Eric Benhamou will deliver the keynote at IPI’s NY Forum on May 21st, and speak about “Investing in the Enterprise IT revolution”. IPI is a leading Institute for Private Investors.
Barak Ben Avinoam, BGV Partner in Israel shares his perspective on Israeli entrepreneurs seeking to raise capital from Silicon Valley based VC firms.
When I meet with Israeli entrepreneurs I am often asked questions on how best to deal with the US VC community. This blog focuses on identifying the common pitfalls as well as a short list of do’s and don’ts.
First, ask yourself “How big is the addressable market for the problem that I am trying to solve?” Some entrepreneurs start a company that is focused on a niche market, offer a one-feature product, or provide incremental improvement to a large problem. This often leads to a relatively small TAM (Total Available Market), and will not be a very interesting value proposition for most investors.
Second, try to get early product concept validation from your potential customers well in advance of the development work. Many Israeli entrepreneurs come up with great new technological innovations, but often do not take the time to validate their idea with potential customers due to distance and or cost issues. Remember that having a POC with a Israeli financial customer may be a nice achievement, but may not necessarily represent the mainstream requirements of typical Enterprise customers and CIO’s in the US.
Third, having a well-balanced team is another key point that is often overlooked by Israeli entrepreneurs. Teams of two or three brilliant engineers who served together at the same technology military unit is a big advantage, but may not necessarily be an indication of success for building business operations in the US market. It would be prudent to add a person with product management and or business development skills early on in the process, who can communicate with potential customers/partners and help to align the technology team with the market requirements.
Fourth, forecasts and projections are a common pitfall for first time entrepreneurs, and it might be an even higher challenge for Israeli teams. Most entrepreneurs are overly optimistic, and that may be a pre-requisite for this challenging task, but remember that every sales performance or R&D milestone will be compared to the original forecasts in due course. It is better to be conservative and exceed expectations, than to explain to your Board why you did not meet your numbers. Remember that you will be confronted with every forward-looking statement that you make, so think through the achievability of plans before you make public presentations and commitments.
Another common mistake that entrepreneurs make is not sharing bad news with their investors and Board members quickly enough. Running into an unforeseen obstacle or missing deadlines is common at early-stage companies. It is not the end of the world if you handle it quickly and pro-actively. Remember to deliver good news fast, and bad news faster.
Lastly, a few words about valuation during investment negotiations. Many times entrepreneurs try to maximize their company’s pre-money valuation in an attempt to protect their equity stake from dilution during the first round of financing. While this is to be expected, entrepreneurs should also take into account that building a venture backed company often requires multiple rounds of financing and maximizing valuation at the first round can create problems at subsequent financings. Optimizing dilution for the entrepreneur requires a focus on winning the war and not necessarily the battles along the way. Sometimes optimizing the valuation in a lengthy negotiation process might come at a heavy cost of missing short-term business targets due to loss of focus and momentum. Unrealistic high valuation at the current round might lead to a sharp downward correction at the next round of financing, which might be a fatal blow for the company. Note that valuation tends to correct itself overtime based on performance, so it is better to deliver better-than-forecasted results, which will lead to a significant increase of valuation at the next round of financing.