Outsized egos are common among venture capitalists. The ability of venture capital funds to provide a lifeline for a company trying to be “the next big thing” makes them inherently less humble. And that’s fine. They are, after all, the de facto bank for startups of all stages; without them, the high-tech industry would not exist.
The 40-year-old founder of Israeli fund YL Ventures, Yoav Leitersdorf, is not afraid to declare that he is better at his job than bigger, older firms. To his credit, he has the track record to back up his claims, both in the startup sphere and as a venture capitalist. Leitersdorf is the cousin of Jonathan Leitersdorf - a self-made millionaire and part of the family who built Tel Aviv’s Shalom Tower.
Leitersdorf founded YL Ventures in 2007 with John Quigley - formerly a fund manager at Princeton University - and Ofer Schreiber, a former IVC Research Center analyst. The team also includes analyst Iren Reznikov, marketing director Sharon Seemann and executive assistant Deisary St. Andre.
Leitersdorf, for his part, founded and sold three companies: Movoto, a mobile game developer sold to Bertelsmann; ExchangePath, an online payment solutions startup sold to CMGI; and PcEntertainer Magazine.
YL manages $60 million in two funds (the latter raised $28 milion) focusing on seed funding - $2-3 million per investment on average. The first fund specialized in SaaS startups, the second fund seeks cyber security ventures and the third fund - announced here for the first time by Leitersdorf will raise funds next year to invest in other tech fields to provide diversity for the fund.
“We make our investments mostly with the cooperation of American tech firms - EMC, Akamai, or HP Enterprise - which help us promote our portfolio companies. Most of our workload - in my case it’s about 80% of my time - revolves around marketing our companies in the US. That’s our whole deal! An entrepreneur needs more than just $2-3 million, and the American market is not simple for Israeli companies.”
How is that different than other VC funds? Most of them proclaim a similar strategy. It’s their job.
“Sure. But it is a question of which of them actually do it - and how. The reputation we built ourselves among entrepreneurs - what they say about us - is that we go above and beyond. We join up with each portfolio company as if we were one of the founders. Ofer and I roll up our sleeves and do a lot of work for these companies, from client presentations to executive recruitment. We work hard; I know many venture capitalists say that, but you can tell we do that work because of the testimonials from our entrepreneurs.
I assume you make the case that you understand entrepreneurs better than other venture capitalists because you were one.
“Absolutely. Many times our entrepreneurs tell me that we think alike, that we are in sync. I know exactly what these guys go through! Once you’ve been on that side, you know how to help.”
YL will raise capital for its third fund; Leitersdorf did not reveal its expected war-chest, hinting only that it would be bigger than the second (at least $30 million). “We are primarily raising capital from existing investors; we have already agreed with them on the timeline for the third fund.”
Leitersdorf claims the YL advantage is its physical presence in Silicon Valley. “I maintain a network of contacts which is really special, even for Silicon Valley, and especially among funds that invest in Israeli companies. I spend a lot of time maintaining this network and it makes a big difference!”
Almost every venture capitalist says the same. YL is still a small fund. What is your advantage compared to big funds like JVP and Pitango?
“I won’t specifically address other funds like the ones you mentioned. But in general terms, I have the same advantage over them as over other funds because they do not have a presence outside Israel, they do not have an office in Silicon Valley, and they have few connections. The only aim of our office in Silicon Valley is to help our portfolio companies stay in touch with the most senior executives in the Valley.”
But you are not only on trial with the entrepreneurs; your investors also have expectations of returns from the fund.
“That is true, and our investors stay with us from one fund to the next. The first fund had fourfold returns ‘on the money’ after the management fees we took as partners. We are working to reach at least a threefold return ‘on the money’ for each fund.”
Two exits
Less than a decade after founding YL, Leitersdorf and his partners have managed to have an impressive track record for a firm of their size. YL has had two exits thus far: its holdings in ClickTale were sold in later rounds during 2013 to private equity firm Amadeus Capital (“Our portion was in the eight digits.”); and AcceloWeb was sold in May 2011 to Limelight for $20-30 million.
Their current portfolio includes 7 companies: five cyber security startups (Seculert, Hexadite, Twistlock, Karamba, and FireLayers); one DevOps company (BlazeMeter) and one e-commerce startup (Upstream Commerce).
“Cyber security is one of the safest markets for investment,” says Leitersdorf of the fund’s focus on the field. “Take for example JP Morgan. Last year it invested a quarter of a billion dollars in cyber security solutions; this year it will invest half a billion dollars twice as much and it is not alone. Even at times of crisis and we watch the crises this market will continue to receive support because there is no CISO (Central Information Security Office) that could justify cutting back on the IT security budget. That’s not a possibility.”
Unsurprisingly, Leitersdorf is full of praise for all the companies in YL’s portfolio, but when it comes to cyber security he glowingly mentions Karamba, which is developing cyber security solutions for vehicles. The company was founded last year and recently raised $2.5 million.
“Twenty percent of the vehicles sold in the US last year were connected to the internet,” says Leitersdorf of the company’s potential.
YL was behind the Cyberstorm competition in which five startups faced off at Cyber Week 2016, a conference organized by the Yuval Ne’eman Workshop for Science, Technology and Security, the Blavatnik Interdisciplinary Cyber Research Center, and the National Cyber Bureau at the Prime Minister’s Office.
The winner of the competition, Protected Media, aims to protect online publishers from hackers. Hackers steal from these publishers by creating fake audiences; the Israeli startup (which received investment from Adler Chomsky) is able to differentiate between an authentic audience and a fake one.
“Not our style”
YL also differs from other VC funds because of its investors who are mostly private individuals and not institutional bodies. “We have two groups of investors: the first are executives at key positions in companies mostly American but with a minority of European firms that offer us increased access to their companies, for example Google and Nike. They use their private funds and we benefit from their key roles. The other group is Family Offices old money which invests often but is passive. They are not as helpful as the first group; they mostly wait for their money to return.”
Do you not raise capital from institutional investors by choice?
“Of course, we only want private capital. The first group offers added value while the second offers stability. Raising capital from an institutional investor a pension fund or an insurance company means dealing with its lawyers and other agents. It’s not our style.”
Published by Globes [online], Israel business news - www.globes-online.com - on June 27, 2016
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