Interview with Manuk Hergnyan from Granatus Ventures

Hi all,

Hope everyone is doing well. Here at Hye Combinator, we are starting an interview series where we will interview various professionals who are deeply involved in Armenia’s tech ecosystem.

This past week, I had the chance to talk with Manuk Hergnyan. I was introduced to Manuk by Armen Yemenidjian, a mentor at Hye Combinator, and have gotten to know Manuk well the past several months. Manuk co-founded the first VC fund in Armenia, Granatus Ventures, and is a trailblazer in the tech ecosystem that has developed in the region.

Hope you all enjoy and find it informative, my interview with Manuk below…

HC: Thank you for taking the time Manuk. Can you first maybe give us a brief overview of your background - upbringing, education, professional career, etc.?

MH: I was born in a small city near lake Sevan called Gavar. Was quite fascinated with math and physics, became the winner of math Olympiad of Armenia, but then gravitated towards economics as an emerging discipline in newly independent Armenia. After graduating from Yerevan State University, did my Ph.D. in economics at Moscow State University, afterwards Executive MBA at Oxford University.

After some work experience in a few consulting and investment companies in 2006 I founded EV Consulting which became one of the leading management consulting and research firms in Armenia which I sold to Civitta in 2021, a leading management consulting company in Eastern Europe and Nordics. In 2013 with two partners we co-founded the first venture capital firm in Armenia – Granatus Ventures and I act as a managing partner since then. I have been also a board member of a number of Armenian companies, member of Oxford Innovation Opportunity Network, currently serving on the boards of a few non-commercial organizations including the Union of Advanced Tech Enterprises, Microsoft Innovation Center of Armenia, Arar Foundation.

HC: Fascinating. What was the impetus to start Granatus Ventures?

MH: Back in early years of 2010s we spotted an emerging trend of many Armenian IT companies experimenting with developing their own products. At the time, most of them were engaged in outsourcing or custom software development. While back in 2013 there probably were only a handful of teams and companies which could be called startups, but we took the leap of faith, bet on the acceleration of this trend and started the first VC fund. Apparently, there was no respective knowledge of VC investments in the country and I invited Pierre Hennes (an experienced VC investor working in Singapore) and Yervand Sarkisyan (tech entrepreneur and advisor based in London) to join forces. At that time the World Bank program on E-Society and Innovation for Competitiveness Project started, and one component of that program was to match private investment into a VC fund. Hence, we raised capital from individual investors and family offices, primarily from the Armenian Diaspora that was partially matched by the Government through the proceeds of the mentioned WB program. Later in 2019, the private investors exercised the call option and bought out the government stake and now it is fully private fund backed by the investors spanning from the US to Australia.

HC: Talk a bit about Granatus. What is the investment strategy? Average check size? How large is the team? Do you take an active approach or passive?

MH: Our mission is to provide funding, expertise, and networks to promising technology-driven startups based in or having core value-add activities in Armenia. We prefer to invest in IP, technology & innovation-driven startups that have working prototype/beta version and/or initial market traction. The verticals include enterprise software, ed-tech, consumer internet, mobile, digital media, engineering, systems, AI/ML applications. We invested not only in companies that originated in Armenia and target regional or global markets, but also foreign companies which establish their operations in Armenia facilitated by our investment. This strategy is aimed to enlarge our pipeline of world class investable startups. The size of our first fund was around $6.5M, out of which we invested in 16 companies Our initial average check size is $200-400K, but we can increase our exposure to two-three times more. Our portfolio companies cumulatively raised more than $140M in follow on rounds, primarily from the US and European VCs. They employ more than 500 highly paid engineers in Armenia and pay significant amounts of taxes to the Armenian state budget. Our team is comprised of three partners, one investment manager, admin and analytical support team. The Global Advisory Network is part of the extended team – these are very experienced venture investors, accomplished tech entrepreneurs, professional from different countries who help us in evaluating deals, adding value to our portfolio companies, opening up new opportunities.

HC: The first fund sounds like quite the success. Maybe talk about one of your more successful investments?

MH: We have a number of star performers in the portfolio which are making inroads into a hall of fame of the startup world., CodeSignal, SuperAnnotate.AI are among the more successful investments to name a few. CodeSignal is a remarkable story of betting on A class team. Founded by two IT Olympiad winners, they explored ways of capitalizing this knowledge and created a platform where tech professional could compete solving Olympiad-like tasks, and use it as a filtering and job matching platform for potential employers. While the platform became quite popular, however, the marketplace business model proved to be quite complex. They pivoted and employed SaaS (software as a service) business model by providing a software for automatic assessment of skills and knowledge of programmers. After the shift the business skyrocketed and currently it is used by many large corporates including Facebook, Microsoft, Uber, etc. The company raised about $37M in a few rounds and is currently on a very fast growth track. We backed the company at its foundation, increased our exposure in Series A and looking forward to see further development.

HC: How about one that did not work out so well? What were the key learnings?

MH: We have a mature portfolio, clearly diverging performances of startups and apparently a few investments that did not work. The most important reason has been the lack of product-market fit, inability to scale. Newsdeeply is an example. It was a media platform focused on niche topics, traditionally neglected by mainstream media. The company raised over $5M including from leading Silicon Valley VCs, however, couldn’t find a workable business model. It was particularly hard to have a profitable business model in niche media segments. The lack of strong technical side of the business also contributed to it.

HC: Product-market fit is crucial. Maybe switching gears a bit… how would you describe the health of Armenia’s startup ecosystem?

MH: The startup ecosystem in Armenia is in the very dynamic evolution, it has gone quite far from the point when we started. The number of startups is increasing rapidly, the quality improves, the teams are getting focused on solving more global problems, exposure to more advanced ecosystems has increased, multiple forms of risk capital emerged and support infrastructure became more diversified and sophisticated. Many accelerators, incubators, contests sprung out. One unique feature that the ecosystem enjoys are quite dense links particularly with the US ecosystems enhanced largely by the presence of the Diaspora. It helps accessing markets, specific talent as well as funding. We see more and more founding teams including both local and Diaspora Armenians with complementary skillsets.

HC: It certainly has come a long way, but we are still very early innings. How can the ecosystem improve? What are we lacking?

MH: The most critical gap in the ecosystem is the lack of science commercialization route of startup creation. While this route is one of the major contributors to the emergence of the most disruptive companies in the US and Europe, Armenia is in disadvantage in this regard. The next frontier for our ecosystem is to be able to nurture deep tech startups that create solution based on novel scientific knowledge. This requires much more complex and long-term efforts in supporting science and education, promote research and create necessary infrastructure and international collaboration. As a commercial entity we strive to address this issue leveraging our funding to link world class science-based startups from advanced ecosystems to engage engineers and potentially also researchers and scientists in Armenia.

HC: Interesting. We should work on building a better partnership between the private sector and the Ministry of Education and Science. From your perspective, what are the 2-3 most common reasons why entrepreneurs fail at scaling their ventures? And how do you recommend they overcome or avoid those?

MH: Very often early startup teams spend quite little time in thorough understanding of the market, and whether they are trying to solve real human problems. There's a lot of hype out in the market, and a lot of teams and startups are just being focused on the technology side of the company and quite often overlooking the real need, the complexity of accepting a novel product adoption, switching costs from old to new products, the organizational inertia.

The right timing is also a critical factor – you can be both too early or too late for a specific product market. In many markets there is “second-mover advantage” as opposed to predominant traditional thinking of “first-mover advantage”.

In early stage investing, the most important factor is the team strength and composition. Since very often the initial hypothesis of the product and its features may not be right for the market, there can be a lot of pivots during the startup journey. So, the team should have the ability to solve problems on world class level in a new direction and not be broken in the process.

HC: I have also noticed that some of the entrepreneurs I’ve met have not spent enough time really understanding the market they are going after… if you were giving advice to an entrepreneur who is meeting a VC for the first time, what advice would you give?

MH: Demonstrate a good understanding of the market they are trying to serve, show belief and dedication to make the product succeed, show the flexibility to meet the market needs.

HC: In Armenia, what resources are available to help aspiring entrepreneurs get their ideas off the ground? How about for more established companies that are scaling?

MH: The support infrastructure is now quite developed in Armenia. Almost all the types of traditional ecosystem players are present in the country: incubators, accelerators, Governmental and donor organization grants, business angel networks, VCs. However, there are no very large VCs specialized in later stage funding. Its a feature of very deep ecosystems with strong pipeline of late stage startups, currently we fill the gap by accessing international capital.

HC: Are you raising capital for a new fund? Talk about this if you can.

MH: Yes, we are now in the process rolling out our second fund, Granatus Tech4SDG Fund with the vision to support deep tech startups tackling the world’s fundamental problems. The new fund will make investments in technology-driven ventures that demonstrate strong potential for social and environmental impact. The priority areas for investments are AI/Data Science and Advanced Computing technologies in healthcare, food/agriculture, resource efficiency, ed-tech. The opportunity to contribute to solving fundamental problems of humanity via tech really motivates us. The target capital of this fund is $20M. We are in the process of finalizing the initial closing, but already invested in two companies - both are in healthtech combining biotech, genomics and AI technologies. With these type of investments we also aim to move the frontier of the Armenian tech ecosystem into the next level, towards more science-based opportunities particularly, biotech (which is currently in embryonic stage).

We are also open to accept new investors into the fund for the next closing rounds.

HC: That is great, and best of luck. How can people get in touch if they are interested in learning more about Granatus? Investing, partnering, and so forth?

MH: Very simple, write an email to