As venture funds struggle to raise money in Israel, seed capital, one of the earliest and riskiest stages of investment, is becoming harder and harder to secure. Janvest, a new seed fund of $5 million backed by American angel investors and chaired by the former head of the Mossad (Danny Yatom), saw an opportunity to fill the gap by making offering US-based angel investors the opportunity to tap into the Israeli startup industry. To learn more, VC Cafe interviewed Brian Rosenzweig, one of the managing partners in the new fund and the former marketing director at 21Ventures.
VC Cafe: What is the premise of Janvest and how large is the fund?
Janvest: The premise of JANVEST is to give a wider base of U.S. investors the opportunity to participate in the Israeli high-tech market. Our aim is to connect U.S.-based Angel capital with early stage technology companies in Israel, and do so in a way that substantially mitigates the risk of seed stage investing. In addition, we are working with more modest capital, for example, the current fund we are putting together (first of many), is $5.0M, which will be used to invest up to $500K in approximately 10 seed stage companies in the Internet, software, telecom, security/defense and alternative energy sectors.
VC Cafe: How is Janvest different than other angel funds or VC funds?
Janvest: First, JANVEST is a combination of best practices from leading Angel networks and VC funds. The funds are comprised exclusively of independent, individual investors, who are being given the opportunity to take an active, but not decisive role in the due diligence process on interesting start-ups. Ultimately it is up to the Management Team, Advisory Board and Board of Directors to make the investment decisions, manage the capital investments and oversee portfolio company development. I should mention that JANVEST’s team is comprised almost entirely of ex-technology executives – individuals in the Israeli high-tech sector that have spent the last 25-30 years managing and growing small to mid-size high-tech companies. Each member of the team specializes in one of the aforementioned technology sectors and will play an active part in the management of companies falling within their area of expertise.
Secondly, we are selling a fixed investment product – a fixed number of investors, a fixed buy-in and a fixed number of portfolio companies. Essentially, investors are receiving equal shares of 10 Israeli seed stage start-ups for relatively small capital.
Which brings me to my third difference and that is that we are working with more modest capital – both in terms of our fund buy-in, the amount to be invested and ultimately the exits we are expecting. Our objective is to double, triple or quadruple the valuations of these companies and get them ready for larger investments from VCs or other funding sources. In short, we don’t need the massive exits to repay our investors and we’ve got roughly 10 companies to do it with, which obviously increases our chances for multiple profitable exits.
VC Cafe: What’s your time frame for exists?
Janvest: We are looking at an average holding period of 3-5 years. In this time, as I said previously, we are looking to improve the valuations of our companies and get them ready for either a VC investment round (and an equity buy-out for us), or a strategic acquisition, such as Google’s acquisition of LabPixies back in April after 2 years of operating with just Angel capital.
— To read the full interview, click on ‘read more’ —
VC Cafe: Do you make any performance guarantees to your LPs? What are the expectations?
Janvest: We cannot make performance guarantees – no. But we do tell them that we are aiming for a 3X-5X return on each portfolio company. Now inevitably some will fail, but if we can break even at a 10X return on the portfolio, that is still outperforming most VCs in the market, and with 10 companies in the portfolio, the chances of a profitable portfolio exit is good.
VC Cafe: There has been a drastic rise in the number of funds offering seed (or super seed) capital in recent months, especially in the valley. Do you see a crash coming?
Janvest: In 2009, roughly 450 Israeli high-tech companies raised a little over $1.0B. Only $24M of that went to seed stage companies in Israel despite the disproportionately large number of early stage start-ups as compared to start-ups in initial revenue or growth stages. There is a major lack of capital in the Israeli market for seed stage companies and very few, if any, funds are doing what we are attempting to do at the scale we are attempting to do it at. You can get fantastic deals in the Israeli market because of this capital vacuum for early stage start-ups. So while a crash could be on the horizon in the States, I don’t see the same problem in Israel.
VC Cafe: How do you plan to source new deals in Israel given how crowded the market is?
Janvest: To my previous answer – the market for seed stage companies is not crowded at all in Israel. VCs are investing in later stage companies. The Chief Scientist Fund is overextended (to what degree this could be seen as investment competition). In fact, Israel is about to pass this new Angel’s Law, which is going to incentivize local investors in Israel to put money into early stage start-ups rather than dumping cash into shopping centers in Romania or Bulgaria. The government needs more funding to hit seed stage companies in Israel – its a good situation for us.
VC Cafe: In comparison to single super-angels like Yossi Vardi, a lot of the angel funds are characterized by meritocratic submission and due diligence processes. How will Janvest’s investment committee make its decisions?
Janvest: There is a very organized and precise decision-making process that involves up to 3 months of due diligence on any given company. The Management Team and Advisory Board work together to execute this process, which has a built-in checks and balances system to make sure that when it comes time to decision making, all eyes on the project are in agreement one way or the other.
VC Cafe: What Internet areas do you consider particularly attractive for investment at the moment?
Janvest: As long as the company has a new concept and is not just another application, we will look closer.
VC Cafe: Do you have any minimum criteria for investment? (pre-revenue/no prototype/mobile app only, etc)
Janvest: Yes. The companies need to have at least a proof of concept or beta version of their technology. And in most cases, they will have already received or put in some capital from either the founders themselves or local Angels.
On one hand, too little capital available for Israeli startups may dry up the VC pond completely, causing funds to exit too early (if they can), talented entrepreneurs to leave the country in search for greener fields (the valley), and shrinking the entire industry. On the the other hand, too much money available for investments isn’t good for the industry as valuations get inflated and exit expectations become irrational.
With the current level and frequency of exits, there are hard questions for the venture asset class in Israel as a whole. No wonder that the most recent VC Indicator survey by Deloitte Israel (Q1 2010) shows that 61% of respondents
claim that fund raising will become more difficult. Is a foreign fund of $5 million going to solve the problem, or is a more extensive government bail out needed?