Meet the VC Bullish on Early-Stage Israeli Startups during Wartime
IDF forces in Gaza (Photo: IDF Spokesperson's Unit)
Early-stage ventures have been rocked more than most, with founders and important team members called away into reserve duty or having investment term sheets snatched off the table at the 11th hour. Operationally speaking, they are facing unprecedented new challenges, but when it comes to the tasks of raising capital funding, perhaps the challenges are not entirely unfamiliar.
Try to cast your mind back to mid-August/September. Israel was in the midst of experiencing social turbulence and our founders were feeling the reverberating effects of a challenging economic landscape for startups globally. Venture capital seemed to be drying up fast, and Israel's tech ecosystem was facing the headwinds of change. Some talked of a bubble. Critics in Israel pointed to the government's proposed judicial reform as the primary culprit behind slowed interest and capital injections into the nation's tech ventures. It would be grossly inaccurate to characterize those months as the quiet before the storm.
Already then, there was one very vocal name still writing first check investments to visionary Israeli founders and startups at a remarkable rate.
My first conversation with Michael Fertik unfolded in the serene setting of the Herman Hotel in Tel Aviv. Neither of us had any idea what was just around the corner, as we sat down to delve into the backstory which formulated his profound commitment to Israel's entrepreneurial landscape. Nobody did.
Now, almost two months on from the horrific terrorist attack which has pulled into a full-scale war, and with my feature piece seemingly shelved for the foreseeable future, Michael has emerged as one of the leading supporters and investors in Israeli startups since October 7, doubling down on the caliber of ventures we are producing during these unprecedented times of extreme economic adversity.
Michael Fertik (Photo: Courtesy of Heroic Ventures)
Wartime-forged startup founders are a special breed, and Michael knows how to recognize them. In the eyes of this VC founder of Heroic Ventures and executive chairman and founder of Reputation.com, they are highly investible.
Our conversation in early September uncovered the motivations behind his enduring faith in our dynamic startup ecosystem and his profound Zionistic connections to the Land of Israel. But his execution during the past two months provides a testament to his unwavering belief in our nation's potential.
So, I pulled this feature back off the shelf and got back in touch to ask Michael how his fund has been supporting his existing portfolio and if he has been writing any new checks for founders since the outbreak of the war.
“Tomorrow, Monday, I plan to wire $1 million to one of our existing portfolio companies that is doing very well during the war. They are selling to financial services firms. After my most recent visit to Israel, I met up with the CEO in London to watch him interact in sales meetings with prospective customers. I am doubling down on them during this period.”
“In another instance, one of my portfolio founders was planning to start a new fundraising round in November-December. He is currently down one of his three key engineers due to the draft call-up. Another engineer on his team is Bedouin. I told them that I have a standing offer on the table to invest more capital in their venture to provide security during the war. He has been forced to stop some marketing activities to consolidate capital, but they are plowing full speed ahead with a development cycle (even with a diminished team). Meanwhile, he and I are both taking steps to make sure that the wonderful Bedouin Arab team member is feeling secure, encouraged and vital to the project.”
“In another instance, I had a term sheet out to three founders with excellent generative AI credentials when the war broke out. Two of the founders have been called up to national military service. One of the founders works in the Intelligence Corps, another other has entered Gaza with the infantry and the third founder is volunteering with Israeli evacuees from the area adjacent to Gaza. They have put their company entirely on hold before we had a chance to sign this investment deal. This was their decision, not mine. I am staying in close touch with them and really hope they can proceed with their wonderful idea very soon. When they do, I will still be here to back them.”
To provide context to why Michael’s support of Israeli startups is so influential to the entire eco-system of early-stage ventures and investors globally, it is important to understand who Michael is to borrow some of the insights I learned from that first conversation.
Physically, Michael is an imposing figure in any hotel lobby, even while tucked away in the corner in an utterly failed attempt at being inconspicuous, he is impossible to miss. Tall, handsome and utterly engaging, Michael is after all a futurist of rare pedigree. He boasts a remarkable portfolio of more than ten patents, and in online reputation management (ORM); he is not just a pioneer, he is the veritable oracle, the foremost cyberthinker in the realms of digital privacy and reputation.
I am acutely aware that this man's insights and investments hold the power to potentially reshape Israel's tech and startup topography.
In fact, it is fair to say that Michael Fertik is downright bullish on Israel. I wanted to learn how that happened.
“Back in 2014, I had some things going on which allowed me to stop and think about what I wanted from the next chapter in my life and prompted me to explore new paths. Despite a profound personal connection to Israel, my professional ties to the country were sporadic at best, and I wanted a more regular connection to Israel. I contemplated involvement in charity and philanthropy at first but eventually chose to dive headfirst into investing in the Israeli startup ecosystem. In 2015, I formed Heroic Ventures.”
When I asked Michael what sets his VC apart from others, he explained that he chooses to operate on the “extreme edge of the risk curve."
“My investment strategy consciously defies the typical venture fund profiles. I operate at the extreme end of the risk curve, placing a premium on being the first financial contributor. Over the years, I remained steadfast in my commitment to two distinct principles – focusing solely on Silicon Valley and Israel, and secondly, my role is of first-money investor, the initial financial supporter for startups, either as the literal first investor or closely aligned with the earliest backers.”
Baring in mind that our first conversation took place during discussions on judicial reform and apprehensions surrounding Israel's startup project, Michael noted back then a narrative linking those reforms to a potential downturn in the Israeli startup ecosystem. Addressing the decline in global venture capital investment by emphasizing its universality, he countered that "It's happening everywhere in the world, not just Israel."
Despite skepticism from renowned venture capitalists and some startup CEOs reallocating funds, Michael maintained an open-for-business stance, resulting in a significant increase in deal flow and investments. He attributed the downturn to a broader trend favoring risk-free investments globally, impacting venture capital.
“For the first time in a generation, there's a unique opportunity where you can secure a 5% return on your bank account and U.S. treasury bonds. Personally, I find myself holding more bonds than I can recall. The allure of a risk-free 5% return has prompted a shift away from higher-risk investments in technology and other domains. This trend is significant, with allocators redirecting trillions, then billions, and eventually hundreds of millions, creating a clear pyramid effect. The appeal lies in the contrast between the risk-free nature of treasury bonds and the uncertainties associated with high-risk, illiquid investments such as venture capital, contributing to the observed decline in the latter.”
The dragging of the political discussion into the business arena, drawing the connection between judicial reform proposals and the supposed impending doom of Israel’s startup ecosystem was irrational, logically untrue, intellectually dishonest and bereft of evidence. I was dismayed but I kept saying, 'fine, I'm still open for business.' I wanted everyone to know I'm open for business. And so, my deal flow tripled and quadrupled. I did more deals, I kept my bar high and I invested more in the first seven months of 2023 than I did in all of 2022.”
I asked Michael if he would share with me his philosophy for Investing in Israeli founders and the balance between his Zionistic ideology and the fundamental requirement for capital returns for his LPs.
“While I'm an outspoken Zionist, my investments in Israel are driven by the pursuit of capital returns and efficient allocation, not a specific political or cultural agenda. It's crucial to distinguish my role as a capitalist from being a Zionist, even though I proudly identify as the latter in various settings.”
And what about his funds' limited partners (LPs), do they have any concerns about their capital being used to fund Israeli startups during judicial reforms and now in the middle of a war?
“The considerations of my funds LPs are predominantly business-oriented. Whether Jewish, Zionist or neither, their primary concern revolves around capital returns and the strategic allocation of resources. To be honest, discussions about Israel, including its political landscape and issues like judicial reform, and now during wartime, are viewed as minor details in the broader context of their investment portfolios. The key factors they prioritize include market size, entrepreneur quality and deal valuation.
"And incidentally, I don't collect fees for managing their money. My income is contingent on generating profits for them. This alignment reinforces my commitment to making sound investment decisions and actively participating in the success of the ventures, as my financial gain is inextricably tied to theirs. And I believe that Israeli founders and startups in the early stage still absolutely fall within that philosophy.”
As for online reputation management (ORM), I would struggle to think of a more relevant and needed set of expertise right now nor a more important ally to have in our corner as Israel attempts to fight the tsunami of libelous lies and hatred directed at it. But I’ll save that discussion for my next piece.