Julie Maples (FYRFLY Venture Partners): We invest in data, intelligence and enterprise software that is not really sexy part of the market.
24 May, 2020
Sergey Gribov is a partner at Flint Capital with a rich experience of being a tech entrepreneur and investor for more than 20 years. He was a founder and a top manager in more than 10 startups across Israel, USA and Russia. Sergey has an expertise in IT, namely in cybersecurity, software development, VoIP, finance and bioinformatics sectors.
My original background is technical, I graduated in Computer Science. While I was in university, I started to work for a company called Compugen, which is in Israel. It’s one of the success stories of Israeli startups that appear in the “Start-up Nation” book. I was an employee №1 at Compugen where I did a bunch of different things. But I realized I could never work for a big company and liked startups. And at some point I moved to the US to start an office here. And since Compugen I’ve never worked for a big company. Well, I’ve worked for a couple of months at Fidelity and I was bored to death, so in two months I jumped in our startup.
I was in startups all my life, originally more on technical positions like VP or CTO. And at some point I switched to the dark side: I did business degree at MIT, started to do some angel investments, and naturally, at some point, went to venture capital. So I joined Flint Capital about 5 years ago, and since then I was with them. But it was kind of a pretty natural transition to me. I’ve always been a part of different startups, from individual contributor to CTO, VP, started companies myself, and at some point of my career, I decided that it’s a little bit more fun to do investing and be involved with several different startups at a time than 100% with one startup.
Flint is an international venture fund. We do an early stage, so we invest at seed and A rounds. Our main check is usually at A round, but we prefer to start working with a company at a seed stage. Usually we invest at the stage when there is at least some kind of a better version of a product, at least some customers who may be not paying yet but already using the product, so there are at least some early indications of product/market fit.
We are a little bit different from most of the venture funds in the sense that we are a completely distributed team. The fund itself is remote, so we have never worked from a single office. Our team of three partners is distributed: I’m based in Boston, Andrew is based in Silicon Valley, and Dmitry is based in Europe. We also have an office in Israel, we are investing a lot there. We have a principle in Israel, and since I lived in Israel, I know Hebrew, people know me there, I’m usually the partner who deals with most of the Israeli companies. So I travel a lot to Israel, every couple of months.
I would say half of our portfolio are Israeli startups, a quarter – Europe, another quarter – US. We invest a lot into startups outside of US and help them to go to US market. So, if it’s a startup that is doing something in Europe, for the European market, it may not be the best fit for us. But if it’s a startup that starts in Israel or Europe and they see the US as their main market, that’s a good fit. Because of this distributed nature of the fund, we can help on the ground in US with anything the company needs like healthcare or some business development, hiring, we know how to set up a shop in US, what are the pitfalls. We are well-connected with different venture funds, so if you look at our portfolio, we have a lot of co-investments with top of tier funds which means we can bring investors to the table to do the following round. And we are fairly active, so in the Second Fund, we have already done 8 deals with ninth being in the work out of 9 deals, 6 of them we led the rounds.
Now, in terms of verticals, we have both B2B and B2C. Most of the companies in our portfolio are B2B companies. We like digital health, cyber, fintech, voice tech, DevOps, so we are fairly wide in terms of vertical segments. All partners in the fund are all operators in the past, so we are founders-friendly: we’ve been in the founders’ shoes. We’ve done some technical work, so we can speak to founders in their language.
We don’t choose startups on geography per se, we are actually open for different geographies. So, between Israel, Europe, and the US, if we see a company we like, we can invest. We can’t invest in any company in Asia for example, but it’s more because we just don’t have enough people there to generate a pipeline.
But in terms of criteria, we want to see people solving real problems, we don’t like vitamins, we don’t like feature companies, we like companies that solve real problems which are painful for people and people are willing to pay money for it.
We look for companies that have high potential. We want a company to be at least potentially a billion-dollar company at some point. We understand that most of the companies are not going to get there, but if we don’t even see the potential, we are probably not going to invest. And especially since we are investing at an early stage, we are obviously looking for a great team, which has the expertise needed to take this company off the ground. And we are looking at the competitive advantages.
The team is our criteria №1 because it doesn’t really matter how good the idea is, if you invest at an early stage, there is a good chance that you will need to pivot or change the idea somehow. So we only think of which stage of the company there is a team because even great ideas with not the best execution will still fail. Execution is the key.
So, when we look at the team, we look at what expertise is needed to take this company off the ground and we want to see enough of this expertise around the table in the team. Which means, if there are 2–3 founders, preferably with different backgrounds because you need technical expertise (most of the companies that we invest require a very heavy technical expertise), you need some business development sales, aside of equation because you need to know how to sell these products.
We have teams, which are serial entrepreneurs, we have teams of first-time-entrepreneurs, but we like to feel that the team can take it off the ground. We also look for a good cultural fit: this is a long journey, we are fairly active, so we want the team to be comfortable working with us for a long term, we want them to be willing to work with us even on a personal level.
We like to see enough enthusiasm. Sometimes you get up to founders and you see that “Yeah, we have a good idea” but you just don’t feel the drive from the founders.
In some memorable pitches we could see that this is something the founders are very passionate about. I really like it in founders. And in cases like that, we know that we are going to work a hundred hours a week and as hard as it is possible to build this company.
We did. We had, for example, BlazeMeter, the company we invested 5 years ago. We have already exited it about 4 years ago. It was very short from investment to exit, about 10 months. It had one founder, who is really good. In time we invested, he didn’t have real co-founders, but more like a couple of people around him making a really good management team. But still, it was a one-founder company.
So we are not ruling out one-founder companies but it’s an additional question. We would prefer to invest in 2–3 founders because we think it’s a very hard journey. A startup is really hard to build, and if you have just a single-founder team, you have a lot of problems. It’s very lonely at the top. You’d want to have a couple of people around supporting each other. Also, you’d want to have someone playing devil’s advocate all the time and you don’t want a single founder to make all the decisions.
Again, we are not ruling it out, we do support single founders, but it’s certainly better if we have a team with 2 or 3 founders from the checks and balances point of view.
Last time I looked at CRM I think I got something getting close to 1 000 startups. Now, it’s not all the startups, which I look at, because it’s just the ones who end up in CRM. When I get a startup, it usually takes about 20 seconds to read through it and decide, and there are many startups that I don’t even put in CRM if I decide it’s not relevant for us. Like if somebody sends us blockchain, which we really don’t do, or gaming – it’s just really not relevant for us. But last year I had about a thousand startups in CRM, so I guess, a total of startups I’ve seen was probably somewhere between 1k and 2k.
There are all kinds of different ways. In Israel, for example, where I look for the most startups now, we already have a pretty good brand, so we have a lot of startups coming to us. The best ones are coming through the founders of our companies. They have their friends starting companies and they send them to us.
If I think about the tree last deals that I did, two of them were through the founders of our existing companies, and we have actually scouted for the third one. Just writing a cold email is not the best way to contact us. Especially in a place like Israel: everybody knows everyone, so it’s not hard to find somebody who connects to us. So if somebody is just sending a cold email, this means they don’t know how to get connected to people, something is off.
So the best way to connect is through the founders of our existing portfolio companies, we get some of the inflow of fellow investors we are already working with and some of them are angel investors who do pre-seed, a lot of them would send their companies to us. We use all kinds of sources, but the best way is to go to founders or find connections.
It’s pretty much the same for most of the venture funds. Basically, the way it works, once the partner starts looking at the company, he needs to build convictions, so he is doing whatever needed for this, which means talking to the team, understanding the market, maybe talking to some customers or to some people we know. Usually we use a lot of expertise we have in our network to do both technical and business due diligence.
For example, I am looking at a company now, which is doing something for AI. I would reach out to several heads of my different portfolio companies in AI and ask them what they think about it. And for cybersecurity I’d reach out to my contacts in different cybersecurity startups or talk to a couple of cybersecurity professionals, and get their feel for the market, is it a real problem, is it a good solution for this problem, how the competitor landscape looks like, etc.
That’s kind of a first stage. And if I build conviction what the company is really like, then I would involve my other partners, we would start talking about the company. Usually, we know the companies we look at because once a week we do the pipeline review, and each one of us talks about the top 2 or 3 companies we are searching. By the time I bring it to my partners, we have already heard about the company. Then we start building conviction together, which at some point will mean having a call with the founders. Since we all are distributed, we can’t really all meet the founders face to face, we are usually doing it with Zoom. And once we get a conviction and all three of us like the company, then we decide to invest and do term sheet, and once the term sheet is signed, legal due diligence starts.
In terms of timetable, it really varies because sometimes we have one week from the first meeting to the term sheet, in some cases it was several months. And in some cases we would start talking to the company and say: “Okay, this looks interesting, but we want to see a little bit more traction, so probably next round would be more relevant to us.” And we continue tracking the company and maybe invest in a year. So it’s really hard to say how long the process takes, you just need to build this conviction. And if you can build it quickly, you build it quickly, if you can’t, then it takes time.
We did at least one or two deals that were fairly quick. But that usually happens when we really know the market ourselves, then we really have a good feeling for the market and the problem, we really like the team and everything falls in place. It’s pretty rare. I wouldn’t say that we usually can make a decision that quickly, but sometimes it happens.
Our main check which we write at A stage is somewhere about 3–4 million. But we usually like to get in the first check at the seed stage which is usually somewhere from 0.5 million to 1.5 million. Sometimes, if we would lead seed deal, it may go up to 2 million. So, depending on the stage, anywhere from 0.5 million to 3–4 million.
When we are investing, there is a bunch of red flags. But the whole decision process is kind of an illumination process. So when you start looking at the company, you are looking for the reason to say ‘no’. And only if you can’t find the reason to say ‘no’, then you say ‘okay’.
There is a bunch of different red flags related to the team. E.g., really inexperienced team. Usually, we do check references, so if you get bad references on the team, it’s a ‘no’. Some simple red flags: if I meet the founders and I feel that I know about the space we are working at more than the founders do. I prefer to invest in people who are smarter than me. If you are doing something, you have to understand way more than I do in what we are doing.
Our red flag could be market if we don’t believe it is valid. If the market is too small, then it’s just not for us – maybe for somebody else, depending on their strategy, but for us – we don’t see a big enough potential. If the market is really Red Ocean, you have many, many companies doing the same thing, and we don’t really feel the startup we are looking at has any competitor advantage, which can be sustained – that’s another red flag. That’s probably the biggest one.
Now, to the second part of the question, if we have already invested in the company, then we support the company in any way and shape we can. We are already in, we are in the same boat. Obviously, if the team is not cooperating, that’s a problem. Usually it has to be something for the team not cooperating. In some cases we see that whatever we invested in just doesn’t work. The market is not there, the solution is not there, the team is not that good… there are all kinds of reasons, both subjective and objective, where startups can go wrong. And that’s okay.
In some cases we may love the team, the idea, but it just became clear in a year or two-three years that it’s just not going to fly. In this case, I wouldn’t say that we were not cooperating with a company, we would still try to help and salvage it, but we probably wouldn’t invest and wouldn’t put more money into this company. And that’s ok: if we don’t believe the company anymore, we’d stop investing, but we’d still try to support the company if we can, we’d still try to help it in any shape or form we can. So there are different levels of non-cooperation. Completely not talking to a company – I haven’t had it happen with me so far.
The answer is yes and no. Have we looked at the company and decided not to invest, and then it was a great hit? Yes, it happened and happens fairly often. And that’s ok. Have we ever regretted it? I don’t think so. Basically, it’s all probability games, so sometimes you look and you say “Okay, there is a potential for this company to be a huge hit, but the probabilities just were lower than I would be comfortable with, so I decided not to invest.” If the probability is just 5% it doesn’t mean that it can never happen. It can still be a big company. Would you regret you didn’t invest in it? I don’t think so. If you decide for the right reasons not to invest, it’s fine.
We do constantly look back at our decision-making process in retrospect and we are learning from it. We ask ourselves if we looked at this company and we had the information we had, would we make this decision differently? Not with the information today, but with the information we had at the time of the decision. And in some cases, we say yeah, we probably could have checked this thing or another. But mostly our conversations are about the companies that we have actually invested in and it didn’t work out. And in some cases we were saying “Yeah, we should have checked that, and then we would decide to pass on this company instead of investing.”
If you look at the company and you decide to pass on it, and then it becomes a great hit, it’s fine. There are several companies I have passed on, and they had great outcomes and great exits. And I always make a point of sending emails to the founders and congratulate them on their exit. I have actually made friends with a couple of founders who I passed on investment but we still kept in touch.
I wouldn’t say it’s unusual per se, but it’s unusual for us because we usually don’t invest in companies where we don’t completely understand the tech. We’ve invested in a startup called Mighty Buildings which is 3D printing of houses, and it’s far from our area of expertise. It was a new team, a seed company we did that round together with Khosla Ventures. In that case, because we didn’t really have the expertise in this phase, we drag along in some sense. The idea was great and we are actually doing good progress now, we are already delivering 3D printed homes. And it’s a successful company: we’ve raised follow-on rounds with a much higher valuation.
Well, I would never say never. But we wouldn’t invest in biotech, that’s for sure. Just because we don’t have enough expertise in it, their fund structure should be a little bit different for biotech. We wouldn’t invest in digital health.
There are certain segments and industries I find interesting but I just don’t believe that potentially they are good investments. For example, educational tech: I like the space, I even helped startups in this space at some point. But I’m not very hot about investing in it because most of the companies in this space have really hard problems with business models and things like that. There’s online gaming, for example, it’s a cool space, but it’s just not the right fit for the venture fund.
So, there are some industries that are not the right fit for us because of our strategy and our focus, but they may be cool industries.
If I have a couple of portfolio companies, which can perfectly complement each other, obviously I would connect them. That’s one of the things we do all the time, helping companies to collaborate. If you are talking about a roll-up place when you take two companies, roll them up together and create one company, that’s not our game, that’s more like private equity game. We are there to support founders and management, but we are not going to decide for them what to do. We like to make useful connections for our companies, so if I see any companies (and it doesn’t really matter if it’s our portfolio company, or not), and I know they may benefit from a collaboration, I would introduce them to each other, and it’s up to them if they decide to do something.
It is basically taking the market risk. For example, I have a portfolio company called CyberX, which is one of the leaders in industrial cybersecurity. At the time I invested, we led A round and it was clear that at some point industrial companies will look for cybersecurity solutions because there is a problem. It wasn’t a question that the market will happen at some point, but it was the question when the market will happen. And if you look at the potential of this market, it’s a multibillion-dollar market. At the point that we invested, all companies in this market segment were probably having revenue around just a couple million dollars. The market wasn’t there, so we took a risk of market timing. And the problem with market timing risk is if you build a company and in a year or two the market is actually taking off, you’re the king of the mountain. But if the market is taking off in 5 years, by that time the company might be dead. So it’s a risk.
We were lucky in some sense because the market did happen. And for the last couple of years the usual discussion at a board was if our market segment is going to grow twice or 4–5 times this year. This is a good situation because when the market is growing that fast, the revenue is also usually growing fast if the sales execution is good.
So, we can take this market risk but in this case, we want to really believe that the market is big and we really need to believe that the market will happen really soon. That’s what we did – we talked to a bunch of people, we verified that people understand the need. I wouldn’t say it was very clear, but the indications were that at least some of these people will start allocating big money to this market and the market will happen fairly soon.
The upside of this approach is if you are actually right, you have a company, which is growing like crazy because the market is happening and you are one of the only companies that have solutions for this market.
It’s pretty trivial: if you look at the biggest companies, it’s very easy to see which of them are the most interesting ones. Facebook is obviously one of the choices for me because it has created the whole paradigm of social media. Now, it wasn’t the first company to do social networks. Funny story, I was actually a founder of one of the networking startups about a year before Facebook, it didn’t take off for a bunch of different reasons. But on the other side, I probably can claim that I have built the first social network inside the internet because I’ve built the list of my high school graduates in 1992. As far as I know, it was the first such a list on the internet. My problem was that when people asked me if I could add their high school, too, I said “It’s so easy to do it, just do it yourself.” This was obviously a stupid idea at that time because if I would just add functionality to add any school, and I’d probably be much richer. But that’s okay.
So, Facebook is one of them. Google is probably another one because they’ve built the whole infrastructure for a lot of stuff which we see online now. I’m talking about all the advertisement infrastructure which allows you to monetize sites, all kind of really cool stuff around Google platform, Android and so on.
Apple is now one of the first with smartphones and other stuff. Personally, I don’t like Apple that much because of their corporate culture and other things, but they did a lot of really breakthrough innovation.
That’s talking about the online world. There are also all kinds like our companies, like Tesla, which has completely turned over the whole car industry, and I’m not just talking about electric cars, there are a lot of other things that are completely different with Tesla. If you look at Tesla, it’s a strange car, but you need to understand it’s not a car, it is actually widget on the wheels, and then things fall in place.
There are lots of good books out there. “The Innovator’s Dilemma” by Clayton Christensen is one of the very important topics for every startup that wants to build something big. It’s a fairly old book, it’s more than 20 years old, but it’s still very relevant. “Crossing the Chasm” by Geoffrey Moore is a high-known book for marketing and hi-tech products.
If you want to read about how the venture industry works, just to understand how to work with VCs, “Venture Deals” by Brad Feld is a good one. The whole concept of “Black Swan” is another interesting thing for startups because it’s very relevant. I like Kahneman’s “Thinking, fast and slow”: it’s a hard read, but it’s a great book on how people think, all kinds of biases and things like that.
As for conferences, lately I’ve stopped going to too many conferences. I think conferences are very useful for networking: you can find many people at the same place. So instead of having one week of arranged meetings, you can put it into one day at the conference if you do it correctly. But in terms of the content I’m less fan of the conferences. Frankly, nowadays we have so much content online, so many different webinars, blogs, posts where you can get anything you can ever want.
That being said, I wouldn’t name a specific blog or specific website. I usually use my Twitter or Facebook feeds to find if there is anything interesting. If there is, it will probably appear in my Facebook or Twitter feed. And if I have time, I’ll read it. If I don’t have the time to read it, I just put this link somewhere, and come back and do it when I have some.
Somebody very smart stated that crisis is just a too important opportunity to waste. So it’s always an opportunity because there are lots of market shifts that are happening, there’s a lot of new stuff which will pop up after the crisis. There will be companies who will die out, so there will be space in the marketplaces to fill, etc.
As we see, you have to be more optimistic than a regular person, because frankly, we are looking for the Black Swans all the time. Nobody in the normal mind would invest in a company, which has more chances to fail than to succeed. But that’s what we do.
So we are fairly optimistic. When we look at any crisis, we look at it as an opportunity. If you ask me what the implications are, there is a couple of different angles. One, if we are talking about the whole kind of macroeconomics situation, yes, we will have some economic downturn, and it all depends on how quickly we can get through this and how quickly the governments will be able to provide financial support for businesses not to close.
On the venture side what I expect is we will probably see less money going to VCs for the next year or two. That’s because a typical LP allocates about 5% of his money to venture funds, and much more to stock markets, and if stock markets suddenly shrink, that means that 5% of money allocated to venture funds suddenly become 7%. Which means he is not going to invest next because he wants it to get back to 5%. Plus, stock markets will probably have the bigger potential now than they had a year ago, so more people will put money in them.
Because of this, I would expect it will be harder to raise money for venture funds next year, which also means that many venture funds will try to use the same funds for a longer period so their investment phases are going to slow, it will be harder for startups to raise money in the next year. This also means an opportunity, so if somebody has money to invest, he can invest in better startups at better valuations. I expect valuation will drop, especially in the markets where they were way too high, like Silicon Valley or generally in the US, but in Israel, too.
From another side, if you look at venture funds’ performance as an asset class, look at venture funds of 2008–2010, they have way better performance than venture funds started in other years. What that means is that venture funds who are investing now or in a year, will probably get better performance than the venture funds of other times. So smart LPs will probably put more money into some of these venture funds.
On the side of the startups and segments there are shifts towards remote work and telemedicine. For example, one of our last investments is in a company, which is providing telemedicine solutions, and they are on fire now. We had a board call recently when we talked about the company growing 30–40% employees in a moth because we need to make sure we can onboard everybody, and the company is going to the roof in terms of demand. So consider all kind of tools which allows you to be more effective working from home. I think that a lot of companies will realize that it’s not that bad to have remote teams. As a fund, we are remote-first, and we have invested in a company that even now has a remote-first approach, which means that we don’t have any offices, from the beginning we are building a completely remote team. I think this trend will take off.
The startups, which we have now, need to become more cost-effective, we need to make sure we watch the expenses because it’s not clear when we are going to be able to raise the next round. But at least across our portfolio, we were very active last several weeks, pretty much every single company in our portfolio had board meetings when we discussed what was the effect of the Corona on our business. It looks like all the companies are fine. Some companies are doing better than we have expected. For example, in our company we have Voca.ai, which is doing voice robots for call centers, so you can take a call center agent and replace them with this solution. They actually have a lot of demand, because call centers have many problems now, they are overwhelmed. A lot of them are working at 40% capacity because people can’t work from their usual workplaces, and it’s not that easy to move call centers to remote work. So they understand they need some scalable solutions. Several pilots were supposed to go in half a year, and now they are taking the time to do the whole pilot in a month.
We are actually fairly active. It’s probably accidentally because most of these deals started before the last couple of weeks (note: the interview took place at the end of April 2020), but we have actually just closed two deals within last 3 weeks with one still in work that will hopefully close next week or so. And there is another one, which is also expected to close within several weeks. We think it’s a good time to invest. There will be a lot of market shifts in different segments, and that’s an opportunity for some startups.
Actually, I love it. I really enjoy helping the founders. It’s a great feeling when you invest in a company, which is still a small company, maybe below 10 people, and you work with founders and you help them to grow, and the company is now about 200 people and a leader in its space, and you feel you have actually helped this company to get to where they are now. It’s a good feeling. We invest in different things, so I am learning all the time, I’m meeting people way smarter than me all the time, and all of them are doing interesting things. We are not investing in all of these ideas, but we are still learning from all of them. And it’s a lot of fun.