Verissimo Ventures Monthly: December 2023
What is Verissimo Ventures?
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 before, during and after the investment process 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.
We hope to use this newsletter to share the latest happenings from our portfolio, our new investments and some of our thoughts on both the industry and our approach to investing.
Thoughts on Investing
In Fund 1, we gained a tremendous amount of early stage investing experience by casting our net wide - seeing a lot, investing a lot and building up an incredibly strong network of founders and co-investors while gaining expertise in less familiar markets. Having a background in Series A,B,C investing from NEA, I saw that there was an opportunity to identify and work with companies prior to that stage to maximize their chances of getting there and beyond. As we transitioned to a larger Fund 2, we did a rigorous analysis of our Fund 1 performance and investment decision process in order to build strong frameworks to increase our hit rate and build Verissimo Ventures into a strong business itself.
I am happy to share one of those frameworks here…
Narrowing our Investment Aperture by Business Model
We focus on 5 dimensions to evaluate every new investment opportunity:
1. Team
2. Market & Industry
3. Product & Technology
4. Business Model
5. Traction & Metrics
Of course checking the box on each of these doesn’t necessarily mean that we will choose to invest, rather it provides a framework which leaves ample room for the sort of creativity and optimism required to get involved in the most innovative new companies, while helping us cover any blind spots.
I am first going to focus on Business Model. Despite many of the companies we invest in being pre-launch, we focus heavily on the business model which is still to be built. We do this at the thematic level and at the company level.
What does it mean to have a strong business model?
And how can we possibly know that prior launch?
What assumptions do we need to believe in order for this potential to become a reality?
A Strong Business Model is one that has the ability to produce meaningful cash flow consistently and quickly. See a previous post here where we dive into the concept of using a DCF analysis to better understand sensitivities to the key variables, even for pre-launch companies.
Those key business model characteristics (combined with our own areas of expertise and interest) lead us to the world of enterprise software. While certain sub-sectors have become highly competitive, there are still ample opportunities to build large, fast-growing, cash-producing businesses in this market.
Fundamental characteristics of the enterprise software business model that make it strong:
End Customers: Profitable customers means willingness, ability and urgency to spend real money on important business solutions.
Subscription Pricing: Cash upfront, medium to long-term contracts.
Multi-tenant Architecture: Ability to grow super fast with limited marginal costs.
Of course not every company the world considers to be “enterprise software” has these characteristics, rather this is what we view as the most powerful, necessary attributes of the business model because the result is…
High Margins: High gross margin means high margin for error when it comes to both product and go-to-market, and therefore high cash flow margin.
High Growth: The product itself and the delivery architecture mean that the sky is the limit on the pace of growth.
High Consistency: Subscriptions mean predictability, and enterprise buying processes, while potentially long, are often well-understood.
Prior to launch, each of these things is knowable and therefore sets the company up for a higher degree of success long-term.
We are in the business of making “rules of thumb” just to break them, but there is a science behind the seeming contradictions. If a consumer company comes along which exhibits the fundamentally strong business model characteristics mentioned above, then we will happily dig in. And if there is an enterprise company that comes along which lacks one or multiple of these key fundamental characteristics, then we happily move on. We focus on the underlying characteristics of the business model rather than the industry jargon.
We always ask ourselves: what assumptions do we need to make in order for this to become a large-scale successful company, and are those assumptions believable, measurable and verifiable?
Sometimes the hurdles on the tech are just a bit too high, the competition is too stiff, the demand is not there yet, the buying behavior has to change too much or the pricing leverage simply is not there. Do we believe that these can change meaningfully and why? Is this the founding team to make that happen?
This framework connects nascent startups to a fundamental understanding of what makes for a strong business model, giving us the flexibility to be opportunistic while creating an efficient process for evaluating the large number of opportunities that we see.
I hope that this peak into our constantly evolving investment process was interesting - there is plenty more to share on this.
Portfolio Highlights
Rossum was recently named a leader in the IDC MarketScape for Intelligent Document Processing. Rossum uses in-house AI to automate document processing for large enterprises. We are joined by LocalGlobe and General Catalyst among other leading investors.
Certa recently raised a $35M Series B led by Fin Capital and Vertex with participation from Point72, Tru Arrow and Mantis VC. Certa is building the next generation of procurement and vendor management software.
New Investments
We have made 12 new investments from Fund 2 in 2023. While several of them are still in stealth, we are happy to share a few here:
Founded by Gadi Shenhar, Droxi is changing the way doctors respond to digital patient requests with an AI-enabled in-basket companion which surfaces the relevant information and allows doctors to get through their work significantly faster. Based in Israel and selling into the US market, this team has exhibited incredible resilience over the past two months, executing extremely well on product, hiring, sales and fundraising while also serving the immediate national needs in Israel.
Founded by Jhillika Kumar, Conner Reinhardt, and Shea Belsky, Mentra is a neurodiversity employment network. They serve both enterprises and jobseekers, providing the valuable context and matching algorithms to enable the placement of neurodivergent candidates into ideal roles inside great companies.
Final Thoughts
The current situation has been incredibly difficult for Israel, but it has also been unifying and inspiring. The Israeli technology ecosystem has shown its toughness by continuing to operate at an extremely high level. With many founders and employees serving in reserve duty and keeping the country safe, we have seen superhuman effort exerted in both realms. One of our founders sent me two photos back to back: one in uniform and one in a button down shirt, switching seamlessly between an army base and zoom calls with customers - I told him he is a super hero. This challenging situation is absolutely bringing out the best in people here. We see an incredibly bright future for the companies which are founded, funded and run in this environment.
We have made 4 investments since the war started and are in the process of making 5 and 6. We can only defeat destruction by creating, and that is exactly what all of our companies are working so hard to do.
In addition, alongside some friends in the industry, we launched a handful of initiatives to help the ecosystem continue to thrive:
Investors for Israel - https://investorsforisrael.com/
Tech Condemning Terror - https://techcondemningterror.com/
Buy Israeli Tech - https://buyisraelitech.com/
Invested in Israel - https://investedinisrael.com/