CVC: The Startup’s Secret Weapon Interview with Serhei Kostevitch and Costantinos Loizou
“Why is it easier for me to sell in Italy or Greece than it is in Cyprus?” Constantinos Loizou asked me with palpable frustration. The founder and CEO of EMBIO Diagnostics took a dramatic pause, the question lingering in the air, before providing the answer himself: “Because we’re too focused on pricing.” In the other window of the Zoom call, Serhei Kostevitch, CEO and founder of ASBIS, gave the slightest of nods. Indeed, Cyprus suffers from chronic short-termism, a condition that stands in contrast with the startup philosophy, which is built around future returns; or, better yet, delayed gratification.
Around 2013, Loizou, along with a team from the Technical University of Crete, came to Cyprus to build a prototype device that would use bioelectric sensor components to detect pesticide residue in foods in a matter of minutes. This was, and remains, important: the effects of pesticides are delayed, which forced the EU to introduce strict regulations to control these insidious chemical compounds. After years of trial and error, with some sales in Cyprus and abroad, EMBIO managed to secure an investment from Kinisis Ventures, a New-York-based firm that opens doors to Cyprus startups in the US market. However, expansion required ramping up production and pockets willing to sacrifice immediate returns.
In a 2019 report, the EU described SMEs as the backbone of the Cyprus non-financial business economy, contributing 76% and 83% to total value added and employment respectively. In its latest consultation, the IMF warned that pulling state aid from SMEs during the pandemic would have cascading catastrophic results for the entire economy. According to the Global Entrepreneurship Monitor report for Cyprus, the difficulty in accessing finance was one of the main reasons behind the substantial reduction in nascent entrepreneurial activity in 2019. So, how can entrepreneurs in Cyprus find the money to fund their innovative solutions to persisting problems, join the global market and increase the country’s wealth?
In December 2020, amidst the pandemic, Loizou was introduced to Serhei Kostevitch, the founder and CEO of ASBIS, a Limassol-based multinational value-added distributor of IT-related products that raked in some €2.5 billion that year. In his attempts to mass produce EMBIO’s B.EL.D (Bio Electric Diagnostics) pesticide-residue detection device, Loizou discovered that offshoring factory work is fraught with traps, especially when conveyor belts need to meticulously adhere to strict specifications. ASBIS had joined this dance many times before. With a presence in 26 countries, having someone on-site to quickly fix errors is par for the course. “While working on this project,” Kostevitch explained, “we got to know more about Constantinos and his team, their ambitions and the direction in which they wanted to take EMBIO.” More recently, the biotech has developed another device, which detects coronavirus particles in the air with impressive accuracy: Nicosia General Hospital and the new PwC Cyprus experience centre have already been outfitted with the Air B.EL.D. As Kostevitch noted, this kind of innovation always piques his own interest and ASBIS’ product line already includes an ion emitter. Although peer-review research is scant on the topic, ion emitters are filtration systems that coagulate particles of opposite charge, much like cells clotting a wound, and capture all those nasty particles you don’t want entering your lungs: pollen, mould and viruses. “Their product is testing, ours is fixing; the synergy was just there,” Kostevitch noted in a matter-of-fact way.
Last month, it was announced that ASBIS had invested €1 million for a 20% stake in EMBIO. This will allow the biotech to mass produce, which also means bringing in sales people, as well as redirecting funds to R&D to improve the accuracy of its current devices and expand their applications for detecting unwelcome molecules when food is in transit. “If you ask me,” Loizou noted, “this technology is going to be the standard going forward. We are going to see multiple sensors deployed as part of smart cities. The key point is to make them suitable for daily use.”
ASBIS has previously invested in a number of startups with what the market calls corporate venture capital (CVC). According to Kostevitch, the company is always open to any serious innovation which it can help convert into a fully-fledged business, providing product design and development capabilities and guiding startups through the tumultuous waters of intellectual property rules. “We try to give value to startups; that’s why we are not buying left and right,” he said. As opposed to venture capital, the most usual financing route for startups, finding the nearest exit with above-average returns does not top the priority list with CVC-backed deals. However, getting such deals over the line can be rather more difficult. With corporations being regularly audited, due diligence is extensive. It is an open secret in the startup world that when money is short, getting creative to make ends meet is the only way forward. “It’s a huge pain,” Loizou sighed, “when you are not well-structured. There were times when we thought there was simply too much to do! But, eventually, incorporating these processes into your daily operations helps you grow at a much faster pace.”
CVC deals hit a record high in 2020 – up 24% from the previous year — accruing €19.4 billion in value. While writing this article, I reached out to Andreas Panayi, the co-founder of Kinisis Ventures, to pick his brain about whether these deals can help the Cyprus startup ecosystem pick up speed. In an e-mail conversation, he explained how, “In more mature markets like the USA, we’ve seen first-hand the incremental value when early stage companies receive growth capital from strategically aligned and vested corporate partners. The young companies receive the growth funding they need, and the corporate organisations align with agile, faster-paced, not legacy-dependent startups that may be developing a relevant and disruptive innovation. A vested corporation is poised to commercialize an innovation faster, more effectively and efficiently, and on a grander scale – CVC is a startup’s secret weapon. It is a game-changer for young ecosystems like Cyprus.”
I asked Kostevitch the same question.
He replied wryly, “I don’t know much about a market of startups in Cyprus; I don’t know if it exists.”
On the other side of the coin, then, it appears that the few venture capitalists and corporate backers in Cyprus have little to no means to connect with Cypriot entrepreneurs. Indeed, you can count local startup events on the fingers of one hand. There is just not enough noise, or as Kostevitch puts it, “We need to organise platforms that are loud enough for companies like ours to hear what is happening.” Synergies with universities and capital will also go a long way towards creating a pipeline between innovation and capital, although universities in Cyprus will first need to relax the equity stranglehold they have on academic research conducted in their laboratories. Indeed, CVC-backed deals can plug the short-termism gap that is so prevalent in the investment circles of Cyprus. However, that remains only one part of the solution: startups need be more visible when pitching a vision of cutting-edge homegrown innovation. After all, there is value in being loud: did Klarna and Spotify reach unicorn status by talking quietly?
Kostevitch mentioned that ABSIS had also recently invested in a large facility that will become its new headquarters in Limassol, an investment prompted by the logistic bottlenecks created by the pandemic between China and the rest of the world. “I really want to create a powerful engineering and research centre in Cyprus,” he said. This will boost the country’s image as an innovation hub and, hopefully, also have a spillover effect that will make it easier for startups like EMBIO to increase their local sales. “If you don’t support people who work in quality products, you’ll never see innovation coming out in your market,” Loizou noted. “I’ve talked about our B.EL.D device, about new applications in food safety and healthcare. This is innovation that is being developed here in Cyprus; we need to raise awareness about that.”