For our series of interviews with players of the venture capital industry, we asked Lorenzo Pisoni, Founder of PCUP, how the COVID-19 has changed its business and is affecting the future plans of his company.
PCUP is the dream of giving a cup a soul. That may sound mystical, but it’s actually very down-to-earth: people come together to share ideas and experiences, and when they gather they have drinks of some kind, so cups are the most suitable place for the digital community to access a gathering. Our ultimate goal is to provide businesses a convenient alternative to single-use cups by giving to their customers good reasons not to throw away their cups when they finish their drinks. Our dream started back in 2018, when Stefano Fraioli and I incorporated PCUP srl. We invested our first 46k FFF investment to produce a super-durable, flexible, plastic-free cup that houses a little chip in the bottom; the chip interacts via a simple script we coded that runs on homemade devices for bartenders. Since day one we’ve been testing our product and our idea on the ground: in the span of a few months we received an unexpectedly enthusiastic response at our first live performance at Milan Design Week and from our first customer, National Geographic. Today our cups are IoT devices that interact in real time with users’ smartphones and a business platform hosting venue owners and beverage brands. PCUPs allow people to see all attendees at a venue, promote their content, send drinks to one another, get discounts from beverage brands, and skip the lines: they buy online and pay with the cup itself, which also serves as a mean of payment. Interactive counters and infographics report plastic and CO2 savings in real time: every drink purchased in a PCUP corresponds to a disposable cup saved. In 2019, thanks to investments made with a successful crowdfunding campaign, we met our target revenues while bearing 20% fewer costs than expected, and we entered negotiations with an American angel for a seed round to consolidate our technology and get ready for U.S. export.
When the lockdown arrived, all our customers cancelled their events, and days later our angel withdrew from negotiations because suddenly his priority was to handle his own business, which had been badly hit by the crisis. Within a week we went from being on the precipice of making a great leap to having a few months’ runway. We found ourselves with substantial working capital invested in cup stock. Our absolute priority was to keep our personnel on staff: an R&D shutdown would have killed the company. We took a few weeks to gather data and game out possible scenarios, the main question being: Is our business model dead or just frozen? We bet that by the end of 2021 the industry would go back to normal and even see sudden growth. We decided that we would be ready when that day comes, so we didn’t close the company but instead managed to find the cash to avoid default. In the craziest month, April, we made it, and we even secured 18 months’ runway. We are now preparing the strategy for our next 2M round in 2021, which will be added to the 700k national grant we are applying for.
Yes. The moment we decided to survive, we used all our resources to get cash. For me and Stefano, deciding to cross this second, unexpected, and terrifying “valley of death” right after surviving the first physiological one meant paying a huge personal price: we had to take on life-changing responsibility in a most uncertain scenario. But we were never alone: our team, our advisors, and our families backed our decision; our investors participated in the capital increase we opened at a discounted evaluation and with the extraordinary 50% tax discount granted by the government, and dozens of people wrote us emails in response to our newsletter updates, providing ideas, contacts, or just motivation. We took advantage of our position as certified exporters to offset our VAT credit toward suppliers; we couldn’t cut useless expenditures, because we honestly don’t have any, but we could access government loans. Back in April we already started pivoting our product development and commercial activity toward Covid-proof businesses: small venues and events, conferences, hotels, sporting events, offices. Right after the lockdown we saw our efforts rewarded with the first contacts and deals, and we’ve undergone a continuous recovery since then. We are far from our pre-lockdown revenues, but we’ll get there soon with a better market fit, a validated offer with new targets, more efficient procedures, and tailormade features to help venues dealing with Covid restrictions with our cashless interactive technology.
In my small experience I see two massive challenges to making Italy a startup nation: the insane amount of paperwork you have to do to get things done, and inconsistent application of the law. The ultimate symptom of the combination of these two pathologies is a kind of Wild West situation where whoever has the cash rules: late payments, slow access to loans and grants, and money continuously allocated to professionals who are able to decipher an illogic bureaucracy.
When you’re looking at solutions for startups that need to build big companies fast, I think increasing cash is the absolute priority. It’s on another scale. Creating a disruptive technology or business model requires dedicated professionals, machinery, and even making some mistakes, also known as R&D. All that costs a lot of money, and you pay 22% VAT on that money. VAT is a credit, because in some years startups will invest much more than they sell. Technically you can request a VAT refund, but that’s another bureaucratic nightmare, so you end up burning 22% of your cash for nothing. It’s nice that the government provides tax refunds to our investors and guarantees on our loans, but why not just grant us a VAT exemption? That would save us 22% in equity and bank interests right away, while keeping things simple. I see myself competing against U.S., Israeli, Korean, Finnish, and French startups, and the cash issue is depressing: we raise less money for more equity, and we burn it faster because of late payments, an army of professionals to pay, and a higher VAT %. We are considering incorporating in more fertile territory.
Another measure I would like to see is a secondary market for startup shares. Currently you can easily buy shares through equity crowdfunding platforms, but it’s not as easy to sell them: say you made a nice 2x in one year and you find a buyer—you still have to pay about 1k to handle the transaction in front of a notary. If you invested €250, you need 4x in order not to lose money. Crowdfunding is great, especially in Italy, where institutional investors are weak, but there should be easier tools to reconfigure the way the cap table is split as the company grows.
I am not really into the VC scene yet, so I can just share a personal impression. From the financial point of view, I think that Italian venture capital has missed a great opportunity: six months ago we were all starving to death, and we would have sold big chunks of shares of our dreams for some cash. I expected a line of VCs knocking on our door with offers we could not refuse, and instead when speaking with fellow startuppers I heard about the exact opposite: rounds cancelled, agreements renegotiated, due diligence prolonged. The startups that survived the shock secured other sources of cash, mainly government funds, and now will not give up so easily on their valuations. If I had to invest, I would try to do it before the next round of government funds makes its way from Brussels to startups’ bank accounts.
From the entrepreneurial point of view, I think that Italian venture capital missed an even greater opportunity: in a way, 12–18 months of market shutdown early on is a gift for a validated startup. We spend our days under constant pressure to deliver new solutions to a fast-changing market, hoping big players will not notice us until we are mature enough to be bought and not copied. Normally, delivery always lags behind innovation, and customer success is what startups do worst, as they lack experience, procedures, and personnel. COVID-19 froze all the R&D of the big players, as they were distracted by attempts to secure their existing structures, and that left us alone on the playground with operational costs cut and sudden access to cheap labor. Even with the scarce resources we secured, at PCUP we worked wonders in R&D over recent months compared to what we can achieve while serving customers on a daily basis, and we are creating two new tech positions. Again, I expect VC to understand this and manage to move faster than the recovery fund.