Gil Ben-Artzy, partner at UpWest Labs was recently featured in HaShavua, the most popular podcast in the Israeli tech community. UpWest Labs is a Silicon Valley early-stage investor in Israeli startups looking to build large global companies based in the US. As a seasoned investor who has evaluated thousands of startups from a variety of domains, Gil participated in an “Ask Me Anything” with the HaShavua community on Facebook. Below you can find the highlights of the podcast Q&A. Here’s a link to the entire recording (Hebrew).
What do you think are the most important factors for an Israeli startup to raise funding in the US?
I think that a few factors come to play: (1) You need to be doing something that has a chance of being HUGE. VC economics mandate that any startup investment must have the potential to return the fund — and fund sizes are typically quite large in the US. (2) You need to be in the US. Early stage investing is a local business, and investors typically want the CEO next to them — often, before they even consider investing. (It’s ok for the tech team to remain in Israel, even preferable in most cases). (3) You need to have US-based proof. i.e., customers / users, which indicates potential for product-market fit. Israel-based validation most likely will not be enough.
What is a typical cycle time to close a round of funding?
Always plan for 3–4 months AFTER you are ready. i.e., you have the fundraising materials ready, you practiced for days, made a list of your target investors, and then the clock starts. Important: try and raise between Feb-June and Sept-Nov; other times of the year are relatively quiet.
Can you briefly explain the processes of your work — from meeting the entrepreneur, to seed to investing, as well as your US presence?
We like to meet with companies as early as possible in their life cycle — even if they’re “too early” to come to UpWest Labs (in my opinion, there’s no such thing as too early.) Seeing the entrepreneurs learn and grow over the course of multiple interactions is one of the best forms of validation. Regarding logistics, we like to start with an in-person meeting or phone call with someone from our team. It’s always helpful to get an introduction from someone we know, especially entrepreneurs we have invested in or investors we have co-invested with. Once the entrepreneurs come to UpWest Labs, the initial relationship is focused on optimizing for momentum with customers and partners, and to some extent on building relationships with investors. Then, our operations are set in a way in which we can effectively help our startups for years after our initial investment; we only take 10–12 teams a year, because we want to have the capacity to support our startups in the long term.
I assume that you’re meeting and following vast amounts of both Israeli and American entrepreneurs. Do they have differences? If so, what are the key differences?
At a high level — yes, there are some differences, but none that should prevent Israel entrepreneurs from succeeding. I think US-based entrepreneurs are often better in presenting their ideas in a succinct and appealing way — “Show & Tell” from first grade sort of helps that 🙂 From my experience, Israelis are more resilient at times. Both of these are quite generalized observations. Regardless, smart Israeli founders can adapt quickly and become just as articulate as their American counterparts — I’ve seen it happen!
What is the biggest mistake that Israeli entrepreneurs make when entering the US market?
The short version: coming too late, leaving too early. I mean, they often come to the US only when the product is in advanced stages and discover that the customer wants something else — hard (and expensive) to undo what you have already built. Then, they sometimes only arrive for a week or two at a time, which is often not enough to really gain an understanding and momentum.
Can you name a few of the most active VCs right now in the valley? Also — are there individuals in the valley that one ‘must know’?
There are MANY active VCs in the valley. It really depends on the domain you are in. Some are strong across the board, some are stronger in specific domains. Also, it varies by Partner, not just fund. Same for the individual partners, it depends on your domain and what you are hoping to accomplish.
Is having an MVP that performed amazingly well in Israel, enough to raise a great funding round in the US?
The short answer: unfortunately not. The reasons: (1) US customers may have different requirements. You’ll be surprised how many times I have seen companies do well in Israel, only to discover that the US market behaves differently (e.g., pricing, needs, feature requests, etc.) (2) US investors do not know your Israeli customers, hence will not give them high points as references. So, getting to market ASAP is really the best — and often only — form of validation. Product-Market fit is achieved when the Product and the Market are in the same place.
Are there any legal challenges that Israeli startups face when they recruit from American investors? If so, what do you think is the best way to deal with them?
We often hear from US investors that because they are not experts in Israeli law, they highly prefer to invest in US (Delaware) entities. This may seem trivial, but it does matter to them. Many US VCs have opened offices in Israel and are ok with Israel-registered companies; however, I believe that the vast majority of US-based investors invest only in US-registered companies. If you are registered in Israel, no need to “flip” just yet — just be ready to answer that request if/when it arrives from your potential US-based investor.
Is it more effective for our team to take money from Angels that are recognized in our industry before our product works, or should our team focus on building our product further? Does receiving an investment help promote our product, and thus make it worthwhile to pursue fundraising even though we might not be 100% ready for the investment?
I think that bringing on the right investor early can be very valuable for your business. Not only can that person help you think through business questions you may have, but they should be able to open more customer doors, help you in future rounds, etc. Remember, in a way, you are “marrying” this investor, so make sure to feel that it’s a really good fit.
Can you tell us what are the verticals you’re looking into?
We are a highly diverse fund, and have typically invested in B2B, B2C, both software and hardware (any drone companies out there?) We focus on large market opportunities, hence invested in HoneyBook (events), BuildUp (construction), SentinelOne (endpoint security), and others looking to disrupt big markets. We are also looking at emerging markets — AR/VR being the latest top-of-mind area for us. Healthcare IT also a great area we look at, and startups leveraging AI, deep learning, and some of the more advanced tech out there. We don’t limit the verticals, as the right founder targeting the right vertical for them, is really a huge consideration for us (i.e., “Team-Market” fit).
From your experience, what are the assets of Israeli entrepreneurs in front of US customers and investors?
I think that Israelis come across as strong technologists, persistent and passionate – all strong traits that really can help you sell to investors and customers.
What are the hottest trends in the startup ecosystem of 2016 that you have noticed so far?
AR/VR, Autonomous Cars, Drones, IoT (depends what exactly), Fintech (though may be a bit slower than originally predicted), DevOps, Insurance (though getting a bit crowded).
Relocating to the US can be difficult for Israeli entrepreneurs. Some common problems are difficulties in the transition to another location, distance from family, among others. Can you speak to these challenges?
I think that it often surprises people how hard it is to make the move. The main difficulty is less language, culture, etc. — although those are real challenges, people expect and can prepare. I think that the #1 challenge is that no one knows who you are, and that all the Israeli “badges” you collected in your life — 8200, Technion, VP in Hot Israeli Startup X, who you know in the Israeli community, etc all mean much less in the US. Suddenly, your virtual business card is thinner, and you have less credibility. Don’t get me wrong, Israelis bring a ton to the table and they are highly valued and appreciated. However, less doors open based on who you know and your previous accomplishments — which is what Israeli entrepreneurs are used to when doing business mainly in Israel.
When is the next batch at UpWest Labs due to start? Are startups that address both the US and Asian markets relevant to you?
We invest in startups year-round, but make most of our investments in Dec-Feb and in June-Aug. This way, the startups can come to UpWest Labs for 3–4 months of an uninterrupted sprint, followed by years of our ongoing support, leveraging the community we have built in the US. Our startups aim to be global companies, and begin by targeting to the US market. It only makes sense they would want to target Asia at some point, but my advice is to pick one to start in. It is hard enough to succeed in one region, close to impossible to win in Asia and the US at the same time.
A few questions: Can you please share a bit about a typical ‘funnel to funding’ process for an UpWest participant? I am trying to get a ‘bottom up’ sense of a typical process or some sample use cases. To clarify — let’s say “StartUp X” is selected by UpWest as an investment candidate. When will they typically start to meet follow-on investors? From your experience, do your investments usually move toward follow-on investments with US investors, or Israeli ones? What are your typical follow-on investment sizes? (Is it usually pre/post/or A) Will they usually close the follow-on investment during the in the initial 3 months or after 6+ months?
The short version: Come to UpWest Labs if you want to build a large global business, are “in it” for the long-term, and don’t expect to raise quickly. Over 70% of our companies raise seed rounds that average $1.5–2M. However, it takes time to prepare the company and find the right investor. We tell our startups to have a runway of 9–12 months after our initial investment, as they will need to gain some momentum in the US market and for US investors to get to know them before real discussions can happen. As for post-seed, Series A rounds typically are $8–15M in size. In general, US valuations are higher than Israeli ones, but that’s not the reason to add US investors to your Israeli investors (a combination is often a great idea) — the reason to bring them is that they can open doors to customers that otherwise would take you ages to acquire.