YL Ventures' unique method to early-stage investing

Invest in startups that can be sold in three years; Shop around before the investment

Update: 3/29/2013 - I recently caught up with Yoav to discuss an update to YL's strategy. Check it out here: YL Ventures tweaks strategy to allow for homeruns

In this new era of early-stage investing, we're seeing all sorts of models. There's Dave McClure's model of investing in 100 startups annually, in hopes that 20 to 30% will be base hits, not necessarily homeruns. On the opposite side of the investment spectrum is Mike Maples, who limits the number of companies he will invest in, in hopes of finding homeruns, or "Thunder Lizards."

While most other strategies fall in between, YL Ventures has an unique take on early-stage investing. YL Ventures, which has $30 million under management, wants to invest in startups that could be sold within three years, said Yoav Leitersdorf, a partner at YL Ventures.

The idea is to find startups (mainly across Internet, e-commerce, mobile, SaaS) with IP that a big strategic company would like to own, and pay up for in a few years, when the risk of building such a platform is mitigated. You might think of YL's approach as being the R&D for big corporations. in fact, before Yoav makes an investment, he likes to get the corporate nod. "We immediately show it [the company] to potential acquirors," said Yoav, in a recent interview. "We take them to companies that are the most-likely acquirors even before we make the investment."

As Yoav sees it, his strategy puts less pressure on startups. "We have of a more modest and realistic strategy," he said. "We don’t need the homeruns to do well as a fund. It puts pressure off the entrepreneurs in terms of hitting a homerun." Of course, Yoav does put pressure on the companies to sell after three years. Otherwise, YL Ventures sells off their interest. "We hold a company for two or thrre years and the outcome is a strategic acquisition of 100% of the company," he said.

With this approach, Yoav must work closely with the entrepreneurs to create a lot of business development opportunities to ensure the company develops a product that ultimately aligns with a future buyer.

It's an interesting approach, no doubt. And, one that requires YL Ventures' partners to incorporate the risk-taking mindset of a venture capitalist, a practical transactional view of an investment banker and a strategic view of a business development person. Indeed, Yoav does wear all those hats. 

"I spend 70% of my time doing BD (business development), and lead generation for my portfolio companies," he said.

Check out our interview and hear more about YL Ventures' unique approach to venture investing.