The venture model...is fine. Just needs a thesis that makes sense.
News broke today that YL Ventures has announced the closing of a new $27.5M VC fund, YL Ventures II, based in Silicon Valley and targeting Israeli start-ups.
This is great news - and it's all the more gratifying because Yoav Leitersdorf is one of the smartest and most focused investors in Israel. Yoav has been talking about tech-driven investing for years, and has been actually doing tech-driven investments when others were just talking about it.
There are many pieces of conventional wisdom when it comes to venture capital. Here are three of them, all of which are true:
It's nearly impossible to raise a new fund.
It's important to have a clearly delineated strategy.
Investment discipline is crucial.
Lots of would-be VCs fail to raise capital in the first place. Many raise capital, only to fail to define a strategy. And many raise capital, define a strategy, and then fail to execute on it. YL's case illustrates that a smart strategy coupled with intense discipline can drive success in both investments and in fund formation.
YL's strategy, which was set forth publicly on the small firm's website years ago (click here to see it) is simple:
Be seriously capital efficient: small investments in companies that are not burning tons of money.
Facilitate the "big VC story" if possible but focus on making money for your LPs even in the (vastly more likely) case of a smaller exit.
Technology-driven investments. It is possible to make money in companies with no technical barriers to entry, but investment decisions are a lot harder to make and outcomes harder to predict. Some investors are just better at making technically-driven bets - and the existence of some IP creates barriers to entry, protects pricing power, and (with luck) can create a floor exit valuation.
Work hard with your portfolio companies to define a strategy and an exit plan.
I think YL's strategy makes sense in general - but it's an especially strong strategy for a small emerging fund to adopt because if an investor can plan to make money on smaller exits (outcomes that might not interest the mega-VCs) and still gain exposure to potentially larger outcomes - that investor can gain access to opportunities before his more established competition can move in. As many have pointed out, there is a limit to which the mega-VCs can take very early-stage risk, particularly when exit outcomes are likely to be small.
Having discussed any number of start-ups with Yoav over the years, what most impresses me about him and his fund is the discipline. It's one thing to state a strategy. It's another thing to actually live by it. I've seen Yoav turn down a lot of interesting investments because they didn't match his strategy perfectly. I respect him tremendously because of it - and I am sure it will continue to bring success to YL as it already has with investments like Acceloweb (acquired by Limelight), Clicktale, Seculert, Blazemeter, and Upstream Commerce. If you haven't heard of these companies, check them out.
