A few months after raising seed capital for Lightrun in 2019, company CEO and co-founder Ilan Peleg received an email from an analyst at investment fund Insight Partners, who was interested in the company's progress. "I receive a lot of approaches like that, and I don't always answer each one because we're very busy running the company, "says Peleg. "But Insight's message caught my attention, because it wasn't generic. They did their homework, knew about the code observability sector where we operate, and understood our advantages within it." Peleg's correspondence with Insight continued over the following months, and when the company decided to go for another round of fundraising earlier this year, the veteran New York fund was naturally the one to lead it.
Lightrun was just one of 29 new investments in Israeli start-ups made by Insight Partners since the beginning of the year, more than double the number of investments it made last year, according to the IVC Research Center. This huge volume of investments, along with its size, have made Insight the most dominant and influential fund today in the Israeli high-tech market, by a considerable margin.
Unsurprisingly, Insight was also one of the funds that led the much-talked about investment in Assaf Rapaport's cloud security company Wiz, awarding it a $6 billion valuation, just a year and a half after it was founded. Behind this flood of investment stands a "well-oiled machine," as many in the industry call it, with a modus operandi built up over 26 years.
The story of how Insight and Lightrun made contact is not unusual in itself. In the investment world's current competitive environment, many venture capital funds try to reach companies as early as possible. But Insight differs in the sheer scale of its start-up scouting system. Insight employs about 40 analysts and junior associates who annually identify 25,000 investment opportunities around the world and track almost every start-up that raises initial capital in the US, Europe and Israel. This information is added to Insight's internal database, called GO, which contained information on 130,000 companies as of last year.
The fund will often closely monitor companies for years before actually investing in them. "They often know young companies emerging in Israel better than we do," admits a senior Israeli investor, who adds a warning: "Sometimes start-ups will tell Insight their plans and goals without thinking that it could work against them, and down the road, their analysts check to see if they actually met those goals."
A modest $16 million start
Private equity and VC fund Insight Partners (formerly Insight Venture Partners) was established in 1995 by Jeff Horing and Jerry Murdock as a fund focused on software investments, a concept that was, at that time, still in its infancy. "Our original business plan at Insight didn't include the phrase, 'Software is eating the world,' but it more or less said the same thing," Horing said, referring to a phrase coined by another American investor, Marc Andreessen.
Horing is described by those who worked with him as a brilliant man and a financial genius. "In an hour-long meeting, he came up with points that took me about two years to think up on my own," says one entrepreneur who met with him and did not actually receive an investment from Insight in the end. Horing is more of an introvert, who shies away from the media and center stage, unlike his partner Murdock, whom people describe as a "social animal". Murdock retired from managing the fund in 2011 but continues to serve as an advisor.
Insight started out modestly with $16 million in its first fund, but that amount grew rapidly thanks to the handsome returns it achieved. Insight's fourth fund, which launched in 2000, was $660 million, and its sixth fund, in 2007, reached $1.3 billion. Insight's latest fund, its tenth, which launched in 2020, stands at a record $9.5 billion, and Insight is reportedly in the process of raising an even larger, $16 billion fund - 1,000 times the first fund.
Insight's staff has also expanded accordingly, and it currently employs over 300 people in offices in New York, Silicon Valley, London and Israel, up from 141 in December 2018. Insight's investment processes are led by 26 managing directors, who specialize in different industries and invest in companies at different stages of life but, according to a source familiar with the firm, are not focused on investing in specific countries. All investments are approved by the investment committee, which consists of six men, five of whom are owners of the firm. The committee is chaired by Horing and Deven Parekh, the Number 2 person at Insight.
Early arrival in Israel
Insight began investing in Israeli companies as early as 2000. Its early arrival in Israel was due, in part, to the fact that in those early days, Insight, as a New York fund, was considered inferior to Silicon Valley funds, leading it to look for companies in less crowded niches, like Israel. Since then, Insight's rate of investment in the country has grown, a fact that some attribute to Horing's Judaism.
"I think at some point Horing realized that it was easy for him to work with Israelis, perhaps because of his background," says a source who has worked with the fund. Whatever the reason, investment in Israel has produced great successes in the form of the Wall Street IPOs for WalkMe, Monday.com and Sentinel One this year, and Jfrog last year, all of which are Insight portfolio companies. In the case of Monday.com, Horing led a $25 million investment in 2017, which yielded an estimated 12X post-IPO return.
In 2019, Insight officially opened an office in Israel under the management of Daniel Aronovitz, who is a vice president, ranking just under a managing director. But even better proof of its commitment to investing in Israel is the fact that Horing, who comes regularly to Israel, purchased a unit in a luxury apartment hotel in Herzliya.
Investing at a dizzying pace
According to a source familiar with the fund, the Insight team spoke and met with 8,000 start-ups in the first half of this year. These meetings yielded 82 global investment rounds led by Insight, according to Crunchbase, making it the second most active fund in the world in start-up investments, after Tiger Global.
To maintain this dizzying pace, Insight conducts relatively quick due diligence of the companies in which it is considering investing. Sources familiar with the firm attribute this speed to the cumulative experience of investing in 400 companies to date, and to the involvement of many professionals in its part of the process, people who know how to evaluate everything from the quality of management to marketing strategy.
"Insight was very considerate of us as the company's management and understood that we wanted the due diligence process to be as effective as possible so that we could concentrate on other things," adds Guy Bloch, CEO of logistics company Bringg, which became an unicorn this year, led by Insight. "We had one meeting with them to make sure we were on the same page, and they outlined everything they needed in one go. We set a deadline for completing the process - within 30 days - and they met it."
Paying big for a big share
But can’t speediness and the massive number of investments harm the due diligence process? "My impression was that their due diligence was less intensive than in the past, because today they’re under pressure to invest quickly, so they’ve lowered the threshold. My feeling was that they were really working by the book, only going through the obvious checklist, and not asking anything beyond that," says a market source who worked with them.
In the past, Insight critics have referred to its fast-paced investment style as "Spray and Pray" but apparently this description is a great exaggeration. As one senior investor puts it, "I think their goal is to locate the 20-30% best companies. They won’t necessarily try to find the top 5%".
Investing in many companies is ultimately a component of Insight's strategy. In a podcast hosted by investor Gil Dibner of Angular Ventures last May, Horing explained that for a specific fund to hit companies that will be worth $100 billion or more, a boutique approach of selecting "handcrafted" investments won’t do; one needs to cast a wide net. "As I’ve said to my investors, the biggest mistake I’ve made in the last seven years was saying no," is how Horing described it.
In negotiations, Insight is considered a fund willing to pay well and be generous in valuations as part of its very competitive approach that aspires to win every deal. In return, Insight demands a relatively large amount of equity, around 25% on average, diluting the entrepreneurs’ share. At Monday.com, for example, Insight held 43% before the IPO. Another common Insight method of operation is to initially invest a small amount and gain a foothold in the company, thus giving it preference for leading a larger investment later on.
"They won’t play psychologist to entrepreneurs"
Another matter of debate in the market is the degree of assistance Insight provides to its portfolio companies, post-investment. Insight prides itself on its onsite team whose purpose is to support portfolio companies. This team, a type of in-house consulting firm, consists of professionals in several areas, such as human resources, product, technology, and mergers and acquisitions. The team has doubled in size in the past year from 50 to 100 employees. Insight is also currently seeking to hire more employees for its Israel office. The firm also holds conferences and meetings for companies, and runs a program that enables start-ups at different stages to learn from one another.
Entrepreneurs who have worked with Insight are mostly complimentary in talking about this support. "They have a very experienced in-house pricing expert who spent days with us and helped us understand how much vice presidents of information systems want to pay for products," says Saar Yoskovitz, CEO of Augury, a unicorn invested in by Insight in 2019. A source familiar with the company retells a story told by Eran Zinman, co-founder and co-CEO of Monday.com, as proof of the personal connection between Insight and its entrepreneurs. At the annual Insight investors meeting, Zinman said that during the road show ahead of the company's IPO, he lost his voice. A concerned Horing offered to make him chicken soup and deliver it to him.
But other investors - who are also Insight competitors - express doubt as to whether the fund brings significant added value to entrepreneurs, aside from the money. "If, for example, they help you recruit staff, then maybe you’ve saved working with a head hunter, something like $20,000, which is a small amount for a company that’s raised millions," says one investor. "Ultimately, Insight is a machine and if a company has problems and isn’t doing well, especially if it’s a company they haven’t invested a lot in, they won’t kill themselves to save it. As an entrepreneur, you shouldn’t expect Insight to be your psychologist when there are problems."
One thing is almost undeniable. Insight is definitely a fund that can open doors for follow-on investment or a Wall Street IPO. "They have extensive relationships with entities like Goldman Sachs, based on the dozens of companies they’ve sent there," says a source.
Will the good results continue?
To be fair, it’s important to note that the returns that Insight has generated for its investors are considered good for the industry, especially for a large fund that manages billions of dollars. These returns were revealed in an opinion prepared last year for the Connecticut Retirement Plans and Trust Funds (CRPTF) investment advisory council, which considered investment in Insight.
The Insight Opportunities fund that began investing in 2013, for example, recorded an annual net internal rate of return (net IRR) of 21%, a result that placed it just over the halfway mark in terms of VC fund returns, according to PitchBook. As of the end of June 2020, the fund had a total return of 2.6 times the money to investors. The Insight Opportunities fund that began investing in 2015 recorded an annual net IRR of 27% as of the CRPTF review, and a total return of 2.3 times the money, placing it in the top quarter of VC funds in terms of annual return.
But those years are considered the golden age of venture capital. "That was a time when market prices were low because many entities had not yet realized the potential of the new economy," one market analyst says. "Today, prices have risen significantly, everyone understands the potential, and it will be more difficult for them to reach these yields later on."
Market estimates are that Insight will also now be willing to settle for an annual return of 10%-15% on its present huge funds, allowing it to be less picky in its investing, unlike in the past. Its investors - institutions awash in cash with no investment alternatives in a zero-interest rate environment - will also be satisfied with these returns. In any case, Horing is unmoved by criticism of the fund and is betting that, "The fundamental demand for technology is unstoppable." He’s probably right about that.
Published by Globes, Israel business news - en.globes.co.il - on November 9, 2021.
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