Verissimo Ventures Monthly: April 2024

Deal Selection Process

Verissimo Ventures is a Pre-seed and Seed Venture Fund based in Israel and the US. We invest primarily in enterprise software companies and take a fundamentals-driven approach to early-stage investing. We work closely with founders to help them build the strongest, most fundamentally sound businesses with potential for explosive growth and a meaningful impact on the market.

We were founded in 2020 and are currently investing out of Fund 2.

Thoughts on Investing and Starting Up

We have previously discussed the five key dimensions for investment evaluation and dug in on the business model component. Today we will discuss how all five come together practically to generate investment decisions in a nuanced and dynamic process. 

One of the biggest questions we wrestle with as early stage investors:

Is there an ideal formula for determining a quality investment? 

We can’t answer this question without asking another:

Is there such a thing as a good investment that doesn’t generate returns and a bad investment that does generate returns? 

Investors at all stages wrestle with these questions, but the long timelines associated with early stage investing make it just a bit tougher. Our results come not just 1-2 years out, but 8-9 years in many of the best cases. Interim success can be deceiving, but is also an intermediate step on the road to longer term success. These factors make back-testing and continuous evaluation that much harder. 

Our approach is to create a process that has the right level of abstraction such that it can be both rigorous and specific enough, while also leaving room for the creativity required to pick winners in categories that do not yet exist. It means knowing where to bend the rules while staying fundamentally sound, thereby leaving space for the right amount of upside surprise. On the surface level, it means that each investment process will follow a similar arc, but that the details of each one can be quite different. Matching the approach to the opportunity is inherently circular, which further increases the variability of outcomes. The good news: early stage investing thrives on outlier outcomes, so it’s OK to be wrong - you just want to make sure you’re wrong in the right way. (I have written previously about ways to be wrong.)

Overall, we start each investment process with the same frameworks in mind, but know that it is dynamic and understand that a deal-breaker for one opportunity may be a non-issue for another. We must leave room for our instincts and use our judgment to make decisions. If we’re not doing this, then we have become replaceable.

Along these same lines, subjectivity is a key factor in the investment process - when it comes to both opinions and ability. Rather than pretending there is some sort of absolute answer, we take into consideration our own biases, humble ourselves and use the tools at our disposal to make the best decision while simultaneously working to improve this entire process. It means doing the objective work first: checking the boxes, doing the diligence, but leaving plenty of space at both the beginning and the end of the investment process for emotion. Instincts are built over time in the presence of greatness and guided by experts. Our team has had the great fortune over the last ~15 years to experience this first had, so a big part of our philosophy is to leverage our advantageous experience to optimize our process and constantly improve. We spoke about this during our annual meeting last month and are happy to share an excerpt here:

One of the most important factors in the investment process is the human factor. I am not referring to evaluating the team, but the actual interactions with that team. We are not hedge fund analysts attending earnings presentations and asking the occasional question. On the contrary, this business is very personal, highly networked and reputation-driven. The interface with entrepreneurs and how we reveal this process to them is also a critical component in turning investment decisions into a scalable investing business. 

We follow a few key principles: 

• Don’t waste entrepreneurs’ time 

  • We also fundraise, so we understand the toll it takes on the core business. At the early stage, the list of investors is nearly endless, so we make sure our conversations are genuinely constructive and that no’s are given quickly. 

  • Offer to help via working sessions in our expertise areas and connections to our network. This allows both of us to get a better sense for each other and the business opportunity, all while driving the business forward regardless of whether or not we invest.  

• Don’t waste their customers’ time 

  • References come last in the process, especially for companies this early on in their lifecycle. If we don’t understand the product and buyer well, then we need to question our ability to make a good investment decision. 

• Communicate the process upfront 

  • After running through our 5 dimensions, we are generally left with 1-2 key areas where we need to do more work or we need to hear more from the founder. This should not take long. We also have the benefit of existing relationships and prior industry knowledge, which helps us define these key areas and get answers quickly. 

• Be clear about the subjectivity of the business 

  • Be upfront with the founders about where we as investors struggle and make it clear that it is our struggle, not theirs. They may be able to learn from our struggle, but it is in fact just one perspective. 

• If we aren’t getting increasingly excited about a company, move on 

  • Fortunately there are many founders starting new and exciting companies constantly. There are also many early stage investors. This process is much more like dating (i.e., finding the one) than it is like applying to college (i.e., being the best overall candidate). 

Overall, this business is about two things: building businesses and constant improvement. As a startup ourselves, we have a lot of founder empathy, but also understand the key differences between technology companies and investment funds. We are doing our best to serve both sides of our business - founders and limited partners - in a way that is uniquely our own. 

So coming back to our original two questions:

Q: Is there an ideal formula for determining a quality investment? 

A: Yes, but you probably won’t figure it out until the last investment of your career. The concept of the ideal formula and the drive towards it is more important than the formula itself.

Q: Is there such a thing as a good investment that doesn’t generate returns and a bad investment that does generate returns? 

A: A good investment process is the key. You’ll only know you have one after many years. A bad investment process will generally yield bad results pretty quickly. It’s possible to make a mistake and get lucky, but this is not repeatable and may actually result in even worse returns down the road.

I’ll be taking part in a webinar about Finance for Startups on May 22.

More information and registration can be found here: http://bit.ly/financeforstartupswebinar

Portfolio Highlights

DagsHub is building a platform that helps AI and machine learning teams manage data, experiments and models in one place with zero DevOps. Their community has over 40k members from industry teams, research labs, and enthusiasts. The main problems they are tackling are: reducing the time it takes from idea to model deployment, increasing trust and compliance in AI systems, and enabling knowledge sharing through models and datasets in large enterprises. They recently launched a partnership with Google Colab for an AI focused data management alternative to Google Drive.

With April 15th just behind us, we feel like now is the perfect time to highlight Gelt. Gelt is a premium tax solution powered by technology and expert CPAs. They have leveraged their deep expertise in tax as well as software to build AI-enabled workflows that reduce the level of busy work required to keep clients compliant and thereby enable the efficient development of proactive tax strategies.

Satim provides solutions for analyzing Synthetic Aperture Radar (SAR) imagery. They are currently focused on maritime vessel detection and classification, but their solution can work for all types of objects. Using their proprietary AI models, Satim can detect and identify vessels in SAR images. The major benefit of SAR is that it can see through clouds and in the dark, greatly increasing the utility of satellite imaging. The downside is that the raw images are not easily human-readable. As a result, typical object identification methods for model training via manually tagging do not work. Satim’s secret sauce allows them to create synthetic training data for their AI models and classify vessels with extremely high accuracy.

Lenkie helps SMBs control their cashflow with fast and flexible capital, analytics dashboards, and payment automation tools. Their suite of tools streamlines the accounts payable process, and their credit facilities offer financing in a simple and transparent matter to businesses in categories that are traditionally underserved. They’ve disbursed over £30M supporting the growth of hundreds of businesses across the UK.