Venture capital fund NFX founded by Israel-based Gigi Levy-Weiss, together with fellow US-based managing partners James Currier and Pete Flint, has raised $275 million for its second fund. NFX invests in early-stage companies located in the US and Israel. NFX focuses on seed-stage ventures, and sometimes also invests in pre-seed and Series A rounds, and in companies whose model is based on the "network effect."
The three founders have established and managed 10 companies that achieved exits with an aggregate total of $10 billion. This enables them to manage NFX according to a unique model in which they do not take salaries. "We think that this creates a very interesting fit between us and the fund's investors, and also between us and the companies' founders, because our need for them to succeed is as great as their need to succeed," Levy-Weiss told "Globes."
Levy-Weiss says that one of the reasons that he began the fund was to help Israeli entrepreneurs create connections in the US, especially in Silicon Valley. "Over the years, I made many investments as an angel investor, and I discovered that what my companies most lacked was a connection to Silicon Valley. I'm relatively well-connected to Silicon Valley, and I'm also on the customers consultation committee for Facebook. I discovered that this was one of the things in which I could help my companies a lot," he says. "The companies in which we invest get a bridge to Silicon Valley that goes far beyond what I see that other funds can give. The entrepreneurs will initially work from our offices in Silicon Valley if they decide to move here, and we'll help them recruit employees and connect them to the best suppliers."
NFX began in 2015 as a startup accelerator that invested $120,000 in each company that participated in the program. The first fund of $150 million, which was completed in November 2017, has invested in 25 companies, with an average investment of $2 million per seed company. Levy-Weiss says that the current fund, which is one of the largest seed funds in Silicon Valley, is aimed at facilitating larger amounts than in the past in a large number of companies. Since NFX was founded, Levy-Weiss no longer invests as an independent angel investor. Most of the fund's investors are public funds and universities in the US; there are few funds of funds. NFX also has one institutional investor from Israel. Levy-Weiss says that all of the investors in the first fund participated and increased their investment in the second fund, and three new investors joined.
NFX invests in ventures based on the "network effect," in which every user of the network profits from the additional of another investor. Prominent examples are Facebook and its acquisition, WhatsApp, but also secondhand websites like Craigslist and Houzz, a startup founded by Israeli Adi Tartako. "The reason that we focus on the network effect is that as an entrepreneur, I could have an amazing product that gets copied in a second, and that finishes me. Other than patents, there are four things that protect companies. The first is a brand name like Apple - even if someone else creates something better tomorrow, he won't have that strong brand. The second is size, for example Amazon, through which I get products at the best price because it's the only one working on that scale. Th third is installing - once the product is installed with you, it's very difficult to get it out of the system," Levy-Weiss says.
"These three factors, however, are irrelevant to startups, because you don't have a strong brand or a large scale at the beginning, and I don't know many customers who will agree to install a product from a young company in this way. So we get to the fourth protection, which is the network - it's the most relevant to the Internet. Because this effect is big, it is very quickly relevant to startups, too."
Since the partners in the fund do not receive salaries, the fund can invest its money in other instruments. NFX has a team of 11 programmers developing automation software for its use and software for free use by the founders. "We believe that in the end, software and data will make the biggest difference. It's ridiculous that venture capital, the sector that supports software that's changing the world, has done the least switching to software. It has worked the same way for years," Levy-Weiss remarks. "The most special thing that we're doing is our software team, which is building two types of tools. The first is internal tools for the fund, which help us create a stream of deals and prioritize deals, because we see many thousands of companies a year.
"The second type is tools designed to make things easier for company founders. These tools, which are free and open to everyone, are designed to streamline the work of the companies' founders with investors." NFX has developed two tools to date. One, called Signal, is like social network designed to help founders find and connect with the right investors for them by matching characteristics like sector and stage. The second tool, called "The Company Brief," is designed to help entrepreneurs create a connection with investors through a structured summary, and to monitor each stage in their communications, including obtaining the summary and downloading and opening it.
"These things give us technological infrastructure that we believe will eventually give us a large competitive advantage. We can already see that our internal tools are making us substantially more efficient than we were in the past. We also see that the tools that we gave to entrepreneurs are already improving their work in the industry, and through them, we're getting queries and possible deals. We are also getting statistical information, rather than specific information, but it helps us understand trends, for example. We believe that with time, as the tools improve, the advantage we get from them will increase," Levy-Weiss explains.
According to Levy-Weiss, behind the fund's unusual management lies the founders' concept of the changes they see in the entrepreneurial culture in Silicon Valley. "In recent years, just like there are complaints in Israel about the exit culture, there's a feeling in Silicon Valley that the money culture is replacing the urge to change the world," he says. "It affects how everyone looks at everything - how a company's success is measured. Instead of measuring according to what you brought the world, what you created, and how it affected people's lives, you're measured according to how much money it's worth now - because money is something quantitatively measurable. This chase after who's a unicorn and who isn't creates a chase after high-value deals merely in order to get to this $1 billion. It comes at the expense of the urge of the founders and the investors to create.
"We're not an impact fund. We're a completely ordinary fund, our investors look at their returns, and so do we. On the way, however, we want to look at how many people use the product and what effect it has on their lives. This comes from a real belief that if the product has an impact on people's lives, the money is bound to come."
Published by Globes, Israel business news - en.globes.co.il - on May 22, 2019
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