Today, as we continue our roadmap for start-ups, we try to answer a tough question facing most Israeli start-ups - should I go with a US or Israeli venture capital fund? The activities of US venture capital funds (VC) in Israel are increasing, providing Israeli entrepreneurs with more choices. But, what kind of added value can a US VC provide? To get some insights, Enable interviewed Joshua Segal, of Global Catalyst Partners (GCP), a seed fund based in Palo Alto California. Headed by the highly successful Silicon Valley serial entrepreneur Kamran Elahian, founder of leading companies such as CEA Systems, Cirrus Logic, Centillium, PlanetWeb, and NeoMagic, GCP has quickly earned the title as "the Kleiner Perkins of Israel."
Enable: Why are US VC funds so attractive to Israeli start-ups? Israel already has a $4 billion venture capital industry.
Joshua Segal: "I think that there is a widespread perception among Israeli entrepreneurs that very few domestic VC funds make an impact because they don't offer more than 'dumb money,' i.e.: a straight cash investment. Local VC funds, even the large ones, still tend to syndicate and commit 'drive-by' investing. And Israeli entrepreneurs still remember that in 1998, when NASDAQ dumped, investments by local VC community slowed to a trickle while the US venture firms kept on with the mad pace of investment in start-ups. In the eyes of Israeli start-ups, US funds active in Israel exhibit confidence and seem to know where the market is heading."
Most Israeli funds are run by executives with experience and/or training in the US. What is the difference?
"Let's put it this way. There is no denying that Israel has an unusually dynamic high tech sector and that is what has drawn our attention. However, nearly all of the 4 Israeli companies that we have invested in unsuccessfully sought money on the local VC market. Yet we raised $25 million for Actellis Networks from leading US funds almost immediately; ditto with KangarooNet ($15 million - MN); and we raised $17 million for Cahoots.com (also currently raising another $50 million in the US - MN). So Israeli entrepreneurs have an enormous unrecognized potential."
To become 'billion dollar' companies?
"You've hit the nail on the head. A major difference that entrepreneurs encounter when dealing with a US VC fund such as GCP and many Israeli funds is that the local investors are often happy with an exit at a relatively low market cap while we aim to create the next 'new new thing' - we'd prefer to have 1% of a Microsoft than 20% of crappo.com. I recently read an article in which Geoff Yang (a partner at leading Silicon Valley venture fund Redpoint - MN) implied that an exit at a market cap of $150 million should be considered a failure - and given the current market conditions, this is a view probably supported by the majority of US venture capitalists. This is not true of every Israeli fund - BRM has successfully spun off CheckPoint and BackWeb at billion-dollar market caps."
Let's talk about the value added of a US VC Fund.
"Israeli entrepreneurs need to cut through the mystique of the VC industry. There are different tiers of value-added provided by American VC funds, some better and others worse than their Israeli counterparts. And local start-ups need to focus on the records of success and specializations of the various American funds. For example, an Israeli entrepreneur will be well-served by coming to us for systems, software and microelectronics aspects of the Internet, Telecom, and Datacom sectors - but certain other VCs would be far stronger in supporting an Internet content deal."
Beyond the obvious benefits of being invested in by a leading US VC, such as access to contacts and operational and entrepreneurial experience, what else do these foreign players provide?
"Many of the top US VCs treat all of their separate investments as a united entity. For example, Kleiner has developed its 'keiretsu' model of portfolio companies supporting each other and Softbank brings together a series of Internet-related entities. We also integrate such a philosophy into our investment process. An Israeli company fortunate enough to catch the eye of such a VC fund not only gets the dollars but also access to the network."
So how does the Israeli entrepreneur access US VC funds?
"US funds generally won't invest in non-US companies so if Israeli companies are looking to raise money in America it would be a good idea to look at setting themselves up as US entities. Regular readers of Enable will have already picked up many of the tricks of identifying potential American VC partners. Israeli entrepreneurs should not be sheepish in using their contacts to access American funds - there are some 50,000 Israelis working in Silicon Valley alone and many have had past contact with the investment side of the high tech business. Local legal and consulting firms have US connections. Other Israeli entrepreneurs have made it. And don't forget that the management of a slew of leading US high tech companies and service firms - such as Microsoft, Applied Materials, Intel, 3COM, Bain, McKinsey, etc. - are full of expatriates."
Bottom line - what chance does an Israeli entrepreneur have to get funding from a U.S. VC?
"In terms of raising money from US funds, the opportunities are far better for today's Israeli entrepreneurs. Foreign angel investors and corporate VCs are increasingly active here. Garage.com has recently established a local office. Sevin Rosen is one of our investors and Sequoia is already here. The shift in the balance of power from VCs to entrepreneurs so recently seen in Silicon Valley will conceivably encourage other US VC funds to set up shop in Israel in the hope of looking for better deal flow.
My special thanks to Joshua Segal, of Global Catalyst Partners for contributing to Enable. As this is the last column of 1999, I would like to wish all of my readers a very healthy, happy new year.
Published by Israel's Business Arena on December 27, 1999.