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Traditional venture capital investing is broken; the new model is to bet on $20-$80 mln exits
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
Most everyone following the venture capital industry knows the traditional VC model -- raising several hundred million dollar funds and swinging for the fences with each investment -- has become a challenging approach to venture investing, particularly during the worst liquidity drought in years.
The problem with this model is that it doesn't take much to build a company, particularly an Internet company, these days. So, many startups can be formed and developed with much lower capital requirements and packaged for a sale at much lower valuations.
Betting that more exits will occur in the $20 million to $80 million range is Israeli-based venture firm, YL Ventures, which has $30 million under management. Yoav Leitersdorf founded the firm about 18 months ago, after having been an entrepreneur himself. Yoav started three technology companies and sold them, and I were both at the Innovate!Europe conference, held in Zaragoza, Spain.
In this interview, Yoav tells me that valuations in Europe have tumbled 50%. So, clearly it's a good time for VCs to be looking. He also said that U.S. venture capitalists provide more value-add than their European counterparts. That's mainly because most U.S. venture capitalists have operational experience whereas European VCs tend to not have entrepreneurial experience.
Yoav's approach is unique in that he's very involved with his companies. Often, he does a lot of the business development and marketing for his portfolio companies, essentially leveraging his rolodex comprised of executives at media properties, particularly those based in the U.S. When he invests, he'll put half a million to work, and work toward an exit in a relatively short period of time - two to three years. He's satisfied with a $20 million to $80 million exit.
Is this the right model? It seems with the economic downturn, there's more of an appetite - if there's any appetite at all - for smaller deals. And, given the low capital needs to build a viable business, companies can get by without the need of huge capital infustions from venture capitalists.
But Yoav has been at this for just a couple years, and at the end of the day, he'll still need those exits. While he's not swinging for the fences, getting a single isn't a sure thing.
Watch the interview for more insight into Yoav's investing criteria.
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