Disclosure: I am working with YL Ventures to identify promising Finnish start-ups. For more information, or to put your company forward, contact me at villevesterinen@gmail.com.
Start-ups seem to be all the rage nowadays in Helsinki. Jaiku’s recent acquisition by Google surely hasn’t hurt. There are few things that cause more discussion among Finnish entrepreneurs than venture capital, or the lack thereof.
Yoav Andrew Leitersdorf, managing partner of YL Ventures, is looking to help build a credible venture capital ecosystem in Finland. YL Ventures is a European high-tech early stage venture capital fund.
Yoav talked with me about his fund’s policies and the need to rethink standard venture capital strategies. YL Ventures looks for low-valuation high-tech start-ups (that is, below € 5 million) that are more suited to become divisions of large corporations than stand-alone ventures. The fund attempts to build its start-ups to mid-size valuations—below € 50 million – and match them to suitable acquirers.
YL Ventures says it is in contact with over 50 strategic acquirers. The industry average time for exiting an investment is 5.8 years, but YL Ventures seeks to do it in 2 years. To achieve this YL Ventures applies an early exit approach after building a start-up to a level that a large corporation can acquire it.
Before founding YL Ventures in 2007, Leitersdorf was involved in founding, developing and selling three technology businesses in London, New York and Tel Aviv. One example is New York based online payment service ExchangePath, founded in January 1997 with € 3 million of capital and sold to technology and e-commerce solution provider CMGI in September 1999 for € 25 million. His other two companies were mobile TV company Movata and PcEntertainer Magazine,the world’s first online multimedia magazine.
Looking for the next Facebook or Google is not the only model for venture capital. Leitersdorf believes that many corporations are hungry for external talent and innovation, and accelerated medium-size strategic exits will work.
Your fund has a different approach to many other venture capital funds. Could you describe your strategy and why you decided to go with a different approach?
YL Ventures agrees with other VCs that entrepreneurial innovation is best executed outside the corporation. However, once a concept-proven product, a proprietary technology and a good team are in place, YL Ventures believes that it is most efficient to integrate an entrepreneurial outfit with a large strategic player that has the credible brand, distribution, customer base and synergetic products that make it far easier for the innovation to capture its market. This goes against the traditional view among venture capitalists that stipulates that startups should be able to absorb a significant amount of capital and turn that capital into organic growth, achieving hundreds of millions or billions of Euros in valuation within approximately 5-7 years. YL Ventures believes that this traditional venture capital model is no longer the most efficient, since today billion-Euro initial public offerings are few and far in-between, and more than 9 out of every 10 startups that go this route ultimately fail. YL Ventures supports short-term medium-size exits that are far more achievable and represent a win-win-win situation for startups, corporations, and investors, if done properly and professionally.
In Silicon Valley there is a growing differentiation between angel investors and venture funds. Would you describe YL Ventures as more the former or the latter?
I would disagree and say that in Silicon Valley (where we spend a lot of time due to the location of strategic acquirers), the line between early stage venture capitalists and experienced angel investors is blurring. It is true that the angels typically favor earlier exits than the venture capitalists. However, YL Ventures is certainly organized and run as a professional venture capital fund, and like other funds we prefer to invest after an angel round, not instead of an angel round. In other words, in terms of the stage of the company, YL Ventures is similar to a typical venture capital fund, seeking to invest at the Series A stage, except that we look to take companies on a completely different route than those typical funds. We take companies directly to an acquisition, whereby other funds take companies through multiple rounds of financings in hope for very large payoffs at the end.
Your fund seeks to fund the whole, though granted short, lifetime of the startup, from a sub-million angel investment to an 1+ M round. What benefits does this bring entrepreneurs? Are portfolio companies free to seek large-scale funding (10+ M) after a round with you?
Entrepreneurs that take investment from YL Ventures are far more certain of the likelihood that they would achieve a multi-million dollar exit, which for most of them is a life-changing event. These entrepreneurs opt for a shorter, more likely exit at the medium-size rather than home-run valuation range. In addition, these entrepreneurs are far less likely to be diluted in future investment rounds, because the exit strategy is not about multiple future financings. Portfolio companies are not free to seek large-scale funding once we get involved – we see that more as a last result rather than primary strategy for our companies.
What are you looking for in a company to qualify for an investment?
We generally look for three things that are very much tied to each other: First, we seek deep technology and proprietary products that we know are highly desirable by the strategic acquirers that we work with. Second, we seek highly-talented, engineering-oriented teams that would make great additions to these corporations that we work with. Finally, the overall company, including its long-term strategy, should be suitable to these corporations. Beyond these, as any investor, we seek reasonable valuations, decent deal terms and great people to work with.
What industries are you focusing on? From abroad many see the Finnish tech world as almost exclusively mobile telephony based but there are many other strong areas like IT. Your background is in mobile technologies – will you just focus on that space?
We focus on the Internet, telecom (mostly mobile applications) and digital media sectors. My personal background is in all three of these sectors. Finland has been very strong in mobile, but we believe that innovation in any sector can come from anywhere. For this reason we haven’t opted to select certain European geographies as more desirable than others. We view the Finnish market as openly as we view all other European markets.
How do investors see Finland as a start-up market?
Most investors do think ‘mobile’ when they think of Finland, and that is unfortunate. In general, I believe that venture capitalists view the country very positively. Some, however, believe that more should be done in the country in order to encourage entrepreneurship and make it easy for individuals to start new companies.
What should startups that meet your criteria do to get your interest?
The best way to get our attention is to get in touch with you, Ville. Other than that, startups can always email us directly at plans@YLVentures.com. Receiving blog coverage before contacting us is helpful because it provides us with other, interesting perspectives.
