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It Tech Two to Tango

With Larger Rounds Come Bigger Risks, Say Venture Capitalists

Four of Israel’s leading venture capital players spoke Tuesday at Calcalist’s investor event It Tech Two to Tango

Lilach Baumer  :  2019-06-18T14:16:09..
With fewer deals and higher sums invested, 2018 saw a decade high of angel seed investments. With this data, Calcalist journalist Hagar Ravet opened a panel discussion on early stage investments Tuesday at Calcalist’s investors’ event It Tech Two to Tango. The event was held at the Tel Aviv events space of LABS at the Azrieli Sarona Tower.

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The panel’s participants were Arik Kleinstein, co-founder and CEO of Glilot Capital Partners, Ayala Peterburg, founder and managing partner at S Capital, Ofer Schreiber, partner at YL Ventures, and Sigalit Klimovsky, partner at Grove Ventures.

 

 

 

There has been a big trend of investors putting their money into private equity, as well as big technology companies that are seeing their revenues continue to rise, and as a result, more and more money is being funneled into the venture capital industry, Kleinstein said. The abundance of money in the industry is also bringing up salaries, he said.

Replying to Ravet’s question on whether the easy availability of money in the industry is pushing up costs for founders as well, Peterburg said it is also a question of the domain in which a company chooses to operate. “When we invested in Lemonade, they had a big seed, so they had the long time they need to deal with regulation,” she said. “When you specialize in artificial intelligence, the people just cost a lot more—scientists are an expensive resource and there is a lot of competitions with large companies such as Amazon.”

“We now see more and more seasoned entrepreneurs,” said Schreiber. “If until a few years ago, the typical team was relatively young entrepreneurs that were all about the technology, now we are seeing more and more teams with a much broader vision that are thinking about how to build a category leader, how to be more ready for market, and those kinds of visions cost more money.”

The amount of money invested needs to be realistic to the vision of the company and its technology, Klimovsky said.

With more money come bigger risks, with companies like Uber sinking huge sums to expand the quickest and achieve the largest market share at the expense of a profitable business model, Ravet said.

“On every vertical of investments, we want to have the leading companies, the Ubers,” Kleinstein said, adding that there needs to be a balance between risk and reward. “Obviously it is all about the people,” he said. “Do you just spend a lot of money hoping to get to the first place? There are risks of just burning through the money. That is a responsibility shared by both founders and investors.”

Becoming a market leader is very difficult, Peterburg said. Often a company comes with very interesting business and market, but then you hit a wall, she said. So sometimes a company makes a very large pivot from one market to another, and ends up in a completely different space, she said. 

YL Ventures’ risk mitigation is built into its business model, as the company only invests in cybersecurity companies, Schreiber said. “It’s a trend we see more and more, specialized investors,” he said, adding that when a firm invests across multiple domains or stages, calculating risk is more challenging.

The changes the industry underwent over the last decade and the influx of money have changed how Israeli founders and investors approach a growth strategy, Kleinstein said. As seed investors, Glilot is often “the first one in,” and they work to bring in investors and resources that could help their portfolio companies learn how to bring a product to market and secure Fortune 500 companies as customers early on. “When you break that barrier,” he said, “it is much easier to raise money again and bring high-quality U.S. investors.”

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If 10 years ago Israeli entrepreneurs focused on proving their technical capabilities, today they are much more focused on the business side, said Peterburg. They don’t start in Israel but head directly to the U.S. market, they build U.S. headquarters, they raise seed in Israel but court U.S. investors in later stages, she said.

Larger rounds don’t solve all problems, said Schreiber. Putting in more money doesn’t necessarily mean a company can speed up its R&D process and get a market-ready process faster, and you risk ending up with a company that burned through a lot of funding but doesn’t have a product ready. “It is a lot harder to pivot after burning $500 million,” he said.

According to Kleinstein, higher valuations in the market don’t necessarily mean smaller players are walled out. “New players are coming in all the time,” he said, pointing to Continental AG’s 2017 acquisition of Israel-based cybersecurity company Argus Cyber Security Ltd. for over $450 million.
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