Too many entrepreneurs are way too grateful to get seed money for their ventures. When they are anxious to take anyone’s money, bad things can happen in the second round of funding: They often don’t get it. Why? The first-round investors lack the connections and respect to impress later-stage backers who have bigger dollars. Numerous Israeli startups have learned this tough lesson, and they have profited handsomely by being choosey with their investors.
Before entrepreneurs accept any money from an early stage venture capital firm, they need to become clear on how they’ll raise their second round. Why? Because it’s much harder to raise the second round than the first, and the VCs you choose for the first round can make or break you. Case in point: Israeli startup Waze just sold to Google for $1.1 billion. The company, which provides a free mobile app to drivers who want to know current traffic conditions, initially took $12 million from BlueRun Ventures (along with Magma Venture Partners and Vertex Venture Capital) in 2008. Subsequently, in 2010 Waze raised another $25 million from the same VCs (along with Qualcomm Ventures).
A few days ago I was surrounded by experts in the seed funding to B round transition while moderating a group of 22 carefully selected venture capitalists. Some were from Israel and the rest from Silicon Valley (John Malloy, managing partner of BlueRun Ventures among them). The event was organized by the California Israel Chamber of Commerce (CICC), and hosted by Silicon Valley Bank (SVB). We had live polling and frank discussions on how early stage Israeli VCs should work with larger U.S.-based VCs in funding the B round (and beyond) and for scaling young Israeli companies in the U.S. Eyal Niv, Managing Director of Giza Venture Capital, one of the oldest VC firms in Israel, presented an overview of the Israeli VC scene. Interestingly, of all the venture investment in Israel, only 25% comes from Israeli VCs, with the remainder coming from non-Israeli VCs and multinationals (like Cisco, represented at the event by Tal Slobodkin, Corporate Development Strategy, Acquisitions & Investments).
It is neither necessary nor common for early stage Israeli VCs to provide the next round of funding and guidance to a big exit – the sale of a startup or an initial public stock offering. While 88% of the VCs in the room felt that Israeli VCs were best positioned to identify and manage early stage investments in Israeli firms, every attendee said U.S. VCs are better at having robust U.S. networks that fuel rapid growth of startups. Malloy said moving Waze’s CEO to the Silicon Valley helped propel its growth and sale to Google.
Steve Krausz, General Partner, USVP
The bottom line is that strong relationships and close coordination between Israeli VC’s and American VCs are a very productive arrangement. One of the participants was Steve Krausz, General Partner at US Venture Partners, who joined USVP in 1985, just a few years after it was founded. He said, “We decided early on that opening an office in Israel wasn’t for us. Instead, we made a commitment to travel to Israel frequently and build deep relationships with Israeli VCs the old fashioned way—face to face. My partners Jacques Benkoski, Irwin Federaman and Rick Lewis and I all make regular trips to press the flesh and stay connected. This continual commitment, now over 25 years and running has paid excellent dividends.”
While USVP and other Tier 1 American VCs have worked long and hard to build relationships in Israel, there are more Israeli entrepreneurs with ideas than there is money to fund them. The CICC, led by Executive Director Talia Cohen is committed to strengthening trade relations between Israel and California, particularly in the technology arena. She says, “Broadening the number of American VCs interested in Israeli firms and helping create environments where Israeli VCs and entrepreneurs can make connections in California is part of our mission. The collaboration between the Israeli and American VCs is critical in order to grow more Israeli companies into billion dollar firms. I was delighted to see VCs in our discussions that were new to investing in Israel.” Everyone in the room agreed that the fastest way to catch a VC’s interest is through quality deal flow. But the relationship with other investors who will occupy board seats and share in governance of the firm is important as well. The CICC leverages its members’ expertise and networks to evaluate and connect Israeli companies to Silicon Valley and Israeli VCs, to strategic investors and other potential partners. They are continually launching new events, programs and services to bring even more opportunities to its members.
Entrepreneurs too often get excited by anyone who will give them money. (Read this case study if you want to see how hard it is to raise money after the first round.) But before they grab that bag of gold, they must understand and verify how an early stage VC will help a young company and the importance of the strength of their connections and relationships with later stage VCs. One US VC (who will remain anonymous) told us, “We looked at a firm with an interesting product and some nice market success and were contemplating making a significant B round investment. Yet we were unimpressed with the VCs in the early round and I was facing a tie vote from my partners. At the negotiating table, the early stage VC made a rookie blunder, and we just walked away”. Enough said.
New Israeli VCs weighed in as well. Kobi Samboursky, serial CEO and now Managing Partner of Glilot Capital Partners, formed in 2011, commented on the challenges faced by Israeli VC firms when opening offices in Silicon Valley to develop their own direct networks. He said, “Many of us have tried it without good success. Frankly, maintaining a constant presence in California is not productive. We’ve found the best success in frequent travel and focusing our attention on those Silicon Valley VCs and multinationals that we resonate with. This is the best way we can serve the companies we invest in.”
Silicon Valley Bank hosted the event at its Palo Alto facilities. SVB has been a staunch backer of CICC over the years. John China, Head of Relationship Management for their VC and PE division said, “I am delighted to see the way these experienced VCs shared ideas and experiences. These kinds of events really help increase innovative companies’ probability of success worldwide, and that is close to our hearts at SVB.”
VCs aren’t the only ones who should do their homework before investing. Entrepreneurs with a good opportunity who are serious about scaling their firms to midsized and beyond should carefully research those who offer them money. Choose the ones who can open doors and provide support all the way to the exit.
Follow me @RobertSher and check out my upcoming book, Mighty Midsized Companies; How Leaders Overcome 7 Silent Growth Killers.
