Why We Believe In Early Stage Startups
Mosche Raines, Managing Partner of Labs/02
The secret to investing in early stage startups
When thinking about some of today’s most successful tech companies, especially those from Israel, we immediately think of the companies that have made “exits” – whether through an IPO, or by being acquired.
The likes of Mobileye, Waze, Gong.io, and Monday.com immediately spring to mind. In fact, there are currently 80 Israel-founded unicorns (companies who are valued at over $1bn). The rate of increase of funding for Israeli companies is up 136%, way above the global average of 71%, and easily surpassing other tech hubs such as the U.S. at 78%, Singapore with 95%, and the UK at a 105% increase.
Investors have made significant returns on their investments in these companies, posting 50-fold returns and more in some cases. There is even value for those coming in at a relatively late stage – for example, investors purchasing shares in Monday.com at their IPO price would have made a 25% return as of this writing.
Yet many people forget that these giants were, at one point, early stage startups. And investors that were involved at this stage of the company’s lifecycle earned extreme returns.
So what is the secret to investing in early stage startups?
Different investing models
The majority of VCs are focused exclusively on companies at the “A” Round stage, and beyond. While the number of late-stage deals (B Round and beyond) has grown by close to 70% between 2015 and 2020, the early stage (pre-seed and seed) deal count has grown by only around 10%.
And this is understandable – these investors want to see traction, they want to see which other investors are interested, and in most cases they are precluded from investing in early stage companies, even if they see the value, by their own policies and operating principles.
On the one hand, at this point in the company’s growth journey, there is now more information in terms of the prospects of the company, by definition. On the other, the investment is now more “expensive,” there’s more competition around getting into the round, the company itself can offer less to investors in this particular round, and growth is now more limited.
A blue ocean
The space referenced previously can quickly become a “red ocean” for investors. This cycle can lead to inaccurately inflated valuations, and set up companies for failure rather than success.
But there is another way.
A blue ocean, a space where the most phenomenal future unicorns are in the incubation stages (more about this coming up,) where the technology that will change the world has just been born.
These are early stage technology companies, about to embark on a rapid growth journey, and this is where tremendous opportunity exists.
Some investors are already spotting the opportunity: according to Fortune, quoting Crunchbase data, early stage funding in global startups totaled $201bn in 2021, doubling the previous year.
…But you need the right ingredients
Identify early
Being the first to identify something special – from both a team and a technology perspective – is the first critical step.
Israel is known as the Startup Nation, and as Labs, we are at the very heart of that innovation both physically – being in close proximity to the disruptive innovation coming out of Hebrew University with Labs/02, as well as Ben Gurion University of the Negev with Labs/08 – as well as through strategic partnerships with the likes of the Israel Innovation Authority and Yissum, the technology transfer company of The Hebrew University of Jerusalem, to get first and exclusive access to many of these companies.
Nurture
Investing cash is not enough. For a company at this stage to thrive, what’s required is incubation, support, mentorship, and a world-class network.
Again, this is where Labs/02 prides itself: our incubator has successfully enabled numerous startups to grow to the next stage, and our network – including our association with OurCrowd™ – ensures that we can offer these companies the best chance of future success.
Launch
Once these companies are running successfully, the work doesn’t stop. Growing to the next stage is critical, and for this, early stage companies need assistance across the board.
At Labs/02, we grow with our portfolio companies, celebrating wins, providing introductions, and offering ongoing support.
Finding the next Mobileye™
There is a magic to early stage startups. The way a team, an idea, and technology come together to create something that never existed before.
So next time you read about the latest Israel-born unicorn, remember that the company was once an early stage startup, and you could have invested then.
We make this possible, and it’s a magic I’m proud to be a part of every day.
