“Seeking Alpha” in 3 Steps

In the world of finance, everyone is looking for “alpha”, with alpha being the return generated by an active manager’s skill and analysis that creates performance above the market. In start-up world, where growth is everything, I think alpha means any factor which increases a venture’s time to market or market penetration.

And with alpha in mind, it has become a trend for early stage (seed, series A or in-between) Israeli companies, especially in digital media to raise money in the States. And I guess this trend makes sense, because in the rough and tough game of growing an early stage start-up into a growth and sales stage company, every little advantage one can get makes a tremendous difference – especially your investor. Your investor should become an integral part of the venture’s family, and if anyone in the family can get you closer to your first beta customer,  in front of potential client decision-makers, industry experts, talent to hire or follow-on financing– it just makes a lot of sense to have such a person / entity on board. [1]

So what should entrepreneurs do:

1)      Don’t buy into empty promises.

Look through the smoke and mirrors. A lot of investors speak of “business value-add”, but few are actually able to deliver. Do your own due-diligence, ask to speak to a portfolio company or two, and don’t be ashamed to ask for examples where the investor really helped their companies – it should be part of an investor’s DNA, if they can’t give you many examples off the cuff, they probably ain’t doing it.

2)      Remember that value add has a price.

Like a good friend of mine always says “it’s very expensive to buy on the cheap”. What that means is that investors with real value-add tend to “charge” for it. Whether it is lower valuation, compensation for a director’s seat or warrants – an investor that brings something more to the table usually charges for it, and if they don’t – see the paragraph above J

3)      “Alpha” goes both ways

It is important for Israeli entrepreneurs to know in the back of their minds that for a US investor, an early stage foreign company is more of a liability than an asset. The company is not geographically located in its target market, has a more difficult time hiring talent, and is further away and thus more difficult to communicate with. There are several NY VCs that outright say that the further a company is located from NY, the less likely they are to invest.

So don’t try to battle the above perception, but rather focus on your unique advantages as an Israeli company for you prospective investor. Say that “we think we have a unique and different idea, but we know we are more versatile, and have access to equally able talent at half the price”. Try to emphasize the fact that you have plans to come to the US, but as an early stage company there are distinct advantages to being able to run almost twice as long on the same amount of cash as a company in the Valley or NY.

Every piece a founder adds to the venture’s complex puzzle should contribute alpha- finding the right investor is just another piece of that puzzle.

[1] The trend has come such a long way that Israeli investors are trying to emulate those exact characteristics, but stay locally relevant. UpWest and Elevator are two accelerator programs whose claim to fame is providing that “alpha”, and I hear of more and more Israeli VCs bolstering their business development connections in NY and the Valley.