Latvia's startup financing gets creative

Good morning there,

Or should I say, labrīt! As readers may know, I have a soft spot for Latvia. One side of my family hails from the tiny Baltic country, and it’s encouraging to hear that investors are taking notice of startups in the country’s up-and-coming ecosystem. My colleague Zosia Wanat met a bunch of founders and VCs there at TechChill Riga this week, and she learned that many startups are getting creative with funding sources as VC cheques remain hard to come by. Others have decided to focus on profitability instead of the rapid growth demanded by external investors. She digs into the current state of the Latvian startup ecosystem below. 

Elsewhere today, we explore why the next phase of climate tech will be built with debt, more layoffs at embattled UK-based AI company Stability AI and an argument for VCs to look into the Gulf region. 

Plus, last call for our super early bird Sifted Summit tickets! You can sign up here by midnight tonight to save £200. When's it happening? October 2-3. Where? London. See you there.

— Anne Sraders, senior reporter

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Latvia's startup financing gets creative

I was in Riga this week speaking with the small but lively local startup community. In comparison with the neighbouring Baltic states — tech superstar Estonia and up-and-coming Lithuania — tiny Latvia is at an earlier stage when it comes to startup development and funding. 

But things are happening here: there are plenty of pre-seed and seed-stage startups on investors’ radar. For example, Space.Trace, which builds AI-powered tools for engineering product development, gaming adtech  Monetizr and e-commerce shipping tool Swotzy. Plenty of international investors from firms like Atomico, Northzone and Speedinvest are also in town for TechChill, one of the Baltic’s biggest tech conferences, looking out for their next opportunity. 

Yet the funding environment is challenging for Latvian founders — and the economic downturn is pinching. While the ecosystem has had some funding success stories — a $50m Series A for print-on-demand startup Prinitify in 2021 and a $30m Series A for drone-maker Aerones in 2022 — the reality is that out of the three Baltic ecosystems, Latvia clocks up the smallest deal count. VC funding can also be pretty sparse: in 2023, Latvian startups raised just $12m in venture capital. 

Faced with this funding drought, local founders often turn to alternative forms of financing, be it venture debt, loans or government grants.

Take Supliful, an on-demand skincare, nutrition and packaged food product fulfilment startup. Back in 2021, it raised its first round of funding with just an idea. Since then it’s sold 400,000 items, generated $8m in revenue and grown its team to 45 people. From 2022 to 2023, its revenue grew by almost 600% and this year it’s expected to increase at least five-fold. Yet, despite sending “thousands of emails” to US, European and local VCs, none of them decided to invest in its seed round. 

As a result, in 2023 Supliful decided to take a $2m “mezzanine loan” from Latvia’s FlyCap, a growth capital fund — where the lender also takes a share of generated revenue. “We had to take it if we wanted to grow,” says CEO and cofounder Mārtiņš Lasmanis.

“This VC game is bullshit,” he adds, stressing that he worked for a VC for almost a decade. “It's all based on freaking gut.”

Public funding has helped fill the gap too. Last year, Aerones and Naco Technologies, the maker of nanocoating technologies for the green hydrogen industry, received European Innovation Fund grants and “blended finance” of grant (€4.4m) and equity (€10m). Similarly, a startup making tech for training defence medics, Exonicus, received a $2.2m grant from the US government. All of these additional financing “rounds” are higher than the average VC financing raises in 2023 in Latvia, which is below €1m, according to the Startin.LV calculation. 

Many startups, in Latvia and across the region, have decided to turn towards profitability rather than supergrowth and reliance on external financing — including Printify. Markus Villig, CEO and cofounder of Estonia’s mobility giant Bolt, told Sifted last year he hopes the company will hit profitability this year and not be “in need of external investors”. One of Poland’s leading startups, booking app Booksy, told Sifted last year that it’s already hit profitability. 

While alternative financing solutions often come with many strings attached — they’re worth considering. Especially when traditional venture capital is scarce. Should more founders opt for alternative financing options? Or aim for profitability straight away? I’d love to hear your thoughts.

— Zosia Wanat, senior CEE reporter

😬 London-based startup Stability AI has made fresh layoffs, according to two sources with knowledge of the matter. 

• The news was announced to staff last night via email. It will see all “non-essential” UK staff — the “majority” of the team working in the country — leave Stability, according to one source with knowledge of the matter. 
• Sifted has contacted the company for comment but did not receive a response before publication.

🇧🇪 Impact Shakers, a new Belgium-based VC, has raised just over €5m of a target €20m fund to invest in early-stage impact startups across Europe.

• It’ll run one accelerator per year, for four years, and invest in six to eight companies from each cohort. It writes initial cheques of €150k and reserves up to €1.5m per company for follow-ons.
• The six-month programme will also focus on founder wellbeing and company impact, says Yonca Braeckman, cofounder and CEO. Each founder will have a personal coach and will also be encouraged to join “founder circles” to support one another. Impact Shakers will also ask for ‘information rights’ — commonly used by VCs in term sheets to give them regular updates on a startup’s financial status— to “have this as a fixed item of importance in business growth”, says Braeckman.

🇬🇧 UK industry body Manchester Digital along with several tech companies — including Auto Trader, BT and Booking.com — have called for the creation of a Regional Digital Investment Fund to direct more capital into the northern startup economy and take on the dominance of London and the South West of England.

Super early bird ticket sales end today

The super early bird ticket sale ends at midnight on Friday April 19. Attendees can save up to £200 on their ticket to join 3,000 other members of the European tech community in London on October 2-3.

👀 Why VCs and founders should set their sights on the Gulf region.

💸 Climate tech 2.0 will be built on debt.

🤯 Inside the AI ‘revolution’ powering Europe’s autonomous vehicle startups.

🎙️ Sophia Bendz on why Spotify’s Daniel Ek hired people with “no track record”. (Sifted Podcast)

Oxford, UK-based Pathios Therapeutics, which is developing a novel immuno-oncology approach to cancer treatment, raised $25m in Series B funding from Bristol Myers Squibb, Canaan and Brandon Capital. 

Forres, UK-based Orbex, an orbital launch services startup, raised £16.7m  in Series C funding from investors including the Scottish National Investment Bank, Octopus Ventures, BGF, Heartcore and the Export & Investment Fund of Denmark (EIFO).

Glasgow, UK-based Phlo, a digital pharmacy which orders, manages and tracks delivery for prescription medication, raised £9m in funding. Par Equity led the round and was joined by investors including Thairm Bio and Scottish Enterprise.

Ghent, Belgium-based AmphiStar, which develops biosurfactants — present in everyday items from shampoos to toothpaste — derived from waste streams, raised €6m in funding from investors including European Circular Bioeconomy Fund (ECBF), Qbic III and Flanders Future Tech Fund (FFTF).

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