As I start many of my posts, I’ll begin this one with a disclaimer. A big one. I am incredibly biased on this topic. The reasons why will become clear soon enough, but please keep that in mind when reading the following post. I did my best to approach this topic from an objective, nuanced perspective, but alas I am human.
Ask any founder who the best VC firms in the world are, and you will likely hear a list that consists of several blue chip, Silicon Valley based firms: Sequoia, Benchmark, a16z, Bessemer, Accel, Insight, etc.. (As an aside, there was a great series of tweets by Shai Goldman recently that dove into the success, or lack-thereof, of most venture firms in the world. Some of the above names are present). These firms have indeed earned their place on the VC Mount Rushmore, through decades of backing some of the most successful companies in the world.
It’s no surprise then, that most founders dream of having one or more of these iconic firms on their cap table. Historically, Israeli startups were limited to raising early investment rounds from either local funds, or international funds that have local offices. Once these startups matured to a stage in which some of the management team relocated to the US, they were in a position to raise from US based funds in later rounds (when the risk was significantly lower). The model of raising early stage rounds (seed and series A) in Israel and later stage rounds in the US is a tried and true capital raise strategy that led to the now crowded local VC scene.
Recently though, things have been changing. As more institutional money has trickled into the private markets, large US venture firms have turned their attention elsewhere in order to invest in potentially “less competitive” deals. Firms like Accel, Coatue, General Catalyst and Insight have been investing very actively in the Israel ecosystem (to Insight’s credit, they even established a local footprint). And while it is not new for firms like these to be investing in Israel related businesses, it is definitely new to see these firms active at the seed stage. As an aside, this indeed is one of the reasons why the early stage funding landscape is experiencing some of its highest valuations and largest round sizes ever.
This poses an interesting opportunity for Israeli founders. The increased optionality means that founders can now bypass Israeli firms and raise capital from US based firms earlier on. And we’ve seen many founders do just that. So while I have much respect for my counterparts at US based firms, I have one question: why?
To answer that question let’s take a look at the perceived pros and cons of raising from a US fund vs an Israeli fund:
Access to Capital
The main reason that Israeli companies needed to raise capital from US funds in the past was due to the lack of an established growth stage funding ecosystem locally. In other words - access to capital. While that may or may not still be the case, the early stage funding ecosystem has never been stronger locally. Access to capital at the early stages is readily available, nay, bountiful in Israel. As such, this shouldn’t be a reason for Israeli founders to choose a US based fund over a local one.
Go-To-Market
Is the reason perhaps go-to-market expertise? Surely a US fund will be able to help with introductions to customers and US based executives.
If I could use a shrug emoji here, I would. Do US funds have a better network of US based customers than local funds do? Yes. Does this ultimately matter in the success of a business? No.
Introductions from VCs is possibly the least scalable go-to-market strategy out there. Furthermore, as my colleague Eliran Rubin so eloquently wrote this past week (Hebrew only), the local opportunities for a strong initial customer base has never been stronger. As the maturation of Israel’s startup scene continues, this will become more and more true.
Tachlis, Dugri and All That Jazz
The fact of the matter is that there are tremendous advantages to raising money from a local fund. Geographic proximity is obvious, but having someone who you can truly talk to, tachlis, is crucial in the early days of your business. Being a founder is one of the hardest jobs on the planet. It’s a never ending roller-coaster complete with loop-de-loops, sharp turns and exhilarating speeds. I cannot overstate the importance of having someone or even a group of individuals who you can connect with on a deeper level. People you have a shared background and upbringing with. People who aren’t only driven by financial returns but who are also driven by continuing to establish Israel as technological beacon for the world. And yes, people who speak the same language as you. In my humble opinion, having that sense of support and companionship outweighs any other consideration.
Fund Contribution
A secondary, more quantitative consideration to keep in mind, is fund contribution. A potentially appealing characteristic of US based funds are their large fund sizes. Indeed there are a slew of billion dollar+ funds out there, and even more that manage 300m+. Locally, there are few early stage funds that manage over $200m. This however, should actually be a reason to be wary of taking money from US funds. Let’s do some quick math.
Scenario: You are raising a $5m seed round
Option 1: Imaginary Israel based fund Zionist Ventures, that manages a $150m fund, offers to lead your round. This accounts for 3.3% of their overall fund
Option 2: Imaginary US based fund Diaspora Ventures, that manages a $500m fund, offers to lead your round. This accounts for 1% of their overall fund
Whether consciously or not, the US fund can more easily write off your company because on the whole it has less of an effect on their overall fund performance. Large funds aren’t built for seed investments - it simply doesn’t move the needle.
So if access to capital isn’t the reason, go-to-market isn’t the reason and fund size isn’t the reason, why do we still meet founders who stare longingly out the windows of their office daydreaming about a term sheet from a US based firm?
Hype
The reason, I believe, is hype. Who doesn’t want to be on the homepage of Techcrunch or Bloomberg with their latest funding round from Sequoia? Indeed having a top US fund’s brand associated with your company may help with hiring, serve as a signal for follow on investors (assuming of course that the fund continues to support you) and even attract some customers. But hype is fleeting. PR is quickly forgotten. And if you don’t have a good enough product, go-to-market strategy or vision you will be remembered as the startup that could’ve been.
Do What Feels Right, For the Right Reasons
Raising your early rounds of capital is a crucial decision. Aside from your first hires, your first investors will have some of the most influential voices regarding the choices you make for your company. There is no formula, no right or wrong way to approach choosing who your investors should be. The truth is, there’s an incredible amount of variance between funds both locally and in the US, and each fund brings with it their own attributes and culture.
At the end of the day, you should do whatever feels right for you. And indeed the takeaway from this post shouldn’t be that raising from US based funds at the seed stage is a bad thing. US funds are great at what they do, and bring qualities to the table that many local funds do not. Every entrepreneur should make the decision that they feel most comfortable with whether it’s a US based fund, an international fund with a local presence or a sabra fund.
Rather, when making a decision about your investors, make sure you are making it for the right reasons.
Wishing everyone a Shana Tova, a Happy New Year.
Spot on!