Having closed their second fund with $100 million, the team at Israel Secondary Fund offer some important points on the necessity of liquidity over the lifetime of a startup
Every startup remembers the struggle to raise their Seed round, making dozens if not more pitches just to find someone willing to help them get off the ground. The percentage of companies that then made it through to work towards a Series A know how hard this can be.
But what happens later down the road after a company starts growing, building a business and expanding fast?
In contrast with the past, many companies in the Israeli scene are holding out longer, ignoring the early exit ramp in favor of bigger potentials down the road. While you can argue that this is a good thing, building a stronger and more stable ecosystem, it presents a number of new challenges.
VC investors have the reasonable expectation to get paid. They have their own investors to answer to. Then from the company’s side, they are investing their revenues into the growth, which is good but they too need the cash to pay out to themselves and employees as well.
One of the solutions that these players can look to is to bring in new investors like the Israel Secondary Fund, who announced earlier this week that they had closed their latest fund, the appropriately named ISF II.
Taking part in the funding were the usual mix of institutional investors, family offices, and a couple of folks with the necessary net worth. They report having completed four deals already from this new fund, with the intention of seeking out more in the internet, software, fintech, cyber, communications, semiconductors, and life sciences sectors.
The ISF operation is managed by Dror Glass, Nir Linchevski, and Shmuel Shilo. As a secondary fund, they work to acquire limited partner positions in companies, essentially buying out some of the existing investors, founders, and others with a stake in the venture.
Normally when we think about VCs and funds, they work to get in early or take part in later stage funding efforts. But as a secondary fund, ISF looks to fill a different need, providing the capital to give companies the necessary liquidity to move forward.
“Almost all CEOs of companies we have invested in have come to understand the value of having liquidity in their company,” Glass explains to Geektime, noting that having that cash in hand allows for, “current and past employees can see short and mid-term rewards, and investors who have a need or wish to sell can realize value independently rather than try to steer the company towards a premature exit.”
“A successful exit takes on average 10-12 years in Israel,” he says, pointing out that, “Along this period many stakeholders require some level of liquidity. Entrepreneurs and employees wish to see some fruit of their startup’s success in the long years preceding the exit. It allows them to balance their need for some degree of financial security and reward for their performance while focusing on achieving a meaningful exit in the longer term. This is also the interest of the funds backing those companies as it aligns the interests of investors and employees.”