Interview with Karen Vardanyan, Partner at Formula VC, Fund Manager at Sprint Crowdfunders’ Fund
Did you know that only 0.1% of the campaigns of total campaigns on Kickstarter have raised more than $1 million dollars?
In this episode, Karen Vardanyan, Manager at Sprint Crowdfunders’ Fund joins HyeTech Minds to talk about some of the strategies and tactics that founders can use during their first crowdfunding campaigns. Karen shares his thoughts on the common challenges for startups during crowdfunding campaigns, and ways to overcome those challenges. He also gives tips on how to pick the right crowdfunding platform for a higher return.
We also had an interesting conversation on how Armenia can scale the local crowdfunding market and what changes need to be done in Armenia in order to expand foreign investments in the country’s tech ecosystem.
Karen Vardanyan is the Partner at Formula VC, Fund Manager at Sprint Crowdfunders’ Fund. He is an experienced finance and banking specialist currently engaged in an asset management industry through the first of its kind Sprint Crowdfunders’ Fund (www.sprintcf.com) – a new tool for raising dedicated funds for marketing for the startups engaging in crowdfunding.
Narine: Hi Karen, Welcome to HyeTech Minds. How are you doing? How is there in Yerevan?
Karen: Hi, Narine. Thanks for having me. All is good here. It’s quite the summer already. So we are enjoying the weather.
Narine: Super awesome. Karen, it’s your first stop by HyeTech Minds. I wonder if you could just tell us who are you and what do you do now?
Karen: Sure. I’m coming from banking. I used to work in the International Bank for around 10 years. Then around 2018, I switched to the innovation ecosystem, joining my friends who have created a community called Global. am that is aiming to take the Armenian tech ecosystem to the global arena.
Narine: I’m curious to know how you went from banking to crowdfunding? What is the story there?
Karen: I have always been somehow related to finance. And I liked it a lot. Even during my study years in university, and my friends were involved in crowdfunding by running an agency here in Armenia called the Crowdfunding Formula. So, once we were discussing, what are the issues there that they are facing? What are the main problems that stop the campaigns from hitting the maximum they can? And in the end, we ended up that there are two main problems. The first one is the limited marketing budgets that the startups are usually facing. And the second is lack of expertise. And after several discussions, we ended up with a model of creating an investment fund, that will from our side, engage funds from investors from another side, it will become a vehicle for specialized funding of startups that are entering the market through crowdfunding, and that specialized funding will be dedicated to marketing only. And we will add another perk into the financial model that we will do the funding only if one of our trusted partners is engaged as a marketing agency. So we are solving both funding issues and expert issues here. So, that’s how it all started back in 2018.
Narine: So you started Sprint Croundfuning back in 2018. Which is not so long ago? Can you take us into your company? What problems you’re trying to solve and how exactly do you help startups?
Karen: As already I described the bit, it’s a fund, that is funding startups that are entering the market through crowdfunding platforms, which are mainly like Kickstarter and Indiegogo, the two biggest ones. And at Sprint, we are providing these budgets by looking at the metrics the campaigns are showing. And basically, it’s a boost funding. So if you started the campaign like you have a bit of attraction, and you have great potential, then Sprint is jumping in providing some extra budget, providing the expertise in terms of engaging the partner agencies, marketing agencies, specialized in the field, this combination is taking the campaigns to their, you know, maximum success levels.
Narine: Can you a little bit specify what would be the best time to use Sprint Crwoundfuning Fund for a higher return?
Karen: Startups usually are having the idea or maximum, prototype whenever they are coming to us. So it’s a key factor to consider to have a prototype whenever you’re considering crowdfunding. So wherever you are at that stage and applying to Sprint to see how can we help, then we are directing you to one of our partners, they are assessing the product, they are assessing the potential for the campaign. And if it is all looks good, they are you know, taking it and starting to work with the startup by doing all the pre-campaign arrangements by doing all the marketing activities that will be needed for selling the product online because, in the end, you have to sell. No matter what you have created, right. After everything is already prepared, after the campaign has launched, and we see already the real traction, not just the numbers on the papers right, then we are providing the budget. So, we are providing this marketing budget, and usually if managed professionally, these budgets are bringing like at least five to one in terms of return on investment and with with the budget with the expertize the startups are concentrating on the product development and product delivery. So, they are not worrying about how it will perform, they are not worried about, of course, they are worrying but they are not, they are not I mean, they are not heavily engaged in fundraising for you know because if the campaign is going good, they are burning a lot of cash on marketing. It takes a lot of time to find some other sources of funding, etc, etc. But Sprint is like providing it within 24 hours. And you know, they can sleep. Well, if they know that your campaign is performing, they know that they will have no problem with marketing budgets if Sprint is engaged.
Narine: Marketing is getting very expensive nowadays. There is no more free stuff on social media. And this can be a huge financial burden for many startups, specifically if they are in early-stage. In this sense, how do you help startups to avoid having this financial burden?
Karen: Usually, we are providing the budget, in order not to become a burden for a startup in the end. Because in the end, it needs to be paid back with the success fee and all that. So usually, we are limiting our provided budgets to up to 25% of whatever they have already raised. Like it’s 20 to 25%. So we are looking at the numbers, let’s say if a startup is at 50k funding on Kickstarter, we are starting with small with 10k. Then if it goes well, we are already in another trash of I don’t know, another 20k, etc. The limit is it can be as high as 200k per startup. Depending on the performance, and it is pretty much enough for raising like a seven-figure number on Kickstarter.
Narine: So, you’re providing a marketing budget when the startup starts to perform better. But, what happens, if the startup does not perform so well. Do you stop finance marketing activities at any point?
Karen: Our model is quite flexible. So at the point when startups and agencies see that their performance is not good, they are just stopping the relationship with us, like stopping the funding agreement. And given that it’s no time at once, whatever is not spent agencies are sending back to us because we are providing the budgets to the agencies in most of the cases. It’s like a trilateral relationship that is being formed. So the agency sending regular the leftover and whatever is spent is becoming the liability for the startup and in the end, they have to pay it back. But it’s not a problem for them, because at least for the portion that has been spent, and it was effective, they have seen you know, return on investment, so it’s okay for them to pay that.
Narine: How do you exactly evaluate which startup to invest in? What are some of the metrics you use to measure success?
Karen: It really depends on the project itself, because some projects have high margins, some projects have, very tight margins. So before engaging, we are trying to analyze and you know, talk with the startups what are the limits for them, like how much they can spend, how much they can afford, in terms of campaign management, in terms of agency fees, etc. Because crowdfunding campaign is not a cheap thing like around 30 to 40% of whatever is raised on the platform is paid as service fees as platform fees, as is marketing budgets and all that. So startups need to really plan their budgets accordingly. So that’s why we are trying to get into some more details on what is the structure for this particular startup. And when we are assessing like their own performance against their own limits to say, and this is usually the main criteria is a return on investment, so how much we have invested and how much they will raise and the second method streak which is again like, very heavily used his return on ad spend. Because the main driver for for for the campaign is usually like an advertisement. Of course, there are other marketing activities like PR like influencers and all that, but the main driver is still is an advertisement. So there is another metric like return on ad spend, like how much was spent, specifically on ads and how much has been returned. These are the two metrics that we are using, and in combination with the margins that the startups are providing in terms of their product, you know, development and production. We are combining all that and assessing the overall performance.
Narine: This coming generation is savvier in social media. They know how to use social media ads, create content, etc. Why should startups partner with Sprint Crowdfunding? Why not do your own marketing?
Karen: Yeah, so it’s important because we are providing the funding very, very fast. Like, there is no other source that can approve and provide the funds within 24 hours in this industry, because these startups don’t have any kind of collateral, usually, they don’t have any credit histories, they don’t have any kind of you know, banking histories and the traditional institutions are usually not working with them. Angel Investors may be engaged, but again, it takes a lot of time during the campaign to engage an angel.
So Sprint’s main value is speed. The second value is that even if you have the money, you need to spend it correctly.
So if you don’t have an agency engaged, we can arrange it for you. So we can introduce you to the agencies you like from our partners. And after our introduction, usually, the processes are going faster, because these agencies know that there is no budget issue. So they can, you know, they can have to say our limited budget, almost unlimited budget, or a campaign from a campaign perspective. So they are being engaged faster, they are more motivated, etc, etc. So there are two values. First is the speed beside the money itself, and the second is the expertise. And this connection that we are creating, for for the agencies,
Narine: I’m glad you talked about Angel Investors. I’m really curious to know what would be the main reasons decided to get funded through crowdfunding versus funding through angel investors.
Karen: Especially nowadays, crowdfunding is not only for funding itself, not only for money, but at first it is marketing. So it is raising awareness around your product. And it is about market creation. So imagine a startup sitting in their small village or town in any state of the U.S. or I don’t know any part of the world and running a campaign and bakers from more than 200 countries can see their product can bake it. And after making the product, they are becoming ambassadors for that product because I mean, they really, if they break it, they really love it because they have vague the idea they have bagged the prototype stage like there is nothing here yet. So there is no production, they haven’t touched the product, etc, etc. But they already love it. So they are becoming ambassadors, and this is how a market is being created for a particular product. Of course, they are raising a lot of money, which is helping them to kick off sorry, to kick off the production. But I mean, it’s not a source of sustainable funding, right. So it’s, it’s funding for just kicking off it is having sustainability portions in terms of already market creation, awareness rising like a lot of media is covering mainly like a hardware and gadget tech covering the media is jumping into successful you know, campaigns and covering the products. This is some kind of a combination that angel investors can not provide. Of course, angel investors are providing other values, mainly in terms of helping the team to you know, to succeed in whatever they are doing by sharing their own expertise and their own again, known monetary resources that they have their connections, their network, etc, etc. But it is not comparable to the value that crowdfunding is bringing in. So to summarize, both of them are very important. And both of them are really essential if you are engaged in our very special. But it’s like two different purposes that one would think should be raised from angels, or should we go for crowdfunding?
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Narine: I mean I talk to many startup founders. And everyone thinks they have created the next bicycle. This is a good thing. But, also you need to understand that your efforts should be directed at increasing awareness around your product.
Karen: They think that you know, we have created cool stuff, we can put it on a shelf, right, and everyone will see the light coming out of them, product and that usually, I mean, these are your relatives and remarks if your neighbors and not more, you need to, you know, raise awareness.
Narine: 80 plus percent 80% of salads go out of business in just 10 months, so they’re literally crowdfunding becomes a more popular way to raise money.
And you know first hand there are a lot of challenges to have a successful crowdfunding campaign. From your expertise, what are some of the common challenges for startups while trying to go through crowdfunding?
Karen: Before jumping into challenges, let me bring some numbers. And these are just numbers from Kickstarter, only, it’s not covering the whole industry, but it’s indicating how it looks like in the industry as well. So on Kickstarter, there are around 550,000 campaigns that have been registered and run. And of these 550,000, only 200,000 were successful. So it’s like, sounds like a huge number, almost 40% were successful, right? But whenever you look at the deeper metrics, like around 130,000 of these raise less than $10,000. So these are like really tiny campaigns, you know, some raised with the friends and family and all these guys. And only 0.1% of the campaigns of total campaigns on Kickstarter have raised more than $1 million dollars. So it’s 0.1%. So only one 1000 campaigns basically are raising $1 million. So And why is that? So because these guys are raising this million, they’re preparing for the campaign for several months. It’s not a day, it’s not a week, it’s not like. Well, we have a prototype, let’s launch the campaign. There are campaigns that have been preparing for launch for over a year. And this is how success looks like. And you need to put a lot of effort, you need to put a lot of emphasis on preparations, and perfecting everything, like starting from the prototype itself, from the photo-video materials that how you’ll be presenting your product. All the like copies that you’ll be putting on the campaign page and all that. So this is why the campaigns are becoming successful. And of course, again, getting back to what spring provides in terms of the value, you need to have a great agency that will be dedicated to your campaign. And that will be you know, caring for the success of the campaign. And you need to have the budget to spend on doing all the activities that these agencies are, you know, offering.
Narine: I think another important thing and you might agree with me is to pick the right path funding platform. Along with big names, like Kickstarter, Indigogo, there are dozens of new platforms offering different ways of crowdfunding like equity crowdfunding, crowdfunding rewards systems. What would be your suggestion to the first-time founders, what should they consider when they choose a crowdfunding platform for their first campaign?
Karen: I think there are several aspects to think of whenever choosing a platform. The first one is really the purpose of the campaign. So as we talked about what I’m talking about, I’m talking mainly about reward-based crowdfunding, which is equity-free, you’re only giving up some perks against the backing that you’re receiving from the backers at crowdfunding. Equity crowdfunding, you’re giving up on equity. And it is usually having some limitations. Because it’s regulated. For example, in the U.S., you can’t raise more than $1 million within a year, etc, etc. So it has some limitations. But from another side, you’re also giving up some equity, and you know, your fundraising and you’re becoming a good business. In terms of reward-based crowdfunding, as I said, one of the main reasons why people go for that is marketing and market creation. And again, there are different platforms providing the same platform services. So whenever picking a platform, there are two big international was this Kickstarter and Indiegogo, there are several locals, like in Japan, in Korea, in China, there are several, etc, etc. So usually, the campaigners, and the startups who have the ability to apply for the local platforms, usually they are testing their product, they’re, like, posting their product and doing their campaign on their local platforms, like just like, just like testing because usually, these campaigns are small, not so big, but they are getting the awareness and they are getting the clue on what it can become if they go for international platforms. And only after that, they are jumping to Kickstarter or Indiegogo. And the difference between these two is again, there are some differences. For example, it’s somehow some perception is there that Kickstarter is more startup oriented, like founder oriented, while Indiegogo is more backer oriented, for example. So they can be even, you know, some opinions, that is vice versa. So depending on which criteria you are looking at, because, for example, Kickstarter is doing heavy due diligence before landing the campaign, so you cannot, you cannot really post a scam there. And if you post a scam there most probably it will be, you know, even during the campaign, it will be stopped somehow. So this is a plus for bakers, so they know it’s more trusted, etc. On another side, Indiegogo is providing a lot of tools for startups for promoting the campaigns, they have their own newsletters, they are putting it there, etc, etc. So this is some kind of a perk that is more preferable for the startups. But from another side, there is another aspect, which is the audience itself. So depending on the product type, for example, gaming campaigns, like tabletop games, I don’t know even video games sometimes are mostly around on Kickstarter, because they’re they have the audience for these types of campaigns. I don’t know like e-bikes and some kind of e-gadgets are very popular on Indiegogo because their audience is looking at such types of things. So depending on the product, depending on what you are planning to achieve, and how you measure the success of the campaign itself. From the startup’s perspective, then you have to decide which way to go to do a reward base to do equity-based or like to do debt crowdfunding again.
Narine: I think another challenge for the first-time campaigners is to decide on the target amount for their first campaign. Do you have any tips on this?
Karen: So, it is another challenge. How startups are approaching this number, because some startups are putting a number really high and they are never achieving it, but other startups are putting the minimum goal they can, they can you know, afford to produce the limited amount of their product and to deliver it and they are becoming really big. So, the idea is that, whenever you are achieving the goal on the platform really fast. So, called green bar effect is starting to work, which means that the bakers are seeing that, at least you have the minimum amount you need for producing the minimum batch for your product. So, they are starting to somehow Like, share the success already, right. So, they have seen it, it is already green, they know that you will produce something, so you can set up your you know, machinery and all that, meaning that you need to if they bake it, they will just kill your production. So they are jumping in and baking, and at the end of the campaigns are raising much more than the real goal they had in mind. While if they put their real goal like I don’t know, like $500,000 on the platform, they are usually not achieving it. And we have seen a lot of such cases with Sprint as well, whenever the campaigns put a bigger goal, when they fail, when they restarted after, you know, hearing for our advice as well, then they have restarted with a smaller goal with the minimum goal, not the, you know, maximum goal. And they ended up raising more than their goal was actually in, in their mind. So yeah, this is a somehow campaign strategy that needs to be paid attention to a lot.
Narine: So, Karen let’s say you were successful in your first crowdfunding campaign and were able to meet your target goals. How long would you recommend between one crowdfunding campaign and the next one?
Karen: The short answer to that is to deliver the first one, then jump into the second one. Whenever the campaigns are starting without delivering the first items for the first campaign, you can imagine the frustration of the bakers who have baked the first campaign, they haven’t received the items yet. They haven’t received their rewards. And they are seeing that this startup is not focused on producing their rewards while they are doing another campaign. And they are presenting another product, meaning that all this time that was you know, that they were waiting, the startup was not producing their items, but they were developing another product, which is like, really frustrating. And usually, these types of campaigns are failing the second campaign. But right now, by the way, right now, we have an example of, a case when a startup has delivered whatever they have promised, like more than 20,000 items around the world. And they started the campaign right yesterday, their second campaign already, actually, it’s their fourth, but secondly, in this line of products. So during the first day, they have raised more than $100,000. And it’s not the first day yet. So they started at 12pm yesterday. So they still have like two hours to go for completing the day. And they are more than 130k founded already. So this is because all the backers who have received the product, they have provided the feedback, they have assessed the quality. They know that this campaign or this startup is keeping the promises. So they will, of course, they are another product of that startup. And this is the effect of this market creation. This is how it is working.
Narine: By the way, are you only working with Armenian startups?
Karen: Actually, no. We are working with startups around the world. And unfortunately, we haven’t worked with a startup from Armenia. We have worked with a startup that has written Armenian founder or co-founder. But fortunately, of these more than 100 startups that we have founded, none of them is based in Armenia so far. It’s really interesting and it’s its overall concept of strange to find around the globe and That was one of the ideas that whenever we starting the spring farm, to give a bit of a, you know, a history background, how it became what became. So whenever we’re starting, like the font is registered in Armenia, it’s in Armenia found and all that. And whenever we were trying to, you know, present the model trying to sell the products we are offering, we were like, receiving really skeptical answers like, Guys, is it a scam? Or we’re coming from Armenia for providing funding? Are you sure? Because we were like talking with startups from Singapore talking with from the U.S., like, you know, usually, these are the places when, when the money is flowing to our country rather than outflowing. It was a bit strange but right now, everyone already knows what sprint is, knows that it’s an Armenian, you know, font, and it’s presenting the overall meaning to say crowdfunding ecosystem that we have created during this years.
Narine: What do you think how can Armenia scale the local crowdfunding market?
Karen: I mean, they’re all the tools available, almost all the tools available for that. So we have a cool agency operating from here, we have Spring fund, we have a lot of tech talent in engineering, and especially in hardware engineering, as well, because of the heritage coming through the years and all that. I think, overall, it is not specific to Armenia, but I think it’s like that around the world as well. Overall, hardware startups are really difficult to scale. That’s why most of the startups are starting with some softer products that are, you know, easy to scale, they have no boundaries, they are not, you know, attached to the land and all that. And this is a struggle. And hopefully, at some point, with all the resources available in the country, we’ll see more and more startups engaging in b2c hardware. So consumer electronics and other types of products. I think, very soon we’ll have this engineering CPU operating. We might see some hardware accelerators opening up in Armenia as well. So some kind of an ecosystem needs to be created around hardware as well for taking it to the next level because there are many, many resources focusing on software products. But given that hardware is really difficult to scale, it is to say, having some limitations within the scope, but I think we are moving towards that direction as well. And we would like to become a regional hub for consumer electronics, startups that could enter the market through crowdfunding using all the resources that are available in Armenia.
Narine: I think Armenia has a huge potential to expand its tech ecosystem beyond the country, represents in terms of its text tech innovation expansion, and there are a lot of potential and when we see that, but there are a lot of also challenges to overcome. What do you think should be changed in Armenia, that can help us to attract more investments from outside, specifically, the aspirant Armenians to come to our I invest in Armenian companies?
Karen: I mean, they’re obviously a lot of work to do towards this direction. And in terms of taking investments from outside, there are some to say, administrative issues that need to be solved. Let’s say I don’t know how KYC is done, how the investors are being blended into the funds, etc. But from another side, from another side in terms of the overall environment for investment funds, for example, we have Sprint, we have also Formula VC, which is a VC that began an investment fund registered in Armenia. It is quite a good environment in terms of regulation in terms of taxes, in terms of administration, how you’re running the farm, how you’re being regulated, like whether you know the Central Bank is always there and asking questions or they are letting to do what you do. And they are just monitoring so it’s quite flexible and quite convenient to run upon from Armenia. On another side, there are no limitations from where you can intake Investments like if you are not sanctions are no sanctions. And no, there are not any, you know, those types of limitations and the money is clean and all that. There are no limitations to that. But yeah, only on the white money. So, given all these, I think we need to increase the awareness about what’s going on in Armenia, because a lot of peers in the diaspora also known as Armenians, they are usually not aware of what’s going on in Kenya, they don’t know that, I don’t know, they are some vehicles that are present in Armenia, and they come and they can come and invest in these, they usually think that Armenia needs more of charity money rather than investments, because they don’t see the landscape. But I think it’s it’s homework for us to do as well, in order to present not only take but also in other sectors like what’s going on. And in order for the investors to choose where they are going to invest rather than to donate, because that’s one of the main topics that we are trying to push that whenever you are investing $1, you are not just you know, creating the return that you are earning, but rather, you are creating much more value for the dollar. And whenever you’re just donating that $1 It is like most probably it is lost. For something like this.
Narine: That’s a really great point. What would be the best way to learn more about the Sprint Crodfuning fund?
Karen: Our website is http://sprintcf.com You can go and find all the campaign’s all the info on what we do and all that. If you have a startup and you’re planning a crowdfunding campaign, just push the Apply button there and fill out the application form with 10-15 minutes to fill in. So that we can see and assess what you are doing and connect to you. Other than that, we can be connected on social media, like on Facebook or LinkedIn, whatever it is so that we can start the conversation.
Narine: Thank you Karen for the interesting conversation. And thank you for all the insights you provided us. I’m really excited to see what is next to come for the Sprint Crowdfunding.
Karen: Thank you
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