There has been a big debate over the last few years over whether the Series A crunch is real or not. What everyone can agree on, however, is that there are definitely more seed and early-stage funds now than ever before, and more people willing to give money to young companies looking to make it big.
In this edition of "Meet the VC," we interview Shalom Passy, Managing Partner and Director at AfterDox.
In his 20 years at Amdocs, Mr. Passy held a variety of senior executive roles. From 1991 through 1997 Mr. Passy was one of the pioneers of the Amdocs’ Billing solution with SWBT (today AT&T) in St. Louis, and then as Amdocs Account Manager for Bell Atlantic (today Verizon) in Washington D.C. From 1998 through 2004 Mr. Passy led Amdocs’ penetration and expansion into Russia and East & Central Europe, serving for 2 years as Group President in Europe, and then as COO of Amdocs’ Product Group. From 2005 to 2010 Mr. Passy was a Senior Vice President, member of Amdocs Management, founder and President of the cross divisions Delivery Group, Head of Operations at the Amdocs Development Centers in India and Cyprus, and CEO of Amdocs Israel. In 2011 until mid-2012, Mr. Passy was the COO of Time to Know, an education software company. In late 2010, Mr. Passy graduated the Advanced Management Program at Harvard Business School.
VatorNews: Tell us a bit about your background. What led you to the venture capital world?
Shalom Passy: I’m a board member, chairman and advisory board member in several leading Israeli startups, and a senior consultant for strategy & organizational transformation. In my 20 years at Amdocs (NYSE:DOX), I held a variety of senior executive roles. From 2005 to 2010, as Senior Vice President, I was a member of Amdocs Management, founder and president of the cross divisions Delivery Group, Head of Operations & Amdocs Development Centers in India & Cyprus and CEO of Amdocs Israel.
In late 2010, I graduated from the Advanced Management Program of the Harvard Business School. In 2012 I decided I wanted to change my focus and move from the corporate world to where it all begins: startups at seed level. I joined AfterDox, a seed-level angels group, many of them friends of mine from Amdocs, and I started exploring this field.
VN: What is your investment philosophy or methodology?
SP: The first thing I learned was that many (if not most) angels are taking investment decisions emotionally and intuitively. There is no statistic to prove what is better, but for me it was important to build a methodology to challenge my (and my partners') intuition when it comes to such a serious and important decision as investing several hundred thousand dollars of our own money.
I trust my gut feeling as it is based on years of experience and numerous major decisions I’ve made in the past. However, when it comes to investments, we wanted to detach the “gut feel” or the emotional part of the decision and replace it with a more systematic, normalized, and comparable method. The aim was that after we meet a venture for several times and conduct a technical and professional due diligence, the members of our team will have to score their impressions and compare their notes.
Using my partners’ experience, and some research, we built our own scorecard which we use as our due diligence guideline and as our decision-making support tool. We naturally assign the primary score to the team of Founders, but our other criteria are:
- The Product (Disruptive, Value, Stage)
- Competition (Barriers, IP, differentiation)
- Timing (Enablers, Demand, Commoditization)
- Potential (Go To Market, Business Plan, Hockey Stick revenue graph)
- Market (Pain, Growth, Access)
- Commercial (Round, Valuation, Time).
VN: What do you like to invest in (categories of interest)?
SP: We invest in what we know best: SaaS, Mobile, Internet, IoT, Cyber, Enterprise, e-commerce, Communications, and Media. More importantly, we do not invest where we do not bring substantial value, like Hardware or Life Sciences, and where it would not match our values like Gambling or Porn.
VN: What do you like to invest in (important qualities for companies)?
SP: When we evaluate the founders, we search for the following qualities:
- A team that should provide excellent technical skills, strong business experience, sales & marketing skills
- Deep knowledge of the market related to the startup, proven experience, personal involvement
- Fully dedicated (not working on other businesses), ability to listen, implement other people’s ideas, flexible, able to change course, coachable
- Leadership personality, presentation skills, relevant language skills, proven capital raising capabilities
When we evaluate the Product, we search for the following qualities:
- A disruptive technology/innovation that displaces an established market & shakes up the industry or a groundbreaking product that creates a completely new industry
- We prefer to have a technological barrier of entry for the competition.
- The ideal value proposition is concise and appeals to the customer's strongest decision-making drivers
VN: What kind of traction do you look for in your startups?
SP: They score higher in our scorecard when they already have a customer as a design partner, but we invested (without regrets) in Twiggle when they had only a “PowerPoint Product” as it scored highest at the other criteria (they are now at Series B).
VN: What would you say are the top investments you've done (and what stood out about them)?
SP: I’ll mention two of our best startups at our portfolio.
BrandShield monitors and finds trademark infringements, counterfeit sales and brand abuse in multiple platforms—websites, marketplaces, mobile apps, pay-per-click (PPC) ads, and social networks.
We found founders that have already established a successful and profitable company in this field. The “pain” (infringement, fraud, counterfeit) in the market is demonstrating fast, non-linear growth, their dashboard is the best sales tool, and they are practically disrupting the market that is currently controlled by expensive law office service providers. On top of that, we found that several of Israel’s top angels (Gigi Levy, Yuval Baharav, David Asia, iAngels) are investing in them together with us.
Knowmail is an artificial intelligence engine that learns your work habits to help you focus, save time, and increase your overall email and messaging experience to become more successful. I met the founders when they were still working for EMC, and I encouraged them to quit and apply to the Microsoft Accelerator.
I categorize founders into three categories:
- Those who never accept coaching, always think they are smarter than everyone, and are interested only in your money. (When I fail to see it in advance, and invest in one of those, I give myself a big “F” mark.)
- Those who are coachable, you learn from them, they learn from you, and would consider your guidelines when they make their decisions (most of the founders we work with).
- Those that would always listen with passion to learn, and will take your ideas and exploit them to where you couldn’t even imagine—like the Knowmail founders.
VN: These days a seed round is yesterday's Series A, meaning today a company raises a $3M seed and no one blinks. But 10 years ago, $3M was a Series A. So what are the attributes of a seed round vs a Series A round?
SP: From our experience, crossing the “valley of death” and converting seed level dreams to “A” round KPIs takes around two years and $2 million. That’s why we would “force” our startups at seed round to raise at least $1.5M + $0.5M from the Israeli Office of Chief Scientist (OCS). In Series A, all our scorecard criteria are converted to measurable numbers—either financial amounts or user numbers.
My guidelines to the founders are that, in order to get Series A funds, they need to present three things:
- Linear, repeatable growth of their KPIs;
- Tipping point in the future, where their growth will turn to be non-linear (hockey stick), and how they get there;
- A vision for the VCs that will materialize in Series B.
VN: In 2015, there was a lot more money going into late-stage deals than during the heyday back in 2000. So do you think we're in a bubble? And is it deflating now?
SP: In economics, the markets set the prices and balance supply and demand—there is no vacuum.
The same goes in the venture capital business. If all VCs were to invest only in late stage, they would not have companies to invest in. If all the VCs were to invest only in seed stage then they would all go under even if they made excellent progress. The market is balanced with some variance.
We at AfterDox see this slight variance as a business opportunity to have less competition on the best startups and make them ready for Series A and later. Our ability to invest significant amounts at seed stage on one hand and provide strategic attention to each startup on the other hand helps us beat the market statistics. Our companies are then well equipped with strategy, go to market plan, product market fit, financial planning and achievable KPIs. That is what makes them fundable.
VN: How long does it take between meeting the startup and making the investment? How do you conduct your due diligence?
SP: On average, it would take between 3 to 6 months. In Brandshield it took an exceptional 1 month.
At first, we need to fall in love with the founders, then it takes us time to understand and appreciate the product/solution. That’s when we decide if we move on to our due diligence, including all the subjects in our scorecard as well as the financial, legal, and market (we talk with customers, if any, or with potential customers).
VN: What is the size of your current fund? And where is the firm currently in the investing cycle?
SP: We are currently establishing AfterDox 2, a new fund with the following vision—the seed market failures we identified:
- Too many startups to review and conduct due diligence with using a small VC team.
- Statistics at seed level dictate that you spread your investment across 20-30 startups, as no one has the wisdom to choose the next “Waze."
- In a seed-level investment, it’s not enough to hand over your money. If you don’t help them to cross the “valley of death," your money will most probably go down the drain.
- There's a major conflict here. You can’t invest and support 20-30 startups as an angel or even with a small VC team.
- If you invest at seed level, but do not have available funds for Series A round, you become a liability and it risks your initial investment.
In order to resolve the above challenges, we are establishing a unique fund structure and strategy: our $50M fund is uniquely structured in two layers, specializing in accelerator graduates in Israel and developing a "secret sauce" for how to spread investment across 20-30 seed startups (mitigating the risk involved at seed stage).
This “secret sauce” is our Executive Limited Partners layer. This team of experts, not only invest a third of the fund capital, but will also be active in the selection of the ventures, and closely involved in the portfolio companies’ strategic planning, assuring a product/market fit, go to market plan, business model, business development, executive recruitment, management build-up, focus, mentoring, and coaching.
VN: What is the investment range? How much do you put into each startup?
SP: As mentioned before, we believe that the right seed round size should be around $1.5 million. As lead investor, we will look to invest $750K to $1 million, and we would strive to partner with other VCs or angels that believe in the startup potential and join us to get to the $1.5 million range.
VN: Is there a typical percent that you want of a round? For instance, do you need to get 20 percent or 30 percent of a round?
SP: We would like to invest mostly in startups that we can have value and have influence. Therefore we would like to lead the seed investment (although it should be syndicated) and get a board seat. We would also like to participate in Series A and hopefully maintain our board position.
In terms of percentage of equity, it really depends on the maturity of the venture. The more mature the higher the valuation is. In a good round, 20-35 percent of the equity will go to the investors.
VN: What percentage of your fund is set aside for follow-on capital?
SP: We are targeting the first five years of the fund to invest in new ventures and the following five years to support the portfolio with active participation and with follow-on investments.
VN: What series do you typically invest in? Are they typically Seed or Post Seed or Series A?
SP: We target our first entry to be at Seed/Post-Seed and to keep our preemptive and our board seat during Series A.
VN: In a typical year how many startups do you invest in?
SP: In our first fund, we invested on average in two startups every year, and with our new fund we plan to increase it to 5-7 investments per year.
VN: What do you like best about being a VC?
SP: The exposure to the future, the ability to contribute my knowledge and experience to the new generation, the excitement, the risk, but most of all the talent, the energy, and the innovation I see every day when meeting with the founders.
VN: Is there anything else you think I should know about you or the firm?
SP: In the last 4 years, AfterDox invested in nine startups of which six have already crossed the “valley of death” and raised Series A. One of them, SalesPredict, was already sold to eBay, so we have one exit under our belt. More to come…