How Venture Capital Firms in Kazakhstan Select Startups for Investment

Meirzhan Yessimkhanov explained how Activat VC works with startups.

Kazakhstan's venture capital market is one of the most dynamic in the region. Just 15 years ago it was small and largely out of public view, but with the widespread development of hubs and incubators and digitalization across the board, it has started to grow rapidly. According to open sources, venture deals in Kazakhstan totaled approximately $87 million in 2018-2022, although some estimates put the figure above $140 million.

The players in the venture market are startups on one side and investors on the other. The latter include venture funds and firms, as well as business angels. Knowing how to work with investors is an important skill for any startup that wants to raise funds for its growth.

To understand how venture capital firms in Kazakhstan operate, we spoke with Meirzhan Yessimkhanov, Executive Director of Activat VC, and learned how the company entered this market and how it built its startup selection process.

In 2023, Activat VC is a prominent player in our region's venture market. But how did the company get its start?

Legally, Activat VC has been operating since 2014. Its predecessor was Smart Investments, a company that invested in a wide variety of businesses. Its founder, Marat Tolibayev (founder of Activat VC. — Ed.), started investing without specializing in particular sectors: projects came in from real estate, the restaurant business, manufacturing and other industries. There were a lot of projects.

Over time, however, it became clear that working this way was difficult: some businesses began to fail while others started turning a profit, and investment decisions were sometimes driven by trust and good personal relationships. In other words, there was no systematic approach. That was when Marat began thinking about making the process of selecting projects for investment clear, transparent and structured.

At the same time, the shift toward investing in startups began, and about five years ago today's Activat team started to take shape — analysts covering IT markets, financial and technical matters. Together, they began looking at projects through the lens of how they are structured and what forecasts and financial projections their founders have. This allowed — and still allows — the company to conduct a thorough analysis of startups before investing.

So you no longer invest in traditional businesses and focus on IT startups instead?

Yes, today we work exclusively with venture investments and startups — nothing in the real sector. We started doing this actively in late 2019 – early 2020.

Initially, we looked at the US market and entered several deals with American partners. These included, for example, the startup 3DLook – software that determines a person's exact size from their photos for convenient clothes shopping online – and PitchMe – an AI-powered tool for matching candidates to job openings.

We realized this was an interesting opportunity and began investing in Kazakhstani projects as well. Today, our geographic focus is Central Asia and the countries of the Caucasus.

Which of Activat's deals in our region would you highlight? Have there been any successful exits?

Activat has not had any exits from its projects yet, but a number of startups have already shown a multifold increase in value. In other words, if a company were to sell all of its assets at once, we would see our investment grow several times over.

For example, our portfolio includes EasyTap, a service for finding flexible part-time work in stores and restaurants. To date, the value of our investment has grown roughly 14-fold.

What principles guide your investments? Have there been cases where a deal looked attractive, but you turned it down because of internal rules or a mismatch in principles?

Like any company in this market, we have specific investment principles and an investment strategy that we follow. Our Investment Declaration is published on our website — it sets out everything, down to the industries in which we consider projects and the stages at which we invest in startups.

To put it simply, we come in at the pre-seed or seed stage and exit projects a couple of rounds later, without waiting for a potential IPO.

There are actually not that many selection criteria. The first is the market. It must be large enough and global, meaning it offers potential for scaling.

The second is product marketing. The product a startup offers must be in demand in the near term, and that demand must be confirmed by some kind of research.

And the third is the project team. Businesses are built by people, and the human factor is very important here. That's why a not-so-strong project with a strong team is sometimes valued more highly than a strong project with a weak team.

I would also stress that we pay attention to the ethical qualities of startup teams. For example, we run background checks on founders to make sure there are no legal issues such as litigation and the like.

We also look at how, and in what spirit, communication between the Activat VC team and the startup team went. If there were any warning signs or problems already at this stage, we may refrain from investing.

Overall, we look for people whose principles are close to ours. And if we realize that this part doesn't match, the investment may not happen.

What kinds of startups will you definitely not invest in?

As I said, we invest in startups at the pre-seed and seed stages. These are the stages when a startup has only an idea and its team is starting to build hypotheses, or is already launching its first MVP (minimum viable product, i.e. a service with minimal but sufficient features for its first customers. — Ed.), and needs money for marketing.

As for industries, we look at startups from almost every sector. But where we definitely don't go is anything related to blockchain and cryptocurrencies, because this area is unregulated and the market is volatile. In other words, our venture investments, which are already high-risk, would become ultra-risky.

The second is unethical projects, such as those related to gambling and adult entertainment. They are inconsistent with Activat VC's principles.

And third, we don't invest in deeptech startups. These are usually unique technologies at the intersection of science and business. They are not bad, but they are technically very difficult to evaluate. This is where the lack of deep technical expertise in particular industries comes into play. There are not many specialists in such projects worldwide, and unfortunately we cannot verify the soundness of a project's various decisions. In addition, they take quite a long time to develop, while we do not invest beyond a three-to-four-year horizon.

What stages does your project selection process include? How long does it take?

On paper, the whole process looks like it has many steps, but in practice it moves quickly — roughly 3-4 weeks from application to receiving investment. Our company is one of the few venture firms in Kazakhstan, if not the only one, that can deliver such short timelines.

There are several stages. The first is the initial contact: submitting an application on our website or through one of Activat's employees.

The second stage is filling out an extended investment application. This is where initial communication begins with our startup manager, who clarifies the basics of the project. If, based on this information, the startup meets our criteria, it is sent for review by the preliminary investment committee.

The committee brings together experts in various areas — finance, marketing, legal and technical matters, as well as HR. The startup delivers a pitch (a presentation. — Ed.), and committee members ask questions within their areas of expertise.

If, after that, the startup appears promising and fits our investment strategy, we take it into in-depth due diligence. It is examined in every area, and each member of the investment committee writes their own assessment of the startup.

After all this, the final investment committee meets, and we present our decision to the startup. At this stage, the startup has every opportunity to refute or confirm our assumptions. In other words, communication goes both ways.

We have also introduced a scoring system in which each specialist rates the startup in their area on a scale of 1 to 10 points. The more points a startup gets, the higher its chances of receiving investment.

Once a startup receives investment, how is communication structured from there?

The first and most important thing is reporting. For pre-seed startups, monthly reporting is preferred, while at the seed stage it is quarterly or semi-annual. We have a ready-made reporting template for this, which startup teams use to share information with us.

There is also mentoring. For example, we help startups with various issues and introduce them to the right people — other founders and market players, venture funds and potential customers. We do everything we can to help a startup grow more actively and take its place in the market.

As for premature exits from startups, we are not supporters of that approach. We wait until the startup is acquired by a large business or until our stake in the startup can be sold to other investors at later stages of the project's development.

We are not in favor of “harmful” exits — made without regard for the founders' views and to the detriment of the startup itself. We discuss such matters with the founders themselves and with other investors. We believe that deals should benefit all parties and that the startup should not suffer as a result.

As far as I know, Activat also provides mentoring to startups. How does that work?

Our mentoring program is quite customized. We are not an accelerator or an incubator, so we don't run ongoing training or give founders assignments.

Usually, founders come to us with specific requests. In that case, we show the startup best practices and ways to solve the problem, draw on the experience of our team or previous startups, and explain how a particular issue can be resolved. These may be legal, technical or financial matters. We can also always advise a startup on how to prepare reports properly and set up processes.

At the same time, we don't interfere in the startup's own work. Each team must take responsibility for its business on its own. This is also one of our principles: investment and mentoring should support a startup's development, not hinder it.