Tomer Michaeli (Viola FinTech): We understand that in order to build big companies you need to be patient, you have to wait, you have to persevere, and this is the DNA of our group

Tomer is a General Partner at Viola FinTech. He invests in Fintech, Insurtech, and Regtech companies and he serves on the boards of Planck (Israel), Inshur (US & EU), Tookitaki (Singapore), Omnius (Germany) and Easyknock (US). Prior to joining Viola, he was the co-founder and VP Operations at Fundbox, a leading global FinTech company in the credit and payments sector.

Before co-founding Fundbox, Tomer served as a principal at Viola Ventures (formerly Carmel Ventures), where he spent 5 years building early-stage technology companies such as Wanova (acquired by VMWare), DesignArt (acquired by Qualcomm), LiveU (acquired by Francisco Partners), SundaySky and others.

Before joining Viola, Tomer served in various technical and management positions for 10 years in an elite technology unit of the Israel Defense Forces.

He earned his M. Eng. Cum Laude in Biomedical Engineering from the Technion, Israel’s Institute of Technology, his B.Sc. in Physics, Mathematics & Chemistry from the Hebrew University in Jerusalem, and his MBA from INSEAD. He is also a graduate of the extremely selective “TALPIOT” Elite Officers’ Training Program of the IDF.

Tomer serves as an advisor to several entrepreneurs and sits on the advisory board of Curve, a UK-based FinTech company.

How it all started? How did you decide to enter the venture investment business?

My VC career started almost by accident. Like many other people in Israel, I served in a technology division in the army. When I left the service in 2007, I came across an open position at Viola and applied. Not knowing the first thing about the VC world, I secretly hoped that they would help me find a job at one of their portfolio companies. But they were looking for someone to join the team, and I ended up being a perfect fit with experience combining business and technology. I joined the group’s early-stage fund as a Principal and I did about five years of deep tech investing.

But during that time, I had a nagging feeling that I was cheating both myself and companies I was advising. After all, I didn’t have any first-hand experience being an entrepreneur. I decided that if I really want to pursue a career in Venture Capital I needed to gain more knowledge and experience. So I left the group and co-founded my own FinTech startup – Fundbox – which grew quite nicely and now employs around 250 people.

Three years ago I came back to the group, feeling much more accomplished with operational and entrepreneurial experience, to start a completely new fund. That was after zigzagging between entrepreneurship, operations and investing for the past 20 years.

What industries are you interested in?

Our name is Viola FinTech, so naturally we’re focused on FinTech. But we view this category quite broadly – It’s not just neobanks or something like that. We believe that a lot of the disruption in FinTech will be used by existing financial players. So it’s also what we call “tech for fin”. We invest in InsurTech and RegTech, because these are heavily used by technology and financial services players. We also invest in areas where finance is a very important part of the value chain, like PropTech.

Speaking about geography, we are based in Israel, but we invest globally. We’ve made investments in Singapore, Berlin, London, and of course Tel Aviv, Boston, and New York. It’s quite a global mandate because we are a vertical fund and it’s very hard to invest only in Israeli Fintech. Israel is a very fertile ground for growing Fintech companies but it’s still too small for a $100M fund.

We are a co-investment fund, which means we’re mostly co-leading or following. Co-investing makes sense since most of the venture funds are generalists. They invest in FinTech, but in many other areas as well. We believe that companies need both kinds of investors: generalist and FinTech-only. Most generalists help with standard issues involved with building a large company, but there is always a need for in-depth FinTech expertise. And even the best funds have very limited amount of this kind of FinTech expertise. This is why a co-investment fund makes a lot of sense. It also makes sense in terms of deal access – we don’t compete for the same “seat”.

Often, it’s easier to get access to deals as a follower or a co-investor than a single lead, especially if you don’t have feet on the ground in your target geographies, like London, New York, or Berlin.

We are a cross-stage fund. Our investment criterion is what we call a product-market-regulatory fit. Usually, many investors like to invest in a product-market fit, but in FinTech that’s not enough. This is a highly regulated space, and if you don’t sufficiently take this aspect into account, which will in turn affect your product and your market, you will do a very poor job investing. The stage when companies achieve product-market-regulatory fit changes across companies. Some companies reach it at the seed stage, some at the A or B stage. That is why we are slightly less sensitive to the rounds that we are investing in. We mostly do A or B, and less often later rounds.

Can you name industries you really like, yet will never invest into?

I think that in general, the payments industry is always a love-hate story for us. There are quite a lot of innovations in payments today. All the open banking and the fact that you can initiate payments directly over bypassing card rails. It’s one of the most important trends these days. B2B payments are also ripe for disruption.

However, the early adopters of these technologies are usually crypto, gambling, and some other less dignified industries. So while these industries may be legal, we are required to meet a higher standard because all our LPs are financial institutions that are highly regulated and have very strict investment criteria. On a number of occasions, we have seen very interesting companies in this space, and we were excited by their innovation, but it was too hard for us to invest

That’s not to say we won’t invest in this segment, but rather that we just have a higher bar. Some of the use cases have a strong element of speculation, which is a nicer way to call gambling, or even fraud. But sometimes there are instances where providing crypto services to traditional players is definitely something that makes sense. This is exactly the “tech for fin“ that we’ve talked about.

What geography of companies are you interested in?

We’re a global fund so most geographies are in our mandate. However, we’re mostly focused on those we understand and whether we can find a local co-investor we trust.

Our natural comfort zones are of course the Americas, the EU, and Israel. Nevertheless, we are investing in companies that touch the African markets or APAC. For example, we recently invested in a company in Singapore (very far away from here). We don’t have a presence there, but we co-invest with people that we trust, and the company operates in a market we understand very well.

There are very few geographies that we will not touch, and usually, they are not within the mandate of any fund to invest. I don’t know many funds that invest in North Korea, Iran, or Lebanon. Because all financial institutions and banks have very strict rules about where we can invest, we will not invest in countries that are under embargo. Because we are located in Israel, politics may get in the way and we will not invest in countries that are in a state of war with Israel, such Lebanon and Iran. Fortunately the list is short and getting shorter; we’ve seen very positive developments in that context recently – the UAE just established formal relations with Israel, which means that more markets are opening up.

Speaking of Eastern Europe and post-Soviet countries – why not? We would look at investment opportunities there. I cannot say that we understand the market very well, but I wouldn’t disqualify that. Having said that, this is a very sensitive region, politically speaking, so we’d tread with much more care than usual.

What was the most unusual startup you ever saw?

Usually you find unusual startups in areas that are really at the forefront of innovation. It could be crypto space companies that are looking to completely change the way the world monetary system works, and things like that. Companies that have huge vision but zero chances of achieving it because they’re biting off more than they can chew, in markets that have massive regulation. I have a few names in mind, but I’d rather not say them because it’s sensitive and I don’t want to say bad things about people. These are not bad companies, it just a matter of taste.

At what stage of the company’s development are you investing?

We invest whenever we see a strong company that a company has achieved a product-market-regulatory fit. Usually, that happens in the A or B rounds, sometimes even C. But again, we’re also willing to invest in very late stages. We’ll rarely do seed-stage investing.

What are your requirements for startups as an investor?

First of all, of course, we have to really like the team. Many companies have a great idea but don’t execute well on the business plan. We really have to like the team and believe that they can execute, or that we can help them execute. As an ex-entrepreneur, I understand very well the difference between companies that can execute and those that can’t.

We have to be persuaded that the real market size is large enough, because the number one reason companies fail is that there’s no market need for their product or service. Sometimes there are two or three customers that want the product, but that might not be enough. So market size and real market need are definitely two very close related criteria.

Market timing is also related to this. Going back to the discussion about crypto, I think that two years ago cryptocurrency and crypto companies were just too early. If you’d invested in crypto companies two years ago, you’d have lost out because the companies just ran out of money. It is also a question of market maturity and market readiness. These are probably the most important criteria. There are many more, of course. Differentiated product, strong technology, efficient go to market strategy, margin, unit economics, reasonable payback time, lifetime value, and things like that. But I these are the most common – I can’t think of any investor who doesn’t look at these metrics.

What do you want to see in the company’s product?

We don’t have specific requirements, because we are investing in a very broad set of markets, both B2B and B2C, so what we’d like to see changes accordingly. We are not super early stage, so usually we want to see a working product and that customers are using it, preferably in production. But again, since it varies to such a great extent, I don’t think that we have clearly defined “requirements”. For example, if it’s a consumer product, we’d like to see very good user experience, strong LTV/CAC ratio, stickiness, etc. If it’s more of a tech-play then performance, latency, etc., are important.

What qualities are you looking for in teams?

As I said, we have to believe that the team can execute – that they have the right skills for the job and relevant experience. For example, if it’s a B2B but there is nobody in the team with B2B experience, only B2C, it’s a mismatch for corporate product and it raises questions.

It’s very important to us that the team has worked together in the past. We also seek personal references for the team: who worked with them in the past, who knows them, if people say good things or bad things about them…

Team diversity is also very important. If you see a company that has 10 managers and they are all men, it’s not necessarily a disqualification, but it lacks some diversity, which is very important for me personally, because I believe diversity greatly increases the chances of success.

Investors prefer to work with teams. But have you ever supported a one-person startup and what is your attitude towards family business?

We don’t invest in the very early stage, so for us this is less relevant. There are other funds in the group that work with early-stage startups.

Close relations between founders is definitely a risk factor, but it’s not a show stopper either. One of the most successful companies in our portfolio, Insurify, was founded by a husband and wife and we have made such investments in the past. We won’t stay away from a deal because of that.

How big is a check you usually issue?

Usually we write a $3-5 million check, and that’s just the initial check. We’ve done smaller and larger investments in the past, but this is our comfort zone.

What percentage of a company ownership is fair to take for investment?

It depends on the stage. Ideally we’d have at least 10% in the company, but it varies of course.

What multiplication of your investment do you expect on exit?

The higher the better. We don’t have specific targets. Venture investment returns are not uniformly distributed. You make most of the returns on 1 or 2 investments. In most of the investments you lose money, and averages or medians make very little sense in that kind of analysis. We are looking to build big companies and we are patient. It’s not like after three or even five years we are looking to exit or to divest. We are here for the long run. If today it needs 10-12 years to build a big company, we are up for it. We understand that in order to build big companies you need to be patient, you have to wait, you have to persevere, and this is the DNA of our group.

What is your due diligence procedure and how long does it take you to cover the whole way from the first meeting with founders to contract and check to sign?

I think our due diligence procedure is pretty standard. We didn’t invent anything new there. Maybe one thing that’s worth mentioning is the fact that because of our LPs and financial institutions, it’s very easy for us to consult with them on the viability of the idea and the market needs. We often connect them directly to the company. It’s a win-win-win. We can get some market or customer feedback, the banks get an early look into disruptive technologies, and the company may win a customer. For us it’s also a way to market the fund to the company and to show them the level of potential customers that we can put in front of them. The other parts are pretty standard.

In terms of speed, the most important part of course is between the first meeting and the decision or term sheet. Sometimes we make decisions very quickly. There were instances when we made a decision in 48 hours. And sometimes it takes us much longer. It depends on the dynamics of our position, whether we are leading or following, and who the other co-investors are, among other factors

We have a fiduciary obligation to our LPs and we need to make sure that we are investing their money wisely after we do the proper due diligence. However we can be quite fast. If we are coming very aggressively into a deal, average time will be one week. We are a very small team and our investment committee is very small, so we can be very efficient. Even during COVID-19, we are all sitting here in two or three rooms. We are professionals – we’ve done many investments and are very well-practiced. So again, we can move quite quickly.

The time between decision/term sheets and “money in the bank” depends on some technical processes, so that’s much less important in my opinion. We are a Luxembourgish fund and have a Luxembourg administrator that needs to approve our investments. Like all other funds, we need to call the money from our LPs as well.

How many projects do you consider per year?

We probably see a few hundred deals a year. We do deeper due diligence on approximately 20-30 companies a year, and end up in investing in 4 or 5 deals. It depends on how you count it, because some companies are coming back – we’ve seen them several times already.

How startup teams usually find you? Do you wait for inflow or scout for interesting ideas and perspective teams?

We are a strong brand in Israel and get a lot of inbound. Many deals come from people we know through our personal networks and outside of Israel. We rely very heavily on our strong network of co-investors. We catch up and meet regularly, either in-person or virtually, with many of the large funds in Europe and North America. We look at deals alongside funds in Canada, New York, London, Berlin, and Paris, literally on a weekly basis. This is the main source of deal flow for us. We also have a team member – our principal Maayan – whose primary job is to generate this type of deal flow. She works very closely with the dozens of funds that are in our network and just makes sure that we are part of the process when they start looking at a deal.

Sometimes we proactively approach companies that we think are interesting. On other, even rarer occasions, we collaborate with early-stage funds on ideation. We did that in WealthTech and InsurTech, where we’re collaborating with early-stage funds. We call these “challenges” – where we share with the entrepreneurial community the main challenges we see in these markets and call on entrepreneurs or companies to come up with solutions. And this actually generates very rich deal flow as well.

Cold calls are mostly a waste of time for startups. I think that if a startup cannot get a warm intro, it’s not capable of doing business. Because we are a co-investment fund, we will be co-investing with people we know. Naturally, this is who we want to make a deal with. And if you are an entrepreneur and can’t get the warm introduction to an investor, you shouldn’t be in the business. Because getting intros to investors is easier than getting interest from your potential customers.

I’m exaggerating a little bit. But we talk a lot about finding a team that knows how to execute, and this is part of it. Today the world is smaller than ever. You have LinkedIn, and there are so many ways to connect with people. There are many ways to connect with great VCs, and you can get an introduction to almost anyone. Find people who know people and get introduced.

What are your red flags?

I think that regulations are the first red flag. Easy examples are when you are lending without a license or working with countries that we are not supposed to work with.

Also, if we feel that there is a large extent of dishonesty or fakeness, those would definitely be red flags for us. Entrepreneurs are often prone to exaggeration or over-optimism, so there’s a fine line there, but still some lines you must not cross.

Apart from that, anything else is fair game.

Have you ever rejected a startup and then regret it?

Of course we have – who hasn’t? We have an anti-portfolio list like everyone.

Regarding our current portfolio, ours is still young, so I believe that all our companies still have a very good chance for success. It’s too early to tell. There are of course companies that have already exceeded our expectations and become success stories, and others still have to prove themselves.

Has your VC approach changed after the COVID-19 started?

First of all, the fact that we are investing over Zoom, or mostly over Zoom, makes us more careful. However, it’s easier for us than for others because we were doing quite a lot of our investing over Zoom anyway, as we have always relied on local people with prior knowledge of the companies.

For us COVID-19 hasn’t been that big of a challenge, but the fact that you can’t go and meet the companies at their premises as we used to, does have a psychological effect. We have to be more careful.

In terms of our investment focus, industries that were highly affected by the pandemic, such as travel and hospitality, and companies that rely on these industries, are not very interesting for us. On the other hand, this crisis has created a good benchmark for us – companies that succeeded in an industry, while others struggled, create a very strong positive signal.

Another consideration is runway. Due to the high uncertainty the markets are in, companies need to have a business plans that assumes enough runway to get to a period of lower volatility, or at least to safely get to the next fundable stage during turbulent times. No doubt, and this is speculation, but we assume that the recovery will start at least 12 months from now. We have to make sure that companies understand this and are not unrealistic about their growth.

It all depends on the business model and the go-to-market. Many digital-first B2C companies have accelerated, while B2B decelerated, at least in Q2. In general, for companies that are selling to banks or insurance companies, we have a lot of changes to our evaluation process because of COVID-19.

So, is COVID a threat or opportunity for VC?

It’s always both. It’s a threat if you are slow to adapt, while it’s an opportunity if you’re fast enough. Venture capitalists, by their nature, are fast adopters. Sometimes too fast, like in crypto. Usually, it’s small teams that are easier to adapt. In general, it’s more an opportunity.

What are the most common areas of weakness in startups?

Too many startups are way over-optimistic about the real market need and the market size. If they are in the B2B space, they might have unrealistic aspiration regarding sales cycles. Too many of them underestimate the competition or have a poor understanding of who the competitors are, what they’re doing, etc. These are the most common weaknesses I’ve seen.

Can you name three most breakthrough startups in history?

My choices would be Alibaba and Amazon for their transformation of retail and creating the e-commerce business as we know it. Also Intel – they created the modern computer and I can’t imagine how the world would look without them.

Are you satisfied with what you do, or do you think to apply your knowledge and skills to something else in the future?

I love what I’m doing. It’s not easy, even though it may seem so to some outsiders, like we’re just writing checks. But it’s actually quite demanding and very competitive. It has become more and more competitive over the past five years.

However, every day you learn something new, you get to work with amazing people. You also get to see the latest and greatest innovations and trends. Everything moves very fast here. I love it.

Like every other job, this one has its more labor-intensive and less interesting parts, but I think that the dosage of these ingredients in the work that I’m doing is relatively small. I don’t have any plans to change jobs in the foreseeable future, and I also don’t think about retirement. I have about 30 years for that.

What books/films would you recommend to a startup founder?

I’m old fashioned – I love reading books. Of course, I listen to some podcasts, but in general, books are my preference. If you really want to change the world then I would advise you to read any book by Yuval Noah Harari. In Sapiens he talks about how we became the master species on this planet. In his latest book 21 Lessons for the 21st Century, he talks about the way forward.

I won’t even bother recommending the classics, which are mandatory reading for every entrepreneur, like The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail by Clayton M. Christensen or Crossing the Chasm: Marketing and Selling High-Tech Products to Mainstream Customers by Geoffrey A. Moore. Actually, Crossing the Chasm is an amazing book. I like it much better than many others.

I would also recommend reading a book called Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy by Cathy O’Neil. Today we are driven by numbers, and to a certain extent, we are becoming slaves to those numbers. This book talks about the risks of being too dependent on numbers, algorithms and models.  

Your three advice to founders

I think that you should welcome advice from as many sources as you can. If you are a good founder, you will distill from it what you need, and reject the rest. Maybe you’ll take just 10% of it, or maybe you’ll combine it with a hundred other pieces of advice you’ve gotten, and you will adopt it.

I personally try my best to ask permission before giving advice, and I only provide it when I know what I’m talking about. I’ve found that most entrepreneurs listen to advice – whether out of politeness or out of a genuine want to hear an outsider’s perspective – but my advice is definitely to make sure to listen.

For the early-stage founders, I would say that first of all you should choose your co-founders wisely.

Second – the idea is nothing; execution is everything. There were social networks before Facebook, search engines before Google, and operating systems before Windows. Execution is everything!

Thirdly, raise money when you can, not when you have to. This advice is addressed to slightly later-stage startups, but I think that many founders try to optimize for valuation and dilution. COVID-19 showed us that anything can happen. You could be growing super quickly, but next quarter lose 90% of your business. If you can raise money now, even if it’s not at the valuation you can get in six months, but if it’s a good investor and you know what to do with the money, get it and use it.

What is your favorite place?

I think New Zealand is a nice place to live, like anywhere with a lot of wild nature. It can be New Zealand or Canada. It can be Norway or Switzerland. I love to be anywhere with a lot of wild nature.