds should generally be “light-touch” investors. They don’t tend to take voting board seats; their debt facilities don’t have financial covenants and their participation in the company’s life is not invasive. I would get cautious if any of the above are not true in the startups’ conversations with a potential lender.

Thirdly, venture debt is funding that comes on top of equity investments from VCs. It is important to ensure that your existing investors are also comfortable with the debt investor and better if they have already worked together previously. That would both streamline the process and provide more comfort to all of the involved parties.

Last but not least, and something that goes without saying, the company looking to take venture debt needs to be comfortable with its ability to service its regular debt payments. In most of the cases, a good venture debt fund will work closely with the company to assess whether the transaction would be a safe credit and devise various scenarios to mitigate default risks.

How do you support your portfolio companies?

While, as a venture debt fund, we tend to be a non-intrusive investor, we are always very happy to support our portfolio companies where we can.

Given that venture debt is a complement to VC equity funding and not a competitor, we are very tightly and closely integrated into the growth VC ecosystem. In fact, a large part of our deal flow comes from VC funds and we, in turn, provide growth-stage investors with potential pipeline from our own portfolio. As such, we can be instrumental in helping companies raise their next rounds and we always engage to support our companies on that front.

Additionally, Flashpoint Venture Debt is uniquely positioned as part of a wider platform that not only includes VC funds and a Secondary fund but also legal, marketing, IT, and Finance teams. This allows us to leverage our broader institutional knowledge and network to support companies on any other business-related queries. It is not uncommon for us to support companies with business model questions, industry insights, hirings or financial planning.

What are the hottest markets you currently look at as a Venture Debt fund and where do you see the biggest hype?

With the onset of generative AI and quite a bit of noise generated by OpenAI’s ChatGPT, we see a lot of activity in that market. While generative AI is indeed poised to augment processes in many different industries, fields, and applications we are yet to see which specific technologies will be the winners.

In your view, what are the key trends that will shape the European VC scene in the coming years?

The changes in the macroeconomic environment over the last 18 months have already had a pronounced effect on not just the European but the Global VC market. I believe these changes will persist and that we are unlikely to see a quick return to the highs of the market we experienced in 2021. As such, equity capital will be scarcer and more expensive, and, while interest rates are rising and debt rates follow, debt will still become even more attractive than it has been over the past decade and a lot more companies will start thinking about their optimal capital structures where debt will play a more significant role.