We recently interviewed Gil Dibner, founder of Angular Ventures, on our podKast. Angular is a first-check venture capital firm investing in modern enterprise and frontier tech. This is an edited version of our conversion to highlight the most relevant topics of the conversation. You can listen to the interview here.
We're an early stage enterprise and B2B focused fund for Europe and Israel. We try to be a first check firm. There's a bunch of different ways we talk about ourselves, but that's the gist of it. We like to say that we're sort of like the Boldstart of Europe or we're trying to be, with the difference that Boldstart is much more focused on enterprise, infrastructure and devtools. We do a lot of that but we don't only do that. That makes me say sort of. We're also sort of like Point 9 but Point 9 is very much like SaaS and we do like a lot more deep tech than they do generally.
We do investments in technology-driven companies with a focus on enterprise buyers. We're not going to do a consumer deal, and we're not going to do a pharma deal, and we're not going to do a deal with a company that's a bunch of Americans in America. Those are the kind of things we don't do and then we'll do anything else.
We really try to lead with being founder friendly, being founder focused and being highly concentrated in high conviction deals, which I think it’s something that founders can feel when they talk to us. So we tend to not be drawn towards a situation where a company comes and says: “Hey, we have 6 term sheets, do you want to give us our 7th term sheet?”. We don't do that.
We typically end up in situations where we're the only term sheet and a lot of times that's because no one wants to invest in the company. Sometimes it's because we got there first or we got there the fastest, but usually it's because we're dealing with situations where they've met a bunch of VCs and nobody likes it and we're the only ones who like it, and that's where we try to put ourselves.
When David [Peterson] joined, he came up with a much better definition of deep tech and what we do, which is modern enterprise and frontier tech. I think it both sounds better and it’s also a better reflection of what it is that we actually do! We're comfortable in both spheres of the venn diagram.
We've done space, quantum, high performance computing… we're even looking at something in bioinformatics right now. So when you have a deep technology that's sold to a sophisticated buyer, we can run our early stage playbook. We love those companies but we're comfortable in either, just deep tech or just enterprise.
A lot of our best companies are not deep tech per se, and deep tech to me means that there's some degree of perceived impossibility or super difficulty in what a company is building, with the caveat that a lot of times deep tech is really really hard for investors who want to make a return, because you need to have the ability to build a business, not just a technology.
Our first and foremost responsibility to our LPs is to return their capital or ideally return multiples on their capital, and many of the deep tech, frontier tech kind of companies just fall out of contention. Once you try to apply some business logic to what they are trying to do and how long is it going to take and so on and so forth, that’s when we look at all that stuff and we get excited by it. But we have to be careful to select companies that can actually build businesses.
I think that at a very deep level I was always interested in technology. There's two things that drive human civilization forward, first of them is art and the other one is technology, and tech is interesting on that level because it makes people's lives better and hopefully more fulfilling and more enriching, and improves all of our welfare. So it's a super exciting place to play and it tends to attract the most interesting people, the most impressive people, the most forward thinking people. I think that’s the same reason that all of us are investors.
I pretty quickly realized that I was just simply not technical enough to really push the envelope forward on this kind of stuff myself. I took a few advanced math classes in college and realized that this was just not going to work. I didn't have the brain power to understand what was being asked in class, let alone the answers, and then I realized that finance and business is a place where you can add meaningful value and where my skill set was good. I sort of gravitated towards the business, strategy and finance part of the tech ecosystem.
I also think that there's an acknowledgement here, if you really are talking about real deep cutting edge technology or software systems: the number of people on the planet who can really push those things forward is pretty small, and I pretty quickly realized I wasn't one of them and that if I wanted to work with one of those kind of people or with many of those kinds of people, I would have to find a way to make myself useful to them, to serve them in a way that would get me a seat at the table for these super interesting companies, and that led me to venture.
I’m going to answer those questions separately.
I think the way we work with our venture advisors is pretty standard and relatively straightforward. Generally for the most part they are operating subject matter experts: marketing, sales, pricing, product, etc. Between me and David, we've known them all for over a decade, and we bring them in to help our companies deal with specific operational issues where they can add a lot of value.
That's something that VCs we try not to talk about because it's really hard to talk about, and the reason it's hard to talk about is because a lot of VCs say that they have a bunch of faces on their website or certainly in their LP fundraising materials, and it’s a lot of people they have never met. They use it as a way of convincing founders to work with them. They use it as a way of getting LPs to believe that they're helping founders when in reality none of it is happening.
Our focus was completely different. Our focus was on people that we knew well for a really long time and that we knew were really good people, and that they also were really interested in the actual substance of helping founders and would be willing to engage intellectually and deeply with a handful of companies on serious issues.
Just to give you an example of how this works, we have a couple of people that are involved in advising on sales and in things like sales strategy, how to improve sales operations, pricing, etc. They also have, on several occasions, provided an emergency room, supporting a company that is in the middle of a sales process that's urgent. For example, when having the first enterprise customer, suddenly the founder gets an email from the customer saying “I need to put you through security review and, by the way, I'm leaving tomorrow and my replacement is this guy”, and the CEO writes back to me and says “What do I do with this?”. We can bring these very very experienced sales people, they'll jump on a Zoom with me and the founder and we'll work it out. Founders find that kind of stuff incredibly valuable, to be able to lean on these people at a moment's notice when they have a crisis.
I think even if we did figure out how to talk about this, nobody would believe us so we kind of leave that as value for our founders and hopefully that will reflect in return multiples for our LPs, but we don't see it as a marketing tool because no one would believe us.
The first question that you asked, I think is a more interesting one and more applicable to all kinds of VCs.
I think learning to be a good early stage investor, whether your emphasis is tech or not, is probably about learning how to learn, and learning how to learn about things that you don't know much about, and learning how to learn about the aspects of that thing that are actually significant.
One of the things that I benefited from is that, before I moved to London, I was in Israel for 7 years doing tech VC, which was really proper tech VC. I was in Israel from 2005 to 2012 and in that period in Europe there was very little deep tech investing going on, whereas most of what was happening in Israel was deep tech investing, so that was the training ground. It was diving every day into solar panels, storage systems, compression technologies, and all kinds of real deep tech as the wiring and piping of the internet was being built.
The result was that every single company was not a company that I understood. We would invest in a company where the guy you brought to do the technical diligence was telling you that it was never going to work because he represents the old way of thinking, and when the founder would explain to him what he's doing, he’d push back with why it's not going to work.
What I learned was to listen to how the founder was responding to these objections. My learning process then was how to ultimately assess people. I'm not really assessing the technology itself, because in the journey from concept to proof of concept and ultimately MVP and scalability, there's going to be a million technical hard roads that are going to get solved. There's a million unforeseen challenges that the technical team is going to need to fix. The question is not really “have they figured it all out?”. The question is “are they capable of figuring it all out? Are they approaching these challenges with a growth mindset or with a defensive mindset? Can they hold their own against other experts in a debate?”
Sometimes we would get very negative feedback on something from some incumbent and then the founder would write them back and copy us with a really really good defense of what they're doing and then a bunch of questions: “Can I talk to you about them and figure them out more? You're right to raise this question and we've been struggling with it. We don't know how to solve it. But here's some ideas.” You get a sense that this founding team is really serious about solving this and probably able to work it out.
I've always believed that venture is an apprenticeship business that takes a really long time, because the only way to get good at it at these early stages, in particular for deeply technical companies, is just to have a ton of experience in assessing and watching people. When you go through these conversations you're learning how to read a conversation and that takes a ton of time and a ton of mentorship.
I would never say that I'm a trend follower. I think that anyone who knows me would probably say that I’m probably the opposite of that. We're definitely not following trends. We're also definitely not doing the other thing you're describing, which is having this kind of prepared mind ideology. Some people say they have a prepared mind philosophy and they have armies of principals and associates who learn about spaces, and partners that are expected to be experts on sectors. But then you talk to Benchmark and they'll tell you they don't really do that.
Our approach is much more like the Benchmark approach. We are trying to find extraordinary and radical people who have some kind of an earned insight on a space, on an opportunity.
I did a web3 deal before it was even a thing, and then it turned out that the market didn't want a web3 architecture to solve this enterprise problem, and the founders pivoted. They're “okay, we don't need to do this with immutable databases, we can do this with normal databases in a secure enough way and it's fine, because the immutability feature that had driven us in the first place to consider using web3 architecture, is not a feature that customers give a damn about”. So they pivoted away from that technical approach and they now have a solution that's better and widely adopted, they're scaling really nicely and they're closing six figure deals. They've raised their Series A and everything's fine.
I was never like anti-web3, I'm not anti-generative AI, but I'm not running around trying to meet every single generative AI founder out there because that's what everybody's doing and I'm not going to get anywhere with that. I'd rather have an open door and a shingle hanging outside saying: “Hey, come talk to us about crazy stuff”, and once in a while someone's going to come in and say something completely insane, we're going to get excited about it and we're going to do it. I think it comes back to the first principles of what we are trying to do here.
In 2020 and 2021 we literally had the scenario where companies with absolutely no revenue, no product and in some cases just a slide deck, were raising at $20-30-40M post-money with multiple term sheets, and they were doing this in 48 hours if not 24. Nobody was doing diligence. Nobody was meeting anybody, everything was Zoom. This persisted, it wasn't just the pandemic.
I published a blog post in October 2021 called “Alpha, beta, and an inverted venture risk curve” which basically talked about how in that period of time, the next round was almost guaranteed, so you would do your seed round, which instead of being done in the $10M post-money was being done on a $30M post-money, and six months later you were raising at an $80M post. Then six months later you raised a $150M post, in many cases with no revenue or minimal revenue. I think what this meant was that nobody's actually doing the work. You're in an asset selection business but all assets are good assets and therefore no one needs to do any work. You don't really deserve your fees because anybody can just invest in everything, which is sort of what Tiger and a bunch of other funds like that were doing.
Then you had a lot of large brand name funds that were putting out these seed programs to just invest very rapidly in seed deals. So, if you have $1B under management, you can carve out $100M of that and you can do 100 seed deals of a million dollars each without even thinking. That was perverting the whole diligence process. I was thinking about this a lot and trying to understand what the implications were, even if you assume that those valuations were correct.
Let's for a second assume that that was right. I think now we know it wasn't right, but let's assume it was correct. If it's true that every SaaS company is immediately worth $30M as soon as they come up with an idea, I better start doing stuff other than SaaS, I better start looking for stuff that's crazier, I better start looking for stuff that's contrarian enough. I need to get in at valuations that make sense for a venture model, otherwise our fund doesn't have a right to exist. There's no reason you need a seed fund if you can immediately raise at a $30-40M post.
I think it's more about using price discipline and maybe ownership discipline as a proxy. Are my investments contrarian enough to justify my existence as a fund? Am I taking enough real risk? If you think about those two types of investments for a second; one investment where nobody wants to do it and you can get in at a really low price and high ownership, build a real partnership with a founder because no one else in the world believes that that startup's going to work, versus case B, where everybody believes the startup is going to work and therefore everybody's willing to pay a very high price for this company, and it's a highly competitive deal being bid up to very high value. The kind of risk you're taking in both cases is super different.
In the first case, the risk is that it doesn't work. The risk is that there's financing risks. You can't possibly raise money for it because no one else believes in it, or because you’re not able to prove anything in the runway that we've now financed.
In the other case, the main risk you're taking is that even if it works, you're not going to do well as an investor because you don't own enough of it. You don't even care if it gets to a $1B outcome, it needs to get to a $10B outcome.
The other risk you're taking is that if it's so obvious that everyone should just put money into this thing even though they haven't built anything or proven anything, there's probably going to be a lot more competition out there, which is eventually going to affect your pricing of the product and your market share, and it's eventually going to crush you on the exit side anyway.
The likelihood of the $10B outcome went down. There’s not actually a high likelihood that it's $10B. It's maybe $1B on a good day and probably more like $200M if there's seven competitors and you happen to be number three. If you're number one, maybe you can still get to a large outcome.
We looked at this and said we prefer to be in case A, we prefer to be winning based on selecting contrarian opportunities rather than trying to win in non-contrarian spaces and opportunities.
I personally see Europe as an outgrowth of Israel. In other words, I started in Israel, and the startups in Israel had to have a certain DNA generally, which is advanced technology and global markets. That's the attitude, and I think what I discovered when I moved to Europe was that there were many European companies that had exactly the same DNA.
I tend not to talk about geography too much because maybe having spent so much time in Israel I feel like I can understand Israelis as Israelis, but maybe I can't understand a Spanish founder as a Spaniard does, but I can understand the Spanish founder as a guy who's not from the US trying to penetrate the US. That is a shared experience. This person has a co-founder. This person has a wife or husband with kids. They live in Barcelona or Madrid and they understand that to grow their business to $100M of revenue, $70M of that revenue is going to have to come from the US. So how are we going to do that? Are we going to move everyone to the US? Are we going to move some? Are we going to sell remotely into the US? Are we going to raise money in the US? What does our first US reference customer look like? How do we turn that into a relevant reference customer and a relevant story? Those kinds of questions are common across all of the European and Israeli founders that are trying to build big global businesses, so that's where we think there's coherency in what we're trying to do.
As a result, we have portfolio companies in Israel, in the UK, Finland, Germany, France, we have in the past invested in Portugal, we look very seriously at Italy, we have a company in Denmark, etc. We've been in companies all over the place. I would have to go make a special slide to try to remember where everything was because we don't really think about it that way anymore.
I think it's hard to be specific in general. Our conversations with founders right now probably divide into two types.
We're very fortunate that the majority of the companies in our portfolio are really well-funded, with well over two years of cash. Our strongest companies, the companies that we currently perceive as major value drivers for the fund, are very well-funded companies.
The other category is companies that have shorter runways. Our minds kind of break into two camps.
One camp is companies where we have incredibly high conviction, and the second camp is companies that are dealing with real existential issues. From a portfolio management point of view, we looked at our portfolio and also at who we are and what we’re aiming to do: we're a first check fund. We typically write checks of up to $3M, we try to be within the first million dollars. We really want to be a first check investor. We're happy to write a really small check but we want to be first because we think that's where the DNA of a company gets set. That's where we can be most impactful and that's where we can do our best to guarantee the company survives and manages to raise this next round.
We took our portfolio companies and we divided them into companies where we're still responsible and companies where they've already raised big rounds from other funds and so we're no longer responsible. We couldn't save them even if we wanted to.
We thus focused only on companies where we are still the primary responsible party, the lead investor as it were, and we take that responsibility as lead investor pretty seriously whether we're lead or co-lead. Then we scored those companies across a range of dimensions. We have an internal scoring mechanism. We discussed it internally and we figured out companies that score super highly across those criteria. Those are companies where we believe that we can continue to support them even in the worst situations and where we're helping them fundraise and so on.
Then there's also companies that are in a more difficult position where they really need to fundraise or need to make a change in order to survive, and I think that's a place where a number of companies in our portfolio are, which is very challenging, and where we're taking our responsibility as lead investor seriously, trying to help those companies make difficult choices.
I literally just sent an email last night where a founder was writing to me: “Hey, this is what I want you to know, let's have a board meeting to talk about our budget”, and I'm like, your budget is approved, but the real conversation we need to have is not about the budget, but rather how much you're spending on marketing.
Your company will be out of cash sometime next year and you only have a limited number of ways you can save the company: option 1, you can grow revenues to get to break even; unlikely. Option 2, insider lead round. In that case, I'm not the lead investor but there's a bunch of investors on the table and I don't see a forthcoming insider lead round. Option number 3 is an outside round. I'm not seeing that. I'm not seeing the likelihood of success in the next few months and I'm not even seeing the company engaging in a fundraising process. So if the plan is to raise money externally we better do that now. Option number 4 is cut burn rate, cut expenses and get the company to break even that way. Companies say they're unwilling to do that. It's got to be one of those, the other one is shut down. So let's have the real conversation.
I think we're going to see this a lot over the next twelve months. Founders that are charismatic, talented, brilliant people, that have usually been very successful until this point, and now a lot of them are staring down the barrel of a gun or driving a car against a brick wall. They're an airplane 30,000 feet up and they've run out of gas and they have to do something: have to land that plane, they have to stop the car, they have to get the gun pointed away from their head. That scenario often forces founders into this kind of frozen mentality where they can't do anything.
They've got this belief that you know, “I can't really cut costs, I'm going to kill the company. I'm going to wait because the situation for fundraising might get better later. Maybe my insiders will jump in and save me”. And they think, “in the worst case I'll sell the company but I don't need to worry about that now”. You need to worry about that now if you have less than twelve months of cash, you need to start having conversations right now, at the very least have partnership discussions that could maybe turn into an M&A conversation. Our effort here right now is to get founders to actually wrestle with these realities.
It's very difficult to let people go, it's very difficult to trim expenses on that kind of level, but in many cases that's what has to be done and founders need to make really tough choices. Do they want to run against the wall? Every week that goes by your chance of fundraising goes down because you don't have enough time. Yeah, these are really really tough choices.
We're working through this with our founders to try to help them see these options clearly and make very tough calls, and, by the way, our willingness and the willingness of a lot of other investors to finance a company when burn rate is reduced is much higher.
It's absolutely something that I'm passionate about and have spent years doing. One of the things I've learned is that, first of all, let's separate between climate investing and the use of ESG as an aspect to raise money from LPs.
There's a lot of people out there that found a lot of easy money by telling a climate story and the number of climate funds that have been raised in Europe or around the world in the past five years is astronomical, while the number of climate investments that are actually meaningful and good is very low.
When I look at our deal flow, I think we should be doing a much better job of sourcing those early deep tech opportunities in those spaces. We want to get better at sourcing those kinds of companies coming out of universities, technology hubs, etc.
If you look at the deal flow that we've actually seen, it pretty much breaks down into two categories. One which is software solutions like carbon tracking and companies where there's no actual tech. There's hundreds of them. I think the reason that there's such a growth in those companies is precisely because there's so much climate change capital looking for a home, founders realize they could easily raise money for these ideas. I don't think those are particularly differentiated or sustainable companies.
The other category that we see are companies that are building fundamental real technology to solve climate problems, whether that's in nuclear energy, carbon capture, cold fusion, or in all kinds of other areas that can really have an impact on our carbon footprint and our climate. The challenge with those for a seed fund is that typically those companies require $50M to get started and, let's just be honest, as investors the goal for these rounds is to de-risk.
I have met with many companies where they've come to say “hey, we want to raise $3M to build whatever”. Some incredibly capital intensive plans, building 30 substations. There's no meaningful de-risking achieved with the $3M, you should just take another few weeks to make a better PowerPoint and go talk to investors that can put $50M.
There’s all kinds of other organizations that are able to write those kinds of checks for the real solution, for the real deal. Big issues in the power grid, big issues in power generation, big issues in power and capture. There's plenty of money for the real deal solutions. I think where a lot of seed funds can go to die is if they're like “I'm going to put $2M into every cool sounding deep tech climate thing that then is going to immediately need to turn around to raise $50M”. They should just be raising $50M right now. I'm happy to put a $2M check into an earth changing, future-of-nuclear-fusion kind of deal, but it's not going to make a difference unless the company can raise enough capital.
The deal I'm looking for is the kind of company that says: “look, here's a real plan where a small amount of money can actually significantly de-risk my pathway towards being able to raise that large amount”. There I'm all ears.
We recently interviewed Gil Dibner, founder of Angular Ventures, on our podKast. Angular is a first-check venture capital firm investing in modern enterprise and frontier tech. This is an edited version of our conversion to highlight the most relevant topics of the conversation. You can listen to the interview here.
We're an early stage enterprise and B2B focused fund for Europe and Israel. We try to be a first check firm. There's a bunch of different ways we talk about ourselves, but that's the gist of it. We like to say that we're sort of like the Boldstart of Europe or we're trying to be, with the difference that Boldstart is much more focused on enterprise, infrastructure and devtools. We do a lot of that but we don't only do that. That makes me say sort of. We're also sort of like Point 9 but Point 9 is very much like SaaS and we do like a lot more deep tech than they do generally.
We do investments in technology-driven companies with a focus on enterprise buyers. We're not going to do a consumer deal, and we're not going to do a pharma deal, and we're not going to do a deal with a company that's a bunch of Americans in America. Those are the kind of things we don't do and then we'll do anything else.
We really try to lead with being founder friendly, being founder focused and being highly concentrated in high conviction deals, which I think it’s something that founders can feel when they talk to us. So we tend to not be drawn towards a situation where a company comes and says: “Hey, we have 6 term sheets, do you want to give us our 7th term sheet?”. We don't do that.
We typically end up in situations where we're the only term sheet and a lot of times that's because no one wants to invest in the company. Sometimes it's because we got there first or we got there the fastest, but usually it's because we're dealing with situations where they've met a bunch of VCs and nobody likes it and we're the only ones who like it, and that's where we try to put ourselves.
When David [Peterson] joined, he came up with a much better definition of deep tech and what we do, which is modern enterprise and frontier tech. I think it both sounds better and it’s also a better reflection of what it is that we actually do! We're comfortable in both spheres of the venn diagram.
We've done space, quantum, high performance computing… we're even looking at something in bioinformatics right now. So when you have a deep technology that's sold to a sophisticated buyer, we can run our early stage playbook. We love those companies but we're comfortable in either, just deep tech or just enterprise.
A lot of our best companies are not deep tech per se, and deep tech to me means that there's some degree of perceived impossibility or super difficulty in what a company is building, with the caveat that a lot of times deep tech is really really hard for investors who want to make a return, because you need to have the ability to build a business, not just a technology.
Our first and foremost responsibility to our LPs is to return their capital or ideally return multiples on their capital, and many of the deep tech, frontier tech kind of companies just fall out of contention. Once you try to apply some business logic to what they are trying to do and how long is it going to take and so on and so forth, that’s when we look at all that stuff and we get excited by it. But we have to be careful to select companies that can actually build businesses.
I think that at a very deep level I was always interested in technology. There's two things that drive human civilization forward, first of them is art and the other one is technology, and tech is interesting on that level because it makes people's lives better and hopefully more fulfilling and more enriching, and improves all of our welfare. So it's a super exciting place to play and it tends to attract the most interesting people, the most impressive people, the most forward thinking people. I think that’s the same reason that all of us are investors.
I pretty quickly realized that I was just simply not technical enough to really push the envelope forward on this kind of stuff myself. I took a few advanced math classes in college and realized that this was just not going to work. I didn't have the brain power to understand what was being asked in class, let alone the answers, and then I realized that finance and business is a place where you can add meaningful value and where my skill set was good. I sort of gravitated towards the business, strategy and finance part of the tech ecosystem.
I also think that there's an acknowledgement here, if you really are talking about real deep cutting edge technology or software systems: the number of people on the planet who can really push those things forward is pretty small, and I pretty quickly realized I wasn't one of them and that if I wanted to work with one of those kind of people or with many of those kinds of people, I would have to find a way to make myself useful to them, to serve them in a way that would get me a seat at the table for these super interesting companies, and that led me to venture.
I’m going to answer those questions separately.
I think the way we work with our venture advisors is pretty standard and relatively straightforward. Generally for the most part they are operating subject matter experts: marketing, sales, pricing, product, etc. Between me and David, we've known them all for over a decade, and we bring them in to help our companies deal with specific operational issues where they can add a lot of value.
That's something that VCs we try not to talk about because it's really hard to talk about, and the reason it's hard to talk about is because a lot of VCs say that they have a bunch of faces on their website or certainly in their LP fundraising materials, and it’s a lot of people they have never met. They use it as a way of convincing founders to work with them. They use it as a way of getting LPs to believe that they're helping founders when in reality none of it is happening.
Our focus was completely different. Our focus was on people that we knew well for a really long time and that we knew were really good people, and that they also were really interested in the actual substance of helping founders and would be willing to engage intellectually and deeply with a handful of companies on serious issues.
Just to give you an example of how this works, we have a couple of people that are involved in advising on sales and in things like sales strategy, how to improve sales operations, pricing, etc. They also have, on several occasions, provided an emergency room, supporting a company that is in the middle of a sales process that's urgent. For example, when having the first enterprise customer, suddenly the founder gets an email from the customer saying “I need to put you through security review and, by the way, I'm leaving tomorrow and my replacement is this guy”, and the CEO writes back to me and says “What do I do with this?”. We can bring these very very experienced sales people, they'll jump on a Zoom with me and the founder and we'll work it out. Founders find that kind of stuff incredibly valuable, to be able to lean on these people at a moment's notice when they have a crisis.
I think even if we did figure out how to talk about this, nobody would believe us so we kind of leave that as value for our founders and hopefully that will reflect in return multiples for our LPs, but we don't see it as a marketing tool because no one would believe us.
The first question that you asked, I think is a more interesting one and more applicable to all kinds of VCs.
I think learning to be a good early stage investor, whether your emphasis is tech or not, is probably about learning how to learn, and learning how to learn about things that you don't know much about, and learning how to learn about the aspects of that thing that are actually significant.
One of the things that I benefited from is that, before I moved to London, I was in Israel for 7 years doing tech VC, which was really proper tech VC. I was in Israel from 2005 to 2012 and in that period in Europe there was very little deep tech investing going on, whereas most of what was happening in Israel was deep tech investing, so that was the training ground. It was diving every day into solar panels, storage systems, compression technologies, and all kinds of real deep tech as the wiring and piping of the internet was being built.
The result was that every single company was not a company that I understood. We would invest in a company where the guy you brought to do the technical diligence was telling you that it was never going to work because he represents the old way of thinking, and when the founder would explain to him what he's doing, he’d push back with why it's not going to work.
What I learned was to listen to how the founder was responding to these objections. My learning process then was how to ultimately assess people. I'm not really assessing the technology itself, because in the journey from concept to proof of concept and ultimately MVP and scalability, there's going to be a million technical hard roads that are going to get solved. There's a million unforeseen challenges that the technical team is going to need to fix. The question is not really “have they figured it all out?”. The question is “are they capable of figuring it all out? Are they approaching these challenges with a growth mindset or with a defensive mindset? Can they hold their own against other experts in a debate?”
Sometimes we would get very negative feedback on something from some incumbent and then the founder would write them back and copy us with a really really good defense of what they're doing and then a bunch of questions: “Can I talk to you about them and figure them out more? You're right to raise this question and we've been struggling with it. We don't know how to solve it. But here's some ideas.” You get a sense that this founding team is really serious about solving this and probably able to work it out.
I've always believed that venture is an apprenticeship business that takes a really long time, because the only way to get good at it at these early stages, in particular for deeply technical companies, is just to have a ton of experience in assessing and watching people. When you go through these conversations you're learning how to read a conversation and that takes a ton of time and a ton of mentorship.
I would never say that I'm a trend follower. I think that anyone who knows me would probably say that I’m probably the opposite of that. We're definitely not following trends. We're also definitely not doing the other thing you're describing, which is having this kind of prepared mind ideology. Some people say they have a prepared mind philosophy and they have armies of principals and associates who learn about spaces, and partners that are expected to be experts on sectors. But then you talk to Benchmark and they'll tell you they don't really do that.
Our approach is much more like the Benchmark approach. We are trying to find extraordinary and radical people who have some kind of an earned insight on a space, on an opportunity.
I did a web3 deal before it was even a thing, and then it turned out that the market didn't want a web3 architecture to solve this enterprise problem, and the founders pivoted. They're “okay, we don't need to do this with immutable databases, we can do this with normal databases in a secure enough way and it's fine, because the immutability feature that had driven us in the first place to consider using web3 architecture, is not a feature that customers give a damn about”. So they pivoted away from that technical approach and they now have a solution that's better and widely adopted, they're scaling really nicely and they're closing six figure deals. They've raised their Series A and everything's fine.
I was never like anti-web3, I'm not anti-generative AI, but I'm not running around trying to meet every single generative AI founder out there because that's what everybody's doing and I'm not going to get anywhere with that. I'd rather have an open door and a shingle hanging outside saying: “Hey, come talk to us about crazy stuff”, and once in a while someone's going to come in and say something completely insane, we're going to get excited about it and we're going to do it. I think it comes back to the first principles of what we are trying to do here.
In 2020 and 2021 we literally had the scenario where companies with absolutely no revenue, no product and in some cases just a slide deck, were raising at $20-30-40M post-money with multiple term sheets, and they were doing this in 48 hours if not 24. Nobody was doing diligence. Nobody was meeting anybody, everything was Zoom. This persisted, it wasn't just the pandemic.
I published a blog post in October 2021 called “Alpha, beta, and an inverted venture risk curve” which basically talked about how in that period of time, the next round was almost guaranteed, so you would do your seed round, which instead of being done in the $10M post-money was being done on a $30M post-money, and six months later you were raising at an $80M post. Then six months later you raised a $150M post, in many cases with no revenue or minimal revenue. I think what this meant was that nobody's actually doing the work. You're in an asset selection business but all assets are good assets and therefore no one needs to do any work. You don't really deserve your fees because anybody can just invest in everything, which is sort of what Tiger and a bunch of other funds like that were doing.
Then you had a lot of large brand name funds that were putting out these seed programs to just invest very rapidly in seed deals. So, if you have $1B under management, you can carve out $100M of that and you can do 100 seed deals of a million dollars each without even thinking. That was perverting the whole diligence process. I was thinking about this a lot and trying to understand what the implications were, even if you assume that those valuations were correct.
Let's for a second assume that that was right. I think now we know it wasn't right, but let's assume it was correct. If it's true that every SaaS company is immediately worth $30M as soon as they come up with an idea, I better start doing stuff other than SaaS, I better start looking for stuff that's crazier, I better start looking for stuff that's contrarian enough. I need to get in at valuations that make sense for a venture model, otherwise our fund doesn't have a right to exist. There's no reason you need a seed fund if you can immediately raise at a $30-40M post.
I think it's more about using price discipline and maybe ownership discipline as a proxy. Are my investments contrarian enough to justify my existence as a fund? Am I taking enough real risk? If you think about those two types of investments for a second; one investment where nobody wants to do it and you can get in at a really low price and high ownership, build a real partnership with a founder because no one else in the world believes that that startup's going to work, versus case B, where everybody believes the startup is going to work and therefore everybody's willing to pay a very high price for this company, and it's a highly competitive deal being bid up to very high value. The kind of risk you're taking in both cases is super different.
In the first case, the risk is that it doesn't work. The risk is that there's financing risks. You can't possibly raise money for it because no one else believes in it, or because you’re not able to prove anything in the runway that we've now financed.
In the other case, the main risk you're taking is that even if it works, you're not going to do well as an investor because you don't own enough of it. You don't even care if it gets to a $1B outcome, it needs to get to a $10B outcome.
The other risk you're taking is that if it's so obvious that everyone should just put money into this thing even though they haven't built anything or proven anything, there's probably going to be a lot more competition out there, which is eventually going to affect your pricing of the product and your market share, and it's eventually going to crush you on the exit side anyway.
The likelihood of the $10B outcome went down. There’s not actually a high likelihood that it's $10B. It's maybe $1B on a good day and probably more like $200M if there's seven competitors and you happen to be number three. If you're number one, maybe you can still get to a large outcome.
We looked at this and said we prefer to be in case A, we prefer to be winning based on selecting contrarian opportunities rather than trying to win in non-contrarian spaces and opportunities.
I personally see Europe as an outgrowth of Israel. In other words, I started in Israel, and the startups in Israel had to have a certain DNA generally, which is advanced technology and global markets. That's the attitude, and I think what I discovered when I moved to Europe was that there were many European companies that had exactly the same DNA.
I tend not to talk about geography too much because maybe having spent so much time in Israel I feel like I can understand Israelis as Israelis, but maybe I can't understand a Spanish founder as a Spaniard does, but I can understand the Spanish founder as a guy who's not from the US trying to penetrate the US. That is a shared experience. This person has a co-founder. This person has a wife or husband with kids. They live in Barcelona or Madrid and they understand that to grow their business to $100M of revenue, $70M of that revenue is going to have to come from the US. So how are we going to do that? Are we going to move everyone to the US? Are we going to move some? Are we going to sell remotely into the US? Are we going to raise money in the US? What does our first US reference customer look like? How do we turn that into a relevant reference customer and a relevant story? Those kinds of questions are common across all of the European and Israeli founders that are trying to build big global businesses, so that's where we think there's coherency in what we're trying to do.
As a result, we have portfolio companies in Israel, in the UK, Finland, Germany, France, we have in the past invested in Portugal, we look very seriously at Italy, we have a company in Denmark, etc. We've been in companies all over the place. I would have to go make a special slide to try to remember where everything was because we don't really think about it that way anymore.
I think it's hard to be specific in general. Our conversations with founders right now probably divide into two types.
We're very fortunate that the majority of the companies in our portfolio are really well-funded, with well over two years of cash. Our strongest companies, the companies that we currently perceive as major value drivers for the fund, are very well-funded companies.
The other category is companies that have shorter runways. Our minds kind of break into two camps.
One camp is companies where we have incredibly high conviction, and the second camp is companies that are dealing with real existential issues. From a portfolio management point of view, we looked at our portfolio and also at who we are and what we’re aiming to do: we're a first check fund. We typically write checks of up to $3M, we try to be within the first million dollars. We really want to be a first check investor. We're happy to write a really small check but we want to be first because we think that's where the DNA of a company gets set. That's where we can be most impactful and that's where we can do our best to guarantee the company survives and manages to raise this next round.
We took our portfolio companies and we divided them into companies where we're still responsible and companies where they've already raised big rounds from other funds and so we're no longer responsible. We couldn't save them even if we wanted to.
We thus focused only on companies where we are still the primary responsible party, the lead investor as it were, and we take that responsibility as lead investor pretty seriously whether we're lead or co-lead. Then we scored those companies across a range of dimensions. We have an internal scoring mechanism. We discussed it internally and we figured out companies that score super highly across those criteria. Those are companies where we believe that we can continue to support them even in the worst situations and where we're helping them fundraise and so on.
Then there's also companies that are in a more difficult position where they really need to fundraise or need to make a change in order to survive, and I think that's a place where a number of companies in our portfolio are, which is very challenging, and where we're taking our responsibility as lead investor seriously, trying to help those companies make difficult choices.
I literally just sent an email last night where a founder was writing to me: “Hey, this is what I want you to know, let's have a board meeting to talk about our budget”, and I'm like, your budget is approved, but the real conversation we need to have is not about the budget, but rather how much you're spending on marketing.
Your company will be out of cash sometime next year and you only have a limited number of ways you can save the company: option 1, you can grow revenues to get to break even; unlikely. Option 2, insider lead round. In that case, I'm not the lead investor but there's a bunch of investors on the table and I don't see a forthcoming insider lead round. Option number 3 is an outside round. I'm not seeing that. I'm not seeing the likelihood of success in the next few months and I'm not even seeing the company engaging in a fundraising process. So if the plan is to raise money externally we better do that now. Option number 4 is cut burn rate, cut expenses and get the company to break even that way. Companies say they're unwilling to do that. It's got to be one of those, the other one is shut down. So let's have the real conversation.
I think we're going to see this a lot over the next twelve months. Founders that are charismatic, talented, brilliant people, that have usually been very successful until this point, and now a lot of them are staring down the barrel of a gun or driving a car against a brick wall. They're an airplane 30,000 feet up and they've run out of gas and they have to do something: have to land that plane, they have to stop the car, they have to get the gun pointed away from their head. That scenario often forces founders into this kind of frozen mentality where they can't do anything.
They've got this belief that you know, “I can't really cut costs, I'm going to kill the company. I'm going to wait because the situation for fundraising might get better later. Maybe my insiders will jump in and save me”. And they think, “in the worst case I'll sell the company but I don't need to worry about that now”. You need to worry about that now if you have less than twelve months of cash, you need to start having conversations right now, at the very least have partnership discussions that could maybe turn into an M&A conversation. Our effort here right now is to get founders to actually wrestle with these realities.
It's very difficult to let people go, it's very difficult to trim expenses on that kind of level, but in many cases that's what has to be done and founders need to make really tough choices. Do they want to run against the wall? Every week that goes by your chance of fundraising goes down because you don't have enough time. Yeah, these are really really tough choices.
We're working through this with our founders to try to help them see these options clearly and make very tough calls, and, by the way, our willingness and the willingness of a lot of other investors to finance a company when burn rate is reduced is much higher.
It's absolutely something that I'm passionate about and have spent years doing. One of the things I've learned is that, first of all, let's separate between climate investing and the use of ESG as an aspect to raise money from LPs.
There's a lot of people out there that found a lot of easy money by telling a climate story and the number of climate funds that have been raised in Europe or around the world in the past five years is astronomical, while the number of climate investments that are actually meaningful and good is very low.
When I look at our deal flow, I think we should be doing a much better job of sourcing those early deep tech opportunities in those spaces. We want to get better at sourcing those kinds of companies coming out of universities, technology hubs, etc.
If you look at the deal flow that we've actually seen, it pretty much breaks down into two categories. One which is software solutions like carbon tracking and companies where there's no actual tech. There's hundreds of them. I think the reason that there's such a growth in those companies is precisely because there's so much climate change capital looking for a home, founders realize they could easily raise money for these ideas. I don't think those are particularly differentiated or sustainable companies.
The other category that we see are companies that are building fundamental real technology to solve climate problems, whether that's in nuclear energy, carbon capture, cold fusion, or in all kinds of other areas that can really have an impact on our carbon footprint and our climate. The challenge with those for a seed fund is that typically those companies require $50M to get started and, let's just be honest, as investors the goal for these rounds is to de-risk.
I have met with many companies where they've come to say “hey, we want to raise $3M to build whatever”. Some incredibly capital intensive plans, building 30 substations. There's no meaningful de-risking achieved with the $3M, you should just take another few weeks to make a better PowerPoint and go talk to investors that can put $50M.
There’s all kinds of other organizations that are able to write those kinds of checks for the real solution, for the real deal. Big issues in the power grid, big issues in power generation, big issues in power and capture. There's plenty of money for the real deal solutions. I think where a lot of seed funds can go to die is if they're like “I'm going to put $2M into every cool sounding deep tech climate thing that then is going to immediately need to turn around to raise $50M”. They should just be raising $50M right now. I'm happy to put a $2M check into an earth changing, future-of-nuclear-fusion kind of deal, but it's not going to make a difference unless the company can raise enough capital.
The deal I'm looking for is the kind of company that says: “look, here's a real plan where a small amount of money can actually significantly de-risk my pathway towards being able to raise that large amount”. There I'm all ears.
