Global VC. Karen Vardanyan on the investment strategy behind Formula VC

Formula VC is a global-focused venture capital fund investing in Armenian founders at early stages. In an interview with The Tech, Karen Vardanyan, General Partner at Formula VC, spoke about the fund’s investment strategy, startup selection criteria, its approach to AI, and how, in his view, Armenia’s startup ecosystem differs from Central Asia.

Karen Vardanyan, Yerevan city, General Partner Formula VC, Linkedin

About me

I come from a banking background. I spent around 10 years at HSBC Bank, starting in finance and eventually becoming head of procurement for the country.

In 2018, I left the bank and started my own boutique investment fund called Sprint Fund. Sprint Fund financed crowdfunding campaigns on Kickstarter and Indiegogo. We provided bridge funding to help campaigns scale their marketing efforts and connected them with professional agencies to manage their campaigns.

I ran the fund for around eight years, and it was quite successful. We funded around $10 million worth of projects globally, and together, these campaigns raised around $100–150 million on the platforms. 

Then, in 2021, we started our VC fund, Formula VC, based on our experience and knowledge of fund management at Sprint Fund. Our group had also started the first angel network in Armenia, Bana Angels, in 2017. So, we combined these two areas of knowledge and expertise and launched Formula VC. It was a $7 million fund investing in Armenian founders worldwide. Right now, we have launched our second fund, Formula VC II — a $30 million fund, again with a global focus, mainly investing in Armenian founders at very early stages, from Pre-Seed to Series A.

There are 22 companies in the fund, and we love all of them equally. But a couple really stand out.

One is Wirestock, which recently raised a notable Series A from Silicon Valley. The company is tackling the growing problem of ethical data for AI. As AI models require more and more data, there is an increasing need for data that is legally sourced and properly compensates creators. Wirestock has around one million creators worldwide who provide photo and video data for AI training. The company pays creators for their data and creates custom datasets for major AI companies, including many of the hyperscaler labs in the space.

Our portfolio is very diverse, ranging from AI to frontier technologies such as quantum computing and radar.

One of our investments is BlueQubit. They are building software for quantum computing — essentially the layer that allows people to interact with quantum computers outside the lab. At some point, they could become the Windows of quantum computers.

On investments

 
Building a startup is very challenging. Being a founder is really hard. Whenever we talk to new founders, we say: if you have even a tiny chance of not starting a startup, do not start one. But if you are obsessed with your idea and believe it can become a startup, then you have to start.

The challenges are everywhere. When you start a company, everything — including you and your team — is trying to distract you. You have so many ideas, technology is evolving, the world is changing, and you are constantly obsessed with building something new and solving new problems. It’s really hard to concentrate and stay focused.

And especially nowadays, it is difficult to build a moat around the idea you are tackling or the problem you are solving. In the past, technology itself could be a moat. But with AI, technology has become accessible to everyone. So you are no longer competing with 1000 teams around the world — you are competing with potentially a million.

The only real moat you can have is your expertise, your access to the market, and the trust you build with your customers. We mostly work with B2B-startups, and especially in AI, trust is a huge issue. People are afraid to use AI solutions because of security concerns and uncertainty about whether they can actually solve their problems.

But if you come from the industry and speak the same language as your customers, you have a chance to build that trust around your product. And if you succeed in doing that, you can win.

From our perspective, the main way we help founders is through our network. Our funds are largely backed by industry professionals, founders, tech companies, angel investors, and business leaders. So there is a huge amount of expertise and knowledge within the fund, and we try to leverage that to help our founders.

On the Formula VC strategy

We invest at very early stages — pre-seed and seed. From our perspective, we primarily look for Armenian founders worldwide, regardless of where they are based.

Why? Because at such an early stage, you really need to know the people behind the company before investing. At Pre-Seed, the main assets you have are your brain, your mindset, and your ability to tackle challenges.

The Armenian community is quite big and small at the same time. It is spread all over the world, but it is also very connected. So if you are an Armenian founder building something somewhere in the world, we can learn a lot about your experience, mindset, and how you work. That gives us more conviction when deciding whether to invest.

The second is that the company needs to be globally scalable from day one. We do not particularly like companies that want to start in a small market and then gradually move into bigger ones.

Armenia is a tiny market, and there simply is not a large domestic market to build for. That is why Armenian founders tend to think globally from day one. Whatever solution they’re building needs to address a significant problem for large businesses and global markets.

I would say these are the two main criteria we look at when selecting startups to work with.

On startup and venture industry in in Armenia 

Our ecosystem is not bound by Armenian borders. We call it the Armenian ecosystem, but it is quite global and widespread.

Right now, we have around five unicorns that are Armenian or Armenian-founded, making Armenia one of the top countries in terms of unicorns per capita. All of these companies operate in global B2C and B2B markets.

From an ecosystem perspective, I would say we have had three generations of founders.

During the Soviet Union, Armenia had strong universities and research institutes in physics, mathematics, nuclear research and chemistry. After the collapse, many engineers stayed in the country and started IT companies as the internet era developed. These were mainly boutique outsourcing firms working with US companies, with the diaspora also playing an important role. Some of these companies were eventually acquired by major players such as Synopsys and Adobe. This gave Armenian engineers exposure to global markets and problems. Some of them later used this experience to start their own companies — this became the first generation of founders in the early and mid-2000s.

The second generation focused more on the gig economy, including delivery and transportation apps. But many of these businesses struggled because Armenia is a relatively small market.

The third generation returned to a global mindset. These founders started tackling bigger problems for larger markets, with the ambition to build globally scalable companies and potentially unicorns.

Armenia also has strong cultural and business connections with Silicon Valley, especially within the startup ecosystem. Today, the country has a healthy combination of major technology players and a strong generation of startups. We also have five or six VC funds and three active angel networks, while later-stage rounds are often backed by major European and Silicon Valley funds.

Recently, there have also been major investments in AI infrastructure, including the announcement of a large data center in Armenia. Together with public-sector startup programs and support for early-stage companies, this is creating a strong environment for the next generation of founders.

On Central Asia startup ecosystem

I think both Uzbekistan and Kazakhstan are developing quite interestingly at the moment, with a lot of talent and several companies showing strong success.

Historically, Kazakhstan has had a strong legacy in mathematics, including its participation in math Olympiads. I think building on that foundation could lead to much bigger things.

The main difference I see is how the ecosystems started developing. In Armenia, there wasn’t initially a government-led program or initiative to build the startup ecosystem. When there is a lot of government involvement and bureaucracy, you can sometimes lose the hustler mindset.

Founders can become more relaxed and more focused on their country or region, rather than thinking globally and trying to build really big companies. I think this is one of the main challenges Central Asian countries and the wider region are facing today.

From our conversations with ecosystem players in Kazakhstan, Georgia and neighboring countries, we see founders becoming somewhat dependent on programs, grants and other forms of support. In our opinion, this can sometimes hurt the ecosystem rather than develop it.

It’s better to provide a program or grant to help kickstart something, but then let founders navigate the challenges on their own — let them break through the walls, succeed or fail. Otherwise, you don’t necessarily end up with strong founders.

Investment size

With our second fund, our average check size is around $250 000–300 000 at the Pre-Seed stage. At Seed, it ranges from $300,000 to $500 000, and at Series A, from $400 000 to $1 million.

We usually do not take the entire round. We co-invest with other local or international funds. In Armenia, Pre-Seed rounds can reach around $1.5 million. Seed rounds typically range from $1 million to $5 million, depending on the company and industry. Armenian founders tend to raise Series A relatively late and at larger amounts — usually around $10–20 million.

Beyond funding, we mainly support founders through our network. Because founding a company is so challenging, we tell our founders to treat us like an elder brother. Whatever happens, we want to be the first people they call — no matter the time of day or day of the week.

Our community is well connected not only in Armenia but worldwide, with people from around 20 countries involved in our funds. So whatever problem a founder has, there is usually someone in our network who knows how to solve it.

We’ve helped with everything from getting a blocked account reopened to solving everyday operational problems that startups face. We’re there to help whenever needed.

Our funds have a standard 10-year structure, with a 10+1 year maximum depending on the company and industry. Our strategy is to exit through secondary deals around Series C or Series D, when companies become mature enough. Depending on the stage at which we invest, we’re typically looking at an exit after around five to seven years.

Plans

Industry-wise, we are pretty much sector-agnostic. There are only a few industries we do not invest in.

The first is gambling and anything related to it, simply for ethical reasons. The second is biotech, because it takes too long to scale. The third is heavily regulated industries, again because scaling becomes much more complicated.

Other than that, we’re happy to look at almost any sector.

Investor’s advice

To prepare for funding, do a lot of research on the problem you are tackling. Understand how big the problem is and whether it is actually a problem at all. There is a saying: “I found a gap in the market, but there is no market in the gap.”

Find people who are willing to pay and, ideally, people you can convince from day one to become your customers.

Do not ask investors for money to build your prototype. Nowadays, with AI and all the tools available, it’s much more accessible. You do not need $500 000 to start something. Start building, do your research, focus on a very niche market, and validate the idea.

One piece of advice we give our founders, especially in the current AI environment, is that it is very difficult to enter markets. So the moat you can build is around your go-to-market strategy.

Because of the trust issues I mentioned, there are many industries that have not been innovated at all, as well as niches within innovative industries that are still largely untouched. By that, I mean businesses that are still moving from pen and paper to technology, or from Excel to Google Sheets.

If you understand the industry, speak the same language as your customers, and bring them an AI solution, you have a real opportunity to enter the market and scale.

So find that kind of niche, do your research, and start building the business from day one.