PART 2 - Thinking like a VC: What Happens After the Investment
In this blog series, we’re talking to venture capitalist Yuval Cohen of StageOne Ventures. In Part 1, Yuval discussed his definition of a successful VC fund and shared his personal experiences and principles for success in VC management.
In Part 2, Yuval shares his unique perspective on finding, assessing, and investing in a promising startup. And crucially, what happens after the investment.
Finding the Right Startup
A strong set of networks throughout the business world is a prerequisite for connecting VCs with the right startups. As a rule of thumb, a VC needs partners and networks with a diverse mix of backgrounds. For example, Yuval and his partners at StageOne have diverse networks comprising former senior military officers and graduates of the IDF’s elite Talpiot program, academics and serial entrepreneurs from across the startup scene. Additionally, Yuval and his partners meet entrepreneurs in international trade shows,conferences, and other networking opportunities.
There are so many startups in search of a VC that the challenge isn’t finding a startup, it’s finding the right startup. Generally, startups and entrepreneurs hear about different funds through their networks, and assess which is the best fit for their needs. An established VC like StageOne has the advantage of its reputation to attract suitable startups. Most people in the startup world already know about StageOne’s expertise as the go-to VC for cyber security, cloud computing, DevOps tools, and other aspects of B2B infrastructure, so they reach out to Yuval and his partners rather than the fund needing to search for potential investment.
Introduction and Assessment
Unsurprisingly, VCs usually invest in only a small fraction of the startups that it discovers. For example, StageOne generally investigates around 600 companies each year, of which they meet around 100 for more discussion, begin due diligence on 15-20, and finally invest in about 4-6. The process typically goes like this:
- Introductions: One of the VC partners will learn about an early seed team or startup, usually through an introductory email from a mutual connection.
- Deliberations: StageOne has a weekly meeting on Tuesday mornings, where they deliberate every new opportunity that crossed their paths over the previous week.
- Meetings: StageOne decides which companies to meet with during the following week.
StageOne considers every startup carefully before deciding whether to accept or reject it. Although the precise reasons for rejecting a startup are different every time, there are 3 main issues that are ‘make or break’ for a fund:
- The team: Running a startup is extremely tough. When it comes to first-time entrepreneurs, not many people can make the difficult transition from running a startup on a very strict budget to running a company generating millions in revenue.
- The market: Is the market big enough today to support the startup? If not, the fund considers whether they can anticipate it growing sufficiently over the next 2-4 years.
- The technology. “Deep Tech” for B2B is StageOne’s sweet spot. They look out for startups with enough strong technology behind them to give them an advantage.
Thinking Out of the Box
Most VCs only consider mature startups who’ve reached a certain point in their development, but StageOne are willing (and prefer) to invest in business ideas at the earliest stage. It can be difficult to weigh up an early idea that’s not even a one-pager. There’s a much greater risk of failure, but also immense potential to get in on the ground floor of the next major business idea.
Additionally, the best ideas are often the crazy ones that are totally out of left field, and most portfolio companies wouldn’t touch them. “Many VCs prefer to play it safe,” says Yuval, “but it’s part and parcel of my role to assess these ostensibly crazy ideas and sense new trends.”
What Happens After Investing?
Investing in seed-level startups, rather than businesses at the A, B or C round, means dedicating a lot of energy and time to supporting and guiding fledgling companies. That’s where StageOne likes to be.
Yuval and his partners spend the majority of their time helping their startups, which is why they choose to invest in only a small number of them. “Our days are completely taken up helping our startups in every aspect of their business,” Yuval says. Following the initial investment, someone from StageOne formally joins the startup’s board of directors. They’ll meet with them weekly for 1-2 hours of intensive planning; discussing everything from R&D plans to sales and marketing, business development activities, and finance.
This level of involvement only lasts for a year or so. After that, StageOne reduces their direct involvement to one meeting every couple of weeks, then dials it down to talking to the CEO over the phone once every two weeks or so, and meeting in person once a month.
Walking the Fine Line Between Support and Control
VCs have to walk a fine line between guiding startups and taking over control of the company. On the one hand, the VC fund has taken many companies from seed to sales. They have a breadth of valuable expertise and can guide first-time entrepreneurs to avoid many common mistakes. But on the other hand, VCs can’t take over the business. “I certainly can’t tell them what to do,” Yuval points out. “I can advise and make suggestions, but at the end of the day it’s their decision. I’m a great believer in startups owning their vision. After all, it’s their dream.”
The percentage of the business owned by the VC is a key factor in the balance between advising and taking control of the startup. StageOne usually take 20% to 23% of the initial check, but never as much as 25% or more.
The Rise of Tech Marketing in the VC Ecosystem
One of the biggest roles that a VC plays in guiding startups post-investment is in the realm of marketing. The tech marketing scene has changed exponentially within the startup industry. The typical Israeli entrepreneur of 20 years ago wouldn’t think about marketing at an early stage. Product was the primary focus for startups, with marketing following on at a much later stage. But today, product and marketing evolve more or less in tandem.
Yuval encourages startups to think about marketing right from the seed stage. Developing customer personas is a crucial marketing step for early-stage startups, since it informs product development. Early marketing planning is especially critical for cybersecurity companies, one of StageOne’s areas of specialization. With so many cybersecurity startups chasing a limited number of customers, marketing is the only way that companies can differentiate themselves.
However, startups still need to make sure that they really have an actual product before they devote too much energy to marketing. At the same time, savvy VCs are now doing some of their own intense marketing, which marks a refreshing shift in the market.
The VC-Startup Relationship is Deeper than you Think
As Yuval has noted , when VCs choose to invest in a startup, it’s not just a financial investment. They are choosing where to focus their time and expertise for the next several years. It’s clear that the relationship between VCs and entrepreneurs is more than just wallet deep.