The we-do-2-seed-investments-alone-a-year-because-we-need-to-support-them model doesn’t work.
There, I said it. I’m a recent recruit to the VC world, most recently co-founder of Aternity (user experience monitoring) and face.com (massive face recognition platform). Being at the most recent TechAviv meetup, at some points I found myself glad not to be on the panel of VCs, and others where I felt I wanted to shout.
In my mind, seed investing is very different than round-A, B, C and beyond. It’s much more of a numbers and sweat game. The amount of support required is higher than subsequent rounds and too many companies fail at that stage; actually, one should assume more than 2/3 of the companies won’t raise an A round. So, the net effect is that if you only plan to do 2 seed deals per year, the odds are you will fail that year, reducing your incentive to make more seed investments the next year. It’s a catch-22.
When you are the founder of a seed stage company, there are three major issues you care about:
1. Product/Market fit discovery: You must find what’s the minimum viable product that serves your customer. Your customers need to be joyous. You need to delight them. We don’t have enough product talent in Israel – anyone that is involved with the company must be able to help, and not with pattern-based advice. Mockups, brainstorms, pushbacks, the works.
2. Hiring the right team: Roi will need to excuse me, but we do have hackers in Israel. We actually have quite a lot of them, but Yaron is also totally right – most of them want to start their own thing. Most seed stage startups need help to find teams that worked well together before, and in making these teams comfortable they should be working with them on this next big thing.
3. As little money-raising overhead as possible: It’s the time for you to be iterating on your product, to get customers to use it and find what works best. At this stage, there isn’t much due diligence to do: it boils down to team, scale of target market and competitive situation. Also, negotiating what will be the rights of preferred shares isn’t really what you should be doing.
The issues/risk/work (whatever you want to call it) don’t end there. Once you finally have a product with traction, most Israeli companies lack the network in silicon valley to promote it and make it front and center. It’s not a press thing, it’s a group of people who are extremely welcoming… if they know you.
The flipside is that one cannot escape that the burden of proof on a first timer is on the entrepreneur. More so, second timers will already know that they can get to traction pretty quickly. When you look at valley deal flow, you see that companies raising their first round of financing are already making money. It’s a small amount, it’s usually not repeatable, they still haven’t proven scale, but they are out there in the market.
Yes, costs are lower. There is the cloud and open source software that make capex and engineering expenses to a level where a 3 person team can create a real product. Yes, a major part of being an entrepreneur is the ability to convince your team (and many times their significant other) that the equity you are getting is worth fighting for in the day-to-day life, but my primary feedback to you is: “build a smaller product”. Understand where you want to get to, but go for product/market fit that is less certain and pivot from there. Really figure out what is it that would drive people to talk about you, come back and refer others. Yes, it’s risky. Yes, there will be competition – but at least you will have customers to compete on.
With all these hurdles, it manifests itself with an entrepreneur vs. VCs session at TechAviv. It’s startups from mars and VCs from venus.
So, what am I offering? Syndicate early stage deals. Collaborating with US-based angels on companies that are committed to developing killer products. Any.DO was raised in the meetup (thanks Ishay – I was the one clapping vigorously), and it’s a great blueprint of an early stage investment – awesome first time founders that bootstapped their company into 350,000 installs. I am proud to be part of that company, and for Genesis to have led the financing round.
There is a huge opportunity around consumer focused companies in Israel, be it mobile or Internet. Would love to work together to make it happen.
You can always reach me at firstname.lastname@example.org.