Today in the Seed Series we speak with Shuly Galili, co-founder of UpWest with Gil Ben-Artzy. We talk about UpWest investing in Israeli companies with pre-seed funding, how they support early stage pre-product market fit companies, and what is takes to run distributed teams from day one. The following has been edited for brevity and clarity.
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Gené: Welcome Shuly Galili, founding partner of UpWest based here in Silicon Valley investing in pre-seed stage Israeli companies. What is UpWest’s charter?
Shuly: UpWest looked at what was the gap for Israeli founders at the very early stages. We started eight years ago in 2012. There wasn’t a seed environment established in Israel then. Startups were trying to bootstrap with very little money. However the number one pain for Israeli founders, was never money. Israel as an ecosystem is cash rich, market access poor. The number one pain that we identified very early was speed to market, understanding the customer, and who you are selling to at the seed stage. How do I validate my technology with the first US customer. It’s really hard to do it when you are far away. Many of my conversations with founders over the years before starting UpWest was, why are you testing it in Israel? Why are you not trying to do it immediately in your target market.
Our thesis from the beginning was, can we take these founders who are super-focused on the US market, give them a little bit of money and then mostly work with them on validation in the early days of the company, and then help them scale their business in the US. And that’s how we started in 2012 with a $2 million fund that we bootstrapped with friends, colleagues, angels and investors who are still involved to this day.
It wasn’t, ‘let’s build a VC’. We’re passionate about helping Israeli founders. The model of building a fund was the most aligned model that we could find. We do invest in primarily Israeli founders at the pre-seed, and seed stage, very early, pre-product market fit, who are anxiously looking to meet new customers, to validate their technology and then to build a bigger business here in the US. It means that they’re leaving their engineering in Israel. They are hiring the business know-how here in the Midwest, Silicon Valley, New York, or Boston depending on where the customer is.
Gené: Your most recent fund III was $18.5 million. How much do you invest at the pre-seed stage and how much equity do you seek to get?
Shuly: Today our average check size is between $250-400k pre-seed. We typically get around 8 percent. Then we deploy more capital at the seed and series A as well.
Gené: Do you co-invest for the first check in?
Shuly: We do our own checks. We may have added a few angel investors and people from our network, who are value-add, to act for the company in the early days — the CEO of Waze Noam Bardin, and Dan Scheinman a unique angel investor that comes in at the early stage and plays a role at the board level.
We look at the category of seed and we see a lot of players. But few people understand the trials and tribulations that are going on between when a company starts and then to raise institutional Series A. And for us it’s important to have people that can really help the founders through those turbulent times.
Gené: After your initial investment are there firms that you like to work with?
Shuly: What we’ve created for Israeli founders is expanded capital. Within the Israel ecosystem there is a robust VC system. We just tripled that by having the relationships that are happening here. We co-invest with Amplify, Redpoint, Lightspeed, people that understand both the type of technology that comes out of UpWest, as well as the founders’ mentality.
Gené: Is there a particular sector that you invest in?
Shuly: We’re sector agnostic. We’re the first check in a company. So if you look at the common denominator, it’s the character of these founders, and the fact that they are eager to take risk, in going to market without the cushy ‘we raised $10 million.’ We know it’s going to be challenging. You’re going to a place where nobody knows who you are, your background, or expertise.
In terms of sectors, we’re dividing it into three buckets. Sixty percent of our portfolio are typical for Israel in terms of domain expertise. Cyber-security, analytics, marketing tech, SaaS, B2B, and enterprise cloud infrastructure. Twenty percent would be emerging technologies, related to IoT, healthcare IT, agriculture technology, drones and robotics, that come out of either military or academia. Another twenty percent are companies who are innovative in the business model that they have. So companies in the future of work, like HoneyBook that are doing business software for small businesses. We lean a lot towards technical founders, and enterprise B2B.
Gené: You are meeting companies here or in Israel?
Shuly: We source out of Israel, mostly. Ten percent of our investments are US, 90 percent we source in Israel. We look at around a thousand startups a year, and we invest in about six to eight companies.
Our involvement is for the long term. How do you run distributed teams? Silicon Valley is really looking at that. We’ve been doing it for a long time. When we started one of the VCs was saying ‘we can’t invest in your companies because they are not all sitting in one place.’ For us that’s capital efficiency, when they’re hiring tech somewhere else. They’re getting the best of both worlds. How do you build a company that has two offices from day one? How do you really continue to grow these two offices, both hiring technology, as well as building the business here?
Gené: What are the challenges of building a distributed team that you’ve seen?
Shuly: It takes specific founders. Ultimately the sacrifice is on the CEO. It has to be a very communicative CEO. He needs to create a cohesive environment, even though the team is distributed. And ultimately live on an airplane. And not say we’re a US company, and you over there are some sort of an offshore. It’s actually the other way around. Our goal is for our CEOs to share best practices with each other.
Gené: What is the stage that these companies start hiring here?
Shuly: The series A round is when they are seriously ramping up hiring here. Until then, a lot of the focus is on building tech, hiring a lot of great engineers in Israel. Some CEOs feel compelled to move earlier than others. Some CEOs have moved here immediately after we invested. Some CEOs after the series A. We really see the difference in that the longer you wait, the more difficult it becomes.
Gené: Finally, tell us about a couple of companies that you’re excited by and why?
Shuly: One of them announced funding last week (their Series B) a company called Stampli. They’re based here in Mountain View. There are industries that demand new technologies to automate and make it more productive. So Stampli is doing that for invoice processing. They are an accounts payable technology company. They’re dealing with customers who have thousands and thousands of invoices, are inundated with paperwork, with paper trail, with not knowing where the invoice started, and when is it going to be paid. Stampli improves with digitization and AI. They’re in the fintech space
Gené: Who is the target customer?
Shuly: Anyone from retailers to companies that have a lot of outsourced vendors. They raised a Series B from SignalFire. Two brothers are the founders, one is the CEO and the other the CTO. The CEO is here building the team, the CTO in Tel Aviv.
Gené: And another portfolio company to watch?
Shuly: It’s a company called CyCognito. Really incredible team in cyber that comes from the offensive side. They view customers from the hacker perspective. What is vulnerable? How do you really map the attack surface of Marriott? The attack surface has changed, because it’s no longer just the technology that is on your laptop. There are many ways that servers, mobile technologies, customer lists, and credit cards are being exposed today. We have been working with early validation, customers, and helping them get the funding.
Gené: Who are the customers are they talking to?
Shuly: Banks, hospitality, and enterprises.
Gené: Thank you Shuly
Illustration: Li-Anne Dias.