The Journey to Israel Early Stage Fund II
Raising our second Israeli Seed fund, it being the fourth ‘fund’ since 2009 when we started Entrée Capital, started me thinking about the journey we embarked on almost a decade ago when we started working from a small home office.
The plan had always been to transition from being ‘serial founders’, to becoming ‘serial funders’, thereby leveraging our experience over 20 years and, hopefully, replicating our success on a larger scale. The idea was to back founders in the same way that we would have wanted investors to back us. And so our motto became at the outset “For Founders. By Founders.”
Founding a Firm
We believed that to build a investing firm with longevity, one required two key components — a team, and a network. A network would lead to better deal flow, and a good team would work together to pick the right companies. Our thesis was that this approach would lead to great deals, success and the building of a reputation that would, in turn, allow us to attract the best founders. We hoped that this cycle would repeat itself. And so, Entrée Capital was born.
We began by making commitments to other funds around the world. We networked hard and soon enough, a few opportunities arose. We quickly dug into these opportunities, and, despite missing a few deals, we generally made good calls. We were fortunate to have time on our side, access to capital, and an ability to invest in building out our strategy.
Sitting on the other side of the table also presented a new set of challenges. Looking at a startup through the new lens of an investor presented a new tension of not being able to do it yourself. Balancing ROI and time was also a challenge - time for a founder to translate their idea to a product and company, time required to build a team, and time generally being the enemy of return as an institutional investor. We found that logic, gut feel, and being flexible and nimble, coupled with our experience as founders allowed us to, in many cases, make better decisions. We could move fast, which won us deals — at times in under 24 hours.
By the end of 2017, we had been making investments globally for six years. Our global network, the funds we invested with (and which we are so grateful to) and our team, helped source great opportunities. We were partners with amazing founders in startups such as Prospa, SeatGeek, PillPack, Gusto, SkyCatch, Stash, Gastrofix and over 50 other companies. We had exited startups like Scan to SnapChat which then IPO’d. KitLocate was acquired by Yandex (NYSE), and DragonPlay by Bally (NASDAQ). Other exits followed and a few others were planning their IPO. A few were also lost along the way yielding valuable lessons.
Companies we were investing in had raised over $1bn of financing from tier-1 firms such as Accel, Bessemer, Founder Collective, General Catalyst, Insight Partners, Sequoia, Spark, and GreyLock. Our returns after six years ranked in the top 5th percentile of VC returns. Backing our conviction and our winners worked.
So, having built our small firm over the past decade, we reached a point that we had a global network we could leverage, relationships with great founders and investment firms, and an approach that helped founders that we believed was rather unique. Our strong work ethic helped build a reputable firm.
Our Start in Israel
Israel started as a ‘fly in, do the deal, fly out’ operation. One can think of Israel as follows : Silicon Valley (Palo Alto, San Francisco, San Jose and everything in between) and the East Coast (NY and Boston) all piled into an area the size of downtown San Francisco. All with the most talented engineers, with a can do attitude, and where the word “NO” means “lets work it out”. Every coffee shop had a deal going down. We were like a kid in a candy store.
Two things helped us get started:
- A small company called DragonPlay that believed there would be a thing called an “App Store” where one could download games. This company became one of the leading social games startups and together with another great startup, monday.com, created a local network effect for us; and
- Three or so investors in particular (‘mensches’), who having met us, gave us access to their prime deal-flow and connections.
Soon we found a common ‘theme’ in Israel. Early stage companies were giving away too much equity for too little cash in seed financings that were all too often led by angels or by micro funds that could not, in fairness, provide ‘full’ seed financings. Financing terms were too onerous. This led to a ‘balagan’ (a mess), wherein a founder spent too much time across too many of their investors, with no one able to follow on in a meaningful way. We found that in Israel, whilst there was benefit to having a number of investors in a financing round, a founder still required a strong investor who could carry out the investment strategy, and would lead or take up their pro-rata in the next financing round.
Promising startups were not provided the time they needed to achieve critical milestones as a consequence of a lack of capital and in some cases onerous terms. Portfolio companies such as DragonPlay, monday.com, Riskified, Breezometer, Life On Air (HouseParty), all suffered the same journey.
Having been founders ourselves, we understood and identified with these founders, and we found ourselves digging in, helping out and many a time providing interim financing when others did not. And we’d like to believe we had our founders’ backs at all times.
As we progressed, we found that capital efficiency paid off. In some respects, being a bit far from the USA, yet having the USA as the primary market, coupled with the capital constraints, brought a measure of fiscal responsibility to these companies.
We also made a decision to focus on a few areas that we believed played to our Israeli founders’ strengths and the capital environment they were in. These areas were primarily software based, deep-tech (we put Cyber, AI, AR etc. in this), FinTech, SaaS and Outliers. Social games were also a good area (yet we think moving forwards its a difficult space).
We patiently recruited as well as promoted from within to ensure our DNA remained the same. As a result, we are today fortunate to have an investing team that’s multi-generational, multi-disciplinary and has huge drive.
Israel Fund II
For our second fund in Israel, we decided to double down on what we believe worked for us in seed stage investing in Israel:
- Israeli founders, no matter where they are.
- Seed Stage Investments done generally at “Valley terms”, raising sufficient funding i.e. Seed and Seed+ generally, upto $3m.
- Support pre-seed investments where capital is sought to help great teams pursue innovative ideas i.e. $250k-$500k.
- Reserve the substantial part of the fund for follow on investments.
And as a general disclaimer, we’d still look at outliers such as crypto/digital assets, industries that can be tarnsformed by technology, and so on and so forth.
Starting in December 2017, we made some calls to raise $80m for ECV IL II, our second fund, which we have announced today. We have been fortunate enough to attract great LP’s (primarily from the US and UK/EU) quickly and were over-subscribed. Thank you to all our friends and limited partners for making this happen.
We are well on our way. We’ve already closed our first deals in the new fund and are hunting for more. If you have conviction, are determined, have good morals and values, want to be in good company, and you are good — and by good we mean, really really seriously hot at what you do, then this is your time and we are your investing partner, so contact us. We’d love to partner!