As Israel’s venture capital industry continues to break its own records, the competition among investors to find and fund Israel’s next big exit is vicious. What does it take to find an all-star start-up before everyone else jumps on board? The Jerusalem Post spoke with a few of Israel’s leading early-stage investors to learn their secrets.
“The job of a good early-stage investor, in my opinion, is to find a new trend while it is still in diapers, undiscovered,” says Gadi Isaev, Managing General Partner at VentureIsrael. “Once the company has created a buzz, it is too late. You have to look at the markets and evaluate where they are headed.”
Seed- and early-stage investment funds seek to invest in technology companies long before they have a product that is ready for market. The risks at this phase are greater than for established growth companies, but the potential payout is also much more significant.
Israel’s venture industry has been red-hot in recent months, with a record $1.44 billion raised by Israeli firms in January 2021 alone, according to Start-Up Nation Central. And while industry observers frequently complain that there is a shortage of seed funding available for early-stage start-ups, a recent report by Ground Up Ventures found that the number of Israeli seed investments actually rose by nearly 30% in 2020.
VentureIsrael, an early-stage technology specialist launched just six months ago, has six portfolio companies, but Isaev, a nine-year industry veteran, says the process of discovering these companies began years ago.
“The biggest challenge is to find entrepreneurs and get to know them early,” Isaev said. “Three years ago, I realized that quantum computing was becoming a hot topic, and Israel didn’t have anything, so I found out that Hebrew University had a quantum lab and I walked in and asked the professors if they knew of any entrepreneurs doing interesting work. From there, we started to get to know the people in the department and build relationships.”
That helped VentureIsrael land an investment earlier this year in QuantLR, a quantum cryptography start-up developed by Hebrew University physicists.
The company’s other investments came from similar long-term outlooks, Isaev says. “Three years ago, I understood that cybersecurity for maritime ships would become more important, and we started developing relationships with a company called Cydome, which we recently invested in.
“One of the fields I believe strongly in right now is neuroscience. I believe computers will be able to read our thoughts and use them to generate actions. We recently made a significant investment in CorrActions, another Jerusalem-based company that is developing a noninvasive brain–computer interface platform that can identify a person’s cognitive state in order to prevent human errors in real-time.”
The key, Isaev says, is to identify important upcoming technologies, and then build relationships with the people in the industry so that both sides are ready to make a deal at the right time. “But you have to get there early,” Isaev says. “Once people know about it, it is too late.”
Nimrod Cohen, managing partner at TAU Ventures, has a somewhat different approach to cultivating early relationships with promising entrepreneurs. “TAU Ventures is part of Tel Aviv University. We are structured like other venture capital funds, but being part of a university gives us an advantage.”
Once we invest in a company, we have the ability to offer it resources from the university, including access to the staff and students, free office space, and more. We have 1,000 square meters of space that we use to create an ecosystem where our entrepreneurs can work closely together and learn from each other.”
“We also use this space to create new relationships. When we meet someone that we feel we want to work with, but we’re not sure, or they’re not sure, we’ll invite them to sit in our offices for free, or just to meet up and talk. We offer as much value as we can, and we try to give them the feeling that they can approach us about anything anytime they want. Usually, founders are afraid to have that kind of relationship with investors. We try to make them feel comfortable, and we hope that will also translate into them working with us or recommending us to their friends.”
“In our industry, it is common that founders and investors meet just two or three times before they decide to get ‘married’ and commit to a long and very bumpy ride together. I believe that it is better to date before you get married – that is, to build a relationship where you really know each other before you make a commitment. But often, you can’t afford to do 3-5 months of due diligence before making an investment. The best thing is to start early building relationships so that when both parties are ready, the due diligence period can go very quickly.”
For Kobi Samboursky of Glilot Capital, the trick is finding the right people at the right time. “In the last two years or so, we have focused on staying in touch with talented teams, especially ones that recently had an exit and keeping tabs on them,” he says. “We’ll feel out when the time is coming for their next project, and try to make contact early on. Usually, we’ll meet up and offer to help them with the ideation process for the idea, or whatever else we can do. We have done this with teams that we knew from previous portfolio companies that had an exit, as well as others that we knew from other companies. It is sort of like scouting high school basketball players in the hopes of finding a future all-star early on. We believe that finding the right people is the most important thing, and with such a crowded market, you have to be creative and start nurturing relationships early.”