Tilia Impact Ventures is a Prague-based seed stage VC fund. It backs mission-driven founders from the CEE region to make environmental and social change on the global stage. The fund’s investment verticals cover climate, education and healthcare. To date, its portfolio includes 11 startups, tackling everything from minimizing wastage of food, resources and fashion items, to identifying corruption in public spending, and helping both visual and hearing impaired people to live their best lives.
Recently, Tilia Impact Ventures launched its second €32 million fund. Its most recent investment was Arbonics, an Estonian startup supporting landowners to plant forestry and receive carbon credits instead of cutting down their trees. In this deal, the fund invested alongside Nordic Ninja VC and Plural VC (Taavet Hinrikus).
In this interview, Andrew Gray, General Partner at Tilia Impact Ventures, told Vestbee more about the fund’s strategy and investment approach.
Fund strategy overview
Geography: Czech-based fund, investing in CEE region
Preferred industries: Climate (we aren’t afraid of hardware), Education, Healthcare (capital efficient)
Investment ticket: €300k to €1.5M first ticket, with significant follow on reserves to support later rounds
Company stage: seed
Product type: flexible depending on industry and vertical
Product stage: from MVP
Revenues: revenue is one piece of evidence of product-market-fit, but we are flexible on other indicators of PMF, again depending on industry and vertical
Q&A with Andrew Gray, General Partner at Tilia Impact Ventures
What are the 5 main things you look for in a startup?
- Impact: I wouldn’t be doing my job if I didn’t put this first. We see repeated evidence that founders who are driven by a strong and intentional cause are more resilient, attract better talent, and are better able to manage the inherent complexity of scaling up.
- Evidence of Product Market Fit (PMF): As seed stage investors, we need to see early evidence that you can build something that customers love and are willing to pay for. I am always hesitant of companies which tell us that they are “one feature away” from unlocking their customers’ hearts.
- Scale Potential: Often, the available evidence of PMF does not shed light on whether there is a large enough winnable market to justify the risk. As investors, we must take a position on the eventual market size, when the market might grow, and whether we believe that the market is able to be served at scale.
- Founders: Generally, we are looking for someone with the ability to build the solution, and someone with the ability to sell the vision (to customers, investors and the team). Most often these skill sets are split between founders, which is why we like multi-founder teams.
- Secret Sauce: Our favorite question to founders is, “what’s the secret sauce?”. We need to understand why the solution is superior, unique and defensible; or whether the founders are sitting on some unfair advantage which will enable them to execute better than anyone else.
What disqualifies a startup as your potential investment target?
We founded Tilia Impact Ventures with the goal of making real progress against some of the most pressing environmental and social problems of our time – alongside delivering great financial returns. If a founder can’t show us a science-based causal connection between their activities and the overall outcomes they are trying to achieve, we will disqualify that company.
What in your opinion differentiates the best founders from the rest?
Aside from the obvious traits of competency and experience, I’ve noticed that the best founders exhibit a high degree of self-awareness. They know what they don’t know and what challenges they will likely face; they are realistic in understanding how a customer sees their solution compared to their competition; and they usually sit somewhere in the middle of being humble enough to really listen to advice but confident enough to not blindly take all advice onboard.
What startups should take into account before making a deal with a VC fund?
A lot of founders see high valuations as an early sign of success. This is misleading and can often lead to founders struggling at late-seed and series A because once they get into the ~20m EUR valuation realm, a lot more focus is put on revenues and capital efficiency. By racing to this valuation, the companies are in fact shortening their runway to pivot, make mistakes and eventually get it right.
Even more concerning is founders who repeatedly get told by experienced VCs that their valuation is too high, so they go and get a quarter of their round subscribed by less experienced investors believing that this validates their valuation. The reality is that anchoring your round like this alienates good investors and harms company’s fundraising overall.
What is your approach to startup valuation and preferable share in the company?
We work backwards from a few heuristics. We don’t think that founders should be giving up more than 20% in a round, and we like to own at least 10% as a lead investor (I am always glad to debate the merits of a conviction strategy vs optionality with anyone who will listen!).
Next, we look at how much money the founders NEED to raise to get them comfortably through the next ‘risk stage’ which later investors would expect to see — this might be proving monetization, launching in a new market, etc. We look at what valuation is implied by these heuristics, and then we ask ourselves whether the company is actually “worth” that valuation.
A company’s worth is a product of both the specific company itself (its founders, metrics, revenues etc); but it is also a product of the market size, since market size determines the exit value and therefore the possible return on investment. We then flex the valuation up or down to account for these aspects. Of course, another variable is the dynamics of the round itself – the anchoring of a reputable lead or strong competitive tension can cause valuations to change quickly.
How do you support your portfolio companies?
We are fortunate to be backed by a tribe of leading entrepreneurs, investors and experts who share and support our cause. When we invest in a founder, they get full access to this network to support them throughout their journey. This encompasses everything from guidance, resources, hiring, business development and measuring/communicating your positive impact.
What are the best-performing companies in your portfolio?
In terms of impact outcomes, we are particularly proud of DatLab, whose solution for vetting public procurement has been pivotal in the successful of several high profile prosecutions of corrupt public officials. Their tool has been applied to over 25,000 tenders and is delivering estimated annual savings of €142 million for the public.
In terms of growth, we are proud of Cyrkl for creating the largest material waste trading marketplace in Europe. Or food-waste app Munch, who have saved 1.5 million food packages and were successful in raising a large (undisclosed) series A round at the end of last year.
In terms of “ones to watch”: we are excited about fashion resale marketplace NOLD, Biocraft making cultivated meat for pet food, and Arbonics who are enabling forestry owners to access carbon credits.
What are your notable lessons learned from investments that didn’t work out as expected?
Throughout our collective careers, our partner team has seen many permutations of the founder journey play out, and we are in a position to recognize certain patterns before the founders do. When we see a negative scenario unfolding, we have always brought this to the attention of the founders, but sometimes they need to walk their own path.
The hard lesson of last year was not intervening strongly enough and letting founders make mistakes that were avoidable – if you know a founder is wrong about something, don’t wait for them to prove you right.
What are the hottest markets you currently look at as VC, and where do you see the biggest hype?
“Hot” is the right word! There is a real cleantech boom going on now. Those with a longer memory will recall the cleantech bubble of 2005-2011, which largely amounted to little more than hot air and lost fortunes, but we are optimistic that the current wave is fundamentally different. The best founders, especially second time founders, the best developers, customers, capital allocators and governments — they are all aligned towards developing the technologies we need to stabilize our planet’s changing climate. This is certainly bordering on hype and I do hope we can sustain our efforts for long enough to make lasting change.
In your view, what are the key trends that will shape the European VC scene in coming years?
- Looking beyond carbon: As I mentioned above, we are carbon obsessed these days. It’s a noble cause, but it’s also important to think about planetary health as more than carbon. We can’t lose sight of the fragile balance of ecosystems and biodiversity, which are currently in jeopardy, and will remain so even if we stabilize temperatures.
- VCs caring about impact: As I highlighted, many of the best startups these days are in climate and sustainability. Mission-driven founders want mission-aligned investors, and I anticipate that more funds will begin to position themselves as such.
- Liquidity is the word of 2024. VCs are getting anxious after a tough year last year, and we will probably see more creative ways to realize liquidity, such as secondaries, continuity funds, cross-over funds, companies going public sooner, early stage VCs taking more money off the table in earlier rounds. This may even resemble capitulation of VCs, and there will be bargains to be had for those investors who have the flexibility to exploit this opportunity.
- With regard to climate VC funds, my own observation of the market is that we need more specialist investors, larger funds (to support hardware) and longer fund life-spans to give companies the right support the thrive.
- As much as I think it’s not such a good idea, we will probably see more family offices doing direct investment and early stage round composition including more private investors alongside traditional VCs in rounds beyond the usual angel round.
But overall, I think the end of this year will look a lot brighter than the current climate. While it may take years for the effects of the recent downturn to play out at the fund-level, I think the market for founder fundraising will improve dramatically and so will transaction volume and value.
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