The 10 Types of Investors in the Israeli Tech Ecosystem

Masterclass, Episode 1: Understand your fundraising options for a new tech startup in Israel.

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Episode Highlights:

The first thing your startup needs is money – and it’s probably going to come from investors. Bootstrapping success stories are few and far between; almost every big tech company has fundraised at one point or another. Even if you’re planning to write all your code with ChatGPT, you’re still going to need to build a business and compete with well-funded enterprises, which doesn’t come cheap.

This Masterclass will help you understand your fundraising options for a new tech startup in Israel. We’ll break down the types of investments and investors you’ll meet, on the journey from your garage (or, more likely, your one-bedroom apartment in Tel Aviv) to ringing the bell at Nasdaq.

What You’ll Learn:

• Potential sources of fundraising for your startup

• How each investment works and whether or nor it dilutes your holdings

• Key gotchas and things you should be aware of when meeting with investors

Meet the expert:

Yossi Vinitski has been an investor in the Israeli tech ecosystem for over two decades, and has played a role in shaping the local venture capital landscape. Today, he leads the Late Stage program at StageOne Ventures. 

Prepare to Always be Fundraising

As a tech entrepreneur, raising money is going to be part of your life for many years to come, so you’d better get used to it. You should also get used to getting diluted with every additional raise. If all goes well, this will work eventually in your favor: 5% of a $300M company is worth more than 50% of a $20M company.

A Word of Warning: Do Your Due Diligence!

Whether you’re getting your first check or closing a $100M Series E, you need to be very careful about choosing your investors. Once someone is on your cap table, you’ve started a relationship that’s going to last for many years. It’s more of a marriage than a one-night stand, in that neither party has an easy way to end it. If you find yourself entangled with a VC you don’t get along with, things can get ugly.

Obviously turning down investments is easier said than done, especially when you really need the money and it’s not clear that you can get it elsewhere. Still, keep this advice in mind, and have a long think before accepting an offer.

The 10 Types of Investors You Need to Know

(In somewhat-chronological order.)

1. Family and Friends

💰 How much can you expect to get? A few thousands to a few tens of thousands of dollars.

😥 Will you get diluted? No.

🧾 Watch out for: Doing business with your family and friends.

🧾 Relevant for: Any new business.

The details: Most founders start their business with relatively small loans from the people they know. You’ll be asking for a loan rather than an investment, and you’ll typically repay it once you raise your first proper round (or out of pocket). 

The advantage of raising from family and friends is that there’s usually no due diligence at this stage and you get the money quickly. The downside is that you’re doing business with family and friends. If you lose all of the money that your uncle Moishe lent you for your startup, he’ll never let you hear the end of it. (Seriously though, involving your loved ones in your finances can destroy relationships - tread carefully.)

2. Angel Investors

💰 How much can you expect to get? Between $50k and up to a few millions

😥 Will you get diluted? Yes.

🧾 Relevant for: Pre-seed and seed startups of all types..

👀 Watch out for: ‘Opportunistic’ investors with misaligned expectations.

The details: The common angel investor is a rich and well-connected individual who is interested in risking a fraction of their wealth by investing in early-stage startups. They usually invest in pre-seed or seed stages. This is an equity investment, not a loan. You will get diluted, and the angel investor will receive a portion of the company's equity. In return, you’ll get money; in some cases the angel investors will also sit on your board, share advice and industry connections, or make intros to customers.

You’ll meet two types of angel investors: professionals and opportunists. The professionals invest in multiple startups each year. They know the rules and the risks involved, and how the tech industry operates in general. Opportunistic investors, on the other hand, are less savvy – these are ‘regular’ investors looking to diversify their portfolios. They might expect the type of quick returns they’d get from real estate and struggle to understand that they’ve invested in a dream and a slide deck, both of which are currently worth zero dollars. Make sure they know what they’re getting into before taking the money.

The Israeli Innovation Authority

💰 How much can you expect to get? Between $50k and up to a few millions

😥 Will you get diluted? No.

🧾 Relevant for: Mostly deep tech, but worth investigating for every startup.

👀 Watch out for: Bureaucracy.

The details: The Innovation Authority (רשות החדשנות, formerly המדען הראשי) is a government body responsible for supporting the local tech ecosystem. There are various tracks for fundraising from the Innovation Authority, but most commonly these will be conditional grants which you only need to return if your company succeeds in making the money back. There are terms and conditions - e.g., you might need to return more if you move intellectual property out of Israel.

The advantage is that you’re getting more money to run your company, without diluting your own equity. The only real downside is that there’s some bureaucracy involved, and it might end up not being relevant for your company (for example, the IA prefers to fund ‘underserved’ sectors such as deep tech or agritech, rather than companies that can easily fundraise from the private sector). Still, it’s well worth the few hours of form-filling that you’ll need to do in order to apply.

Incubators

💰 How much can you expect to get? Around $500k.

😥 Will you get diluted? Yes.

🧾 Relevant for: Pre-seed, seed.

👀 Watch out for: The fine print; the commitment period and location.

The details: Not to be confused with the type of incubators you might find in Silicon Valley. Israeli incubators are collaborations between private firms (often a consortium of local and international) and the public sector, via the Innovation Authority. You give up an equity stake in your startup, as you would with any other investor. The incubating body gives 15%, and the Innovation Authority covers the remaining 85%. In addition to money, you’ll get a whole range of supporting services – including finance, legal, accounting, and office space. 

There are currently nine incubators that have participate in this program. Most of them are in geographic periphery and will mainly support healthcare and food-tech startups. As always, the devil is in the details, so it's important to research and understand the terms of the equity deal you’re offered before agreeing to it. Also note that the incubator period is typically two years, and you’ll need to run your business in the area it’s supporting (which might mean needing to move house).

Accelerators

💰 How much can you expect to get? Usually a few $100s of thousands.

😥 Will you get diluted? No.

🧾 Relevant for: Pre-seed, all verticals.

👀 Watch out for: Misalignment between your goals and the accelerator.

The details: Accelerators are programs that help startups get off the ground by providing funding, mentorship, and access to capital. They usually invest a few hundred thousands of dollars in exchange for equity. True to their namesake, they can help accelerate your execution – from teaching you the ropes to finding your first customers and connecting you with later-stage investors. 

There are different types of accelerators: foreign accelerators like Y Combinator (you’ll need to relocate for the duration of the program), local accelerators such as Fusion, not-for-profit programs, and corporate accelerators. You need to do your research and understand whether the accelerator you’re applying for has an agenda - e.g., to promote a large enterprise’s exposure to startups - and whether that agenda lines up with your own goals. You should also consider the reputation of the accelerator itself: some accelerators might have a track record of successfully launching startups, and participating in them is validation in itself; others might not have a great reputation in the industry. 

Crowdfunding

💰 How much can you expect to get? Anything between a few $1000s to 1M+

😥 Will you get diluted? It’s complicated.

🧾 Relevant for: All stages, mostly consumer products.

👀 Watch out for: Marketing costs

The details: Crowdfunding emerged in the US in 2008 after the financial crisis, as an alternative way for startups and projects to raise funds from the public. They allow retail investors to support ventures they find interesting. Crowdfunding is suitable for early-stage companies, and not just in tech - you can crowdfund a physical contraption or a social venture. Funders might get equity, early access to products, or even interest payments, depending on the conditions of the campaign. 

Platforms like Indiegogo and GoFundMe have helped companies raise billions in total – but it’s not for everyone, and it’s not free. Getting backers will mean running a marketing campaign, which can potentially cost tens of thousands of dollars, with no guaranteed reward at the end. It’s also worth keeping in mind that consumer products and simpler offerings are a better fit for crowdfunds –.if you’re developing a platform to improve observability for Kubernetes, you might not fare as well.

Venture Capital

💰 How much can you expect to get? $1M to $100M (at 2020-2022 bubble rates)

😥 Will you get diluted? Yes.

🧾 Relevant for: Seed to pre-IPO; all types of startups.

👀 Watch out for: Competing VCs talking to each other (about you).

The details: Venture Capital (VC) firms are the undisputed movers and shakers of the startup industry. They are private bodies, usually structured as limited partnerships, who exist in order to invest in startups with the hope of generating significant returns.

Israel has a broad and sophisticated VC industry, with firms of all shapes and sizes. Some VCs are more niche-oriented, focusing on fields like medical devices or cybersecurity, while others are less specialized. There are microfunds that focus on early-stage companies, and larger funds that invest in Seed and Series A rounds and beyond. VCs can be local, international with a local presence, or fully international. In recent years, the trends has been for VCs to invest in growth and late-stage startups, with rounds that have frequently crossed into the hundreds of millions territory.

VCs are well-known for their structured investment process (this is, after all, their job). A good VC will also provide industry connections, mentorship, and guidance to their portfolio companies. However, the reputation for being ‘smart money’ is not always earned; sometimes they are just money. (See above re:the importance of doing your due diligence.)

Another word of warning: VC firms talk to each other, even if they’re supposedly competing over the same startup. If you’re meeting with a few different firms, you’d better keep your story straight; they can and will ask each other about you.

Corporate VCs, such as those affiliated with Intel and Microsoft, are investment bodies created by large corporations. They aim to expose their companies to startups and make money in the process. Today, one-third of all VC investment comes from corporate VCs. Typically these entities start as a body that’s more closely affiliated with their corporate parent, and as they mature they start behaving more like ‘traditional’ VC firms.

Venture Debt

💰 How much can you expect to get? Millions to tens of millions.

😥 Will you get diluted? No.

🧾 Relevant for: Series A and upwards, specific industries.

👀 Watch out for: High interest rates and strict due diligence.

The details: These are loans specifically designed for high-tech startups. They can provide a non-dilutive source of capital. Venture debt is typically used to fuel future growth, and is most relevant for capital-intensive industries (e.g. fintech, gaming, adtech), and where there is a clear path to ROI for every dollar lent. The sums can range from millions to tens of millions of dollars, and are typically offered to startups who have strong investors backing them. Expect a very strict and thorough due diligence process (which can actually help you get your books in order).

While non-dilutive funding might sound tempting, it’s important to remember that this is a loan – and the lending body can (and must) pursue any legal means to recover it, including taking you to court. What’s more, the interest rates on these loans will typically be high, as they are considered high-risk. If you’re going down this route, shop around for the best terms, just as you would with a personal loan or mortgage offer.

Family Offices and Institutional Investors

• Family offices are investment management firms established by wealthy individuals or families to manage fortunes. They typically invest one million to a few million dollars, often in early-stage startups. Family offices usually don't lead a round, but they might follow a larger fund. Similar to angel investors, family offices can be professionals or opportunists. 

• Institutional investors include banks, insurance companies, and other large financial institutions. In recent years, they’ve become increasingly involved with the Israeli tech ecosystem. They usually invest in later-stage startups, typically Series B and onwards, and are used to writing large checks, (>$10 million). Their involvement usually comes with a strong due diligence process.

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We hope you found this episode helpful. Here’s a sneak peak of what’s coming next. All episodes are also available on Od Podcast.