Nikita Izmaylov, founder of the N1 investment fund, planned to invest $5M in Ukrainian startups in 2022. The war has changed these plans
We are talking with the founder and CEO of N1 investment Fund Nykyta Izmaylov on Zoom for this interview. He is in Europe at Web Summit, like thousands of Ukrainians who went to Europe’s main technology conference. Izmaylov is sure that attending of such events is extremely useful. “You can see the experience of others, gain expertise, knowledge, contacts, and get with all this back to your home country, Ukraine, to implement locally,” the investor claims.
In the pragmatic view of the N1 founder, “the import of foreign experience” will help Ukraine to recover faster and, most importantly, more efficiently after the full-scale war.
The Editor of AIN.UA questioned N1 about how the fund is doing overall, how its projects went through the nine months of the war, and what are its plans for the future.
The N1 fund has a specific focus on fintech startups.
Right now, 90% of its portfolio is centred around the following projects:
- sportbank mobile bank,
- Asquad payment system,
- TRANSENIX, a Tap2Phone technology-based service that turns a smartphone into a payment terminal,
- Money4YOU, a microloan service.
The fund’s total amount of investments exceeds $10 million. At the beginning of 2022, it was planned that N1 would make at least 4-5 more investments for a total amount of about $5 million, doubling the portfolio.
“It’s funny to remember now, but we even wrote an unusual description of the projects that we are interested in. One of them we called ‘quite a catch’,” Izmaylov jokes. If no kidding, N1 is targeting projects that are already generating cash flow, and need funding and support for scaling.
After February 24, the N1 plans as the plans of all Ukrainians, to put it mildly, went to hell. For the first two months, there was no work at all, the fund’s employees were engaged in volunteering and helping the Ukrainian Armed Forces and refugees abroad as much as they could. Closer to the summer, it became clear that it could not last so long, and we began returning to work. We started with developing a strategy.
What did the fund started with?
First, we focused on the projects we have already invested in. They all kept the team, continued to work and grow. So that was the N1 number one task.
At the same time, we did not drop the idea of developing the fund, so we returned to the search for projects. To be honest, practically no new startups appeared during the war. This is probably due to the fact that now, during martial law, even those who had ideas to implement their own business are in a situation where they do not understand where to start. But we had certain lead specialists with whom we managed to get to know by February 24, so we worked with them.
Are there any chances N1 will close the deals before the end of the year?
Yes, there are high chances that we will close some deals. They will be not pure fintechs, but rather businesses where a fintech component can be added. For example, specialized marketplaces, which we seriously consider as our investment goals, but it is in them a fintech component is absent. That is why we are considering bringing our expertise to those projects as one of the ways to invest. But, as I said, they are not fintech in their pure form.
Another vector of our development is Web3.
In a conversation with AIN.UA, Izmaylov explained that the work of the fund had to be reshaped because a problem arose during its development. The fund simultaneously helped to build startups, such as sportbank, and operated as an investor, as in the case of Money4YOU. Here comes the problem: the same team member analyzes investment proposals (how to invest funds) and thinks about how to develop the current projects. So it was decided to divide these directions into the following:
- N1 as an investment fund operating as a venture fund,
- N1 as a venture builder or a company that creates and helps startups to create companies from the idea stage to its full implementation,
- N1 as an investor in crypto projects.
The first two points are clear, but the crypto looks like a new story for N1. Why did you decide to draw attention to it?
These days, I had an opportunity to talk with large funds, such as BlackRock or Morgan Stanley. It became clear that a crypto component is a must-have for fintech. In a year or two, if your company doesn’t deal with crypto or blockchain in any way, or somehow doesn’t use tokens or NFTs — it means you’re kind of old-school, you’re not using all the possibilities. Startups that have something to do with the blockchain, at least for 1%, will be able to raise investments with more ease.
Therefore, I decided that my fund will also look for startups in this area and build expertise gradually. A lot of Ukrainians I know are deeply rooted in this subject. NEAR Protocol, for instance. In addition, the crypto market has in fact been legalized in Ukraine.
That is why N1 plans include crypto.
This is a promising vector, and I am already looking for a team to develop it. The team will be up to 10 people who are only engaged in the crypto market.
Is Ukraine also among the focuses?
Cryptohistory was created so as not to be limited to one country. That is why we follow both Ukraine directly and all of Europe at the same time.
Ukraine remains an important market for N1. Nykyta repeatedly emphasized this during our conversation — the N1 office in Kyiv continues to work, the team is in place, as are the projects.
To confirm, a few weeks before speaking to Izmaylov, the editorial staff of AIN.UA interviewed Denis Saprykin, the head of one of the N1 portfolio companies, the sportbank mobile bank. He did not hide, things are not going easily, but the bank continues to develop and increase its growth metrics. But all plans still came to naught, because of the full-scale invasion, Izmaylov states without smiling.
How is the flagship of your portfolio doing?
By February 24, sportbank’s goals were the following:
- one million customers by the end of 2022,
- investment payback by the end of 2022,
- loan portfolio of 1.5 billion hryvnias,
- deposit portfolio of about 1 billion hryvnias.
After February 24, everything has changed. Now the goals include about 650,000 customers by the end of the year, loan portfolio amounted to 700 million hryvnias, and 300 million hryvnias in deposits.
How do you think, will you succeed in achieving the previous goals by the end of 2023?
This is unlikely to happen. The economy fell by about 35%. We will increase by 5%, maximum 10%, every next year. Yes, by 10% each year is an upward trend, and we are a young team with a young product, and that will allow us to grow. But I don’t believe that the economy and society in general will grow at such a rate that we will catch up to the level we had before the full-scale war. I think, we will be able to return to these indicators in 2024-2025.
What do I mean? The number of clients and the nominal value of the portfolio itself — we will absolutely reach these numbers. We will reach the mark of 1 million clients, that is clear, but the value that we will be able to generate from each client will be much less than what we could generate before the full-scale war. There is a question about this, and it is based on several things.
First, the purchasing power of the hryvnia has dropped. The second is that the cost of the resource has increased and will remain expensive for several more years. The discount rate is 25% now, and I think it will stay at this level for the next 2-3 years. Would it be 20% or 18%, it will directly affect the profitability of this business. Because even if you attract resources from the people in the form of deposits, these deposits are expensive, and you still need to promise the market that you will pay 16-17% for each one. The other side of this process is issuing loans, where the rate will be effective somewhere up to 45-50%. Given the default and other overhead costs, this puts the business at the edge of standard profitability.
Even if it turns out that our customer base will be 2 and then 3 million, it will still be difficult to achieve pre-war strategic indicators. Because, unfortunately, our country itself has become poorer, and it will take 3-4 years for it to reach the pre-war level of population wealth. It is normal, we do understand the state of things, it’s just force majeure circumstances that basically reset us to zero.
It may seem that Nykyta evaluates the situation very soberly. He himself looks at it differently and describes his approach as pragmatic. “I would rather be wrong, and we will recover in 1 year, than talk about the positive just for a story,” he clarifies. In his forecasts, he tries to rely on a long-term strategy that allows assessing risks and not waiting for quick results.
The other three companies also have problems.
- Asquad, the Ukrainian analogue of Stripe, planned to enter the market in March-April. The war made its adjustments. The startup’s development slowed down for half a year, full-fledged work resumed in fact only in October 2022. Now we have to catch up, adapting to the conditions of the market, which is not aimed to develop, but to survive. The focus for 2023 is the European market, the volume of which is larger and the state is better.
- TRANSENIX fully became part of the N1 portfolio already during the full-scale war. The deal was closed in the summer. It is a complex product, the success of which is achieved due to many components. Cool technology — available, Visa and MasterCard licenses — received, local team — available, partner banks — in process. Earlier, another company from Belarus tried to enter the market, but Ukraine was not their main market, so the attempts were not successful. We are sure that we will be able to create a high-quality and demanded product in this direction, so our nearest plan is to cover Ukraine as much as possible.
- For Money4YOU, the market has tightened a lot — its volume decreased by three times.
It might seem that the situation is worse than anywhere else. But Nykyta keeps his chin up and speaks with such a confident, as if he knows for sure that the situation will improve very soon.
When you see such results, it is very difficult. How do you deal with it?
As I said above, I analyze events pragmatically. Yes, there is enough positive. First, I see that Ukrainians really want to return to Ukraine and rebuild it. Many people who have left the country absorb the demand, the experience, they absorb the new vision, they generate new ideas that they have seen in the countries of their current presence. And when those Ukrainians will return home, and they will surely do so, they will come with new ideas and begin to develop them here. Some of them will create new companies that we can invest in.
Secondly, after talking with large investors and investment funds, I understand that there is currently no high demand for Ukrainian companies and Ukrainian startups. But there is one important thing. Ukraine has expressed itself to the whole world as a strong brand. And now, even those investors from large funds who mentioned Ukraine maybe once a year or once every 10 years, now they know exactly where our country is, what its territory is, and what its strengths and weaknesses are. A kind of SEO optimization of Ukraine as a country, as a future investment hub.
Our prospects are good.
The main thing now is the victory.
We will definitely rebuild and recreate everything else.