Venture Capital Investing in Israel's Enterprise Entrepreneurs

Daniel Frankenstein:

Elana, thanks for having me. It's great to be here.

EMS:

Absolutely. So, to kick off the conversation, tell us about Joule Ventures and how you got to where you are today.

DF:

Absolutely. So, Joule Ventures, we're a partner-only seed fund, so we're really intentional about our team and then the entrepreneurs that we back. We got started a little over 14 years ago. I started my career working for a company called the Corporate Executive Board. They were a New York Stock Exchange traded company that was acquired in 2017 by Gartner. And in 2008-2009, they sent me to Israel to open a branch office. In being there and building their business, saw that there was this budding entrepreneurial ecosystem in Israel and saw that there was also a gap in the market in terms of going to market in the United States. So, incredible products being developed in Israel, not so incredible commercialization of those products in the United States. So, saw an opportunity, co-founded a firm. We were founded as a firm called Janvest Capital, and we rebranded to Joule Ventures just to really capitalize on the opportunity to take these incredible products and help them get to the United States market.

EMS:

Great, Daniel. Love your journey. So as a follow-up conversation, given your focus on VC investing and Israeli entrepreneurs and startups, love to hear your high-level outlook for the space.

DF:

Absolutely. Well, we as a firm are very bullish on the general startup economy globally. And maybe I'll make the point that whether it's in Israel, whether it's in Silicon Valley, whether it's in any innovation ecosystem around the world, so much of the entrepreneurial ecosystem in the venture capital world that capitalizes on that ecosystem is really global. It is completely normal to have a founding team in Silicon Valley, developers in Israel, outsourced engineers in India, Ukraine, Argentina. It's really a global ecosystem which makes it a really fun and invigorating environment, and we're very bullish on it.

There's absolutely been a reset in the world of venture capital and in the world of startup valuations. This is a particularly interesting moment for that world because valuations have normalized, there's less private capital, it's harder to raise venture funds and therefore it's harder to raise capital for startups. We actually think that's a really good thing that's washing a lot of businesses out that probably shouldn't have been there in the first place, washing some funds out as well. But what's left is really incredible high conviction investors and also really high conviction entrepreneurs as well. So, we're really excited about this ecosystem. We're excited about this market that allows us to have the time to do our work and find great companies, and we're finding really incredible opportunities in this market.

EMS:

Daniel, that segues nicely into the follow-up question I have for you. I'd love for you to touch on some of the specific opportunities you see in your space and why.

DF:

So, there's a few markets, sort of sub-sectors in our space that we really like. The first is there's so much opportunity to disrupt legacy industry. We have so many industries in our world today where technology really hasn't touched those places yet. There are so many opportunities for efficiencies, there's so many opportunities to make people more productive. So, we really like that. We've made plays recently in places like procurement and supplier portals for the hospitality industry. We've done deals in the equipment financing space, all sort of legacy industry that really has great opportunity we believe.

Another place that we see a lot of opportunity that's kind of specific to a core competency in the Israeli ecosystem is cybersecurity. I like to call cybersecurity sort of the most unfortunate growth industry because as cyber businesses get better at tracking down fraud and hackers, the hackers get better. And so, there's always new innovation in that area. And the third, which is a buzzword that everyone's talking about right now, but artificial intelligence, everyone loves to talk about AI. It's a buzzword in every deck we see. I'll tell you, we've been investing in AI for a decade. We see this as just the maturation of this market, and we're really excited about specifically how AI can bring product development cycles much quicker and allow companies to get products to market much faster.

EMS:

Daniel, on the other hand, what are some of the greatest challenges you face in your space and why?

DF:

So, I think in general, one of the greatest challenges, and I alluded to that early in our conversation, is the global venture market has had really a reset, call it right after COVID and through 2021 in sort this zero interest rate environment, funds were pretty much easier to raise. Startups could raise money at seemingly completely untenable valuations, completely valuations that were not tethered to reality. And obviously that was not a sustainable business. We saw that circumstance taking place and because we've been around a decade-and-a-half, we saw that wasn't sustainable and did a good amount of harvesting earlier positions during that time. But now we've had a reset and we're back to reality where there is a cost of capital, it's harder to raise that money and startups don't know where their next round of financing is going to come from. So, because of that, they're forced to operate much more efficiently, they're forced to do more with less. So, the biggest challenge as a venture capitalist in today's market is switching your hat from grow at all costs, which was kind of the 2021 mindset to, "Hey, you need to grow efficiently, you need to grow thoughtfully, you need to make sure you're building the business the right way from the start because you don't know when your next round of financing's coming." So, that's I think, the biggest headwind facing our industry. But I also think that's going to make our industry better. I think when headwinds face industries and we as venture capitalists also have to get more efficient, I think that is a really important dynamic.

The other thing that I think faces the venture capital industry is sizing. One of my favorite quotes is your fund size is your strategy. And I think a lot of funds don't internalize that because the larger your fund is, the larger a piece of a business you need to own and the larger the outcome of that position needs to be. That forces venture capitalists sometimes to counsel their portfolio companies to unsustainable outcomes and to outcomes that might not be there. So one of the things that we've tried to do and this moment has actually been very helpful in investing in our own discipline, making sure that we are sizing ourselves for our strategy, that we own enough of our portfolio companies, that we're taking a realistic view of what outcome can be created with each of them.

EMS:

Daniel, we've covered a lot of ground today and wanted to see if there are any final thoughts you would like to share with us.

DF:

Well, first, I'm so appreciative to be on here and having the opportunity to share a little bit about our business and about our ecosystem. I maybe want to revisit one of the items we discussed earlier in the conversation and just how bullish I am on this startup ecosystem and how global it is. Our world is increasingly fractured. Our world is increasingly polarized. We don't know people who don't live near us, who don't look like us, who don't speak our language. And the beauty of the startup ecosystem is we come into contact with so many different people in so many different parts of the world who live, look and act differently and we all work together towards common goals.

And it's been one of the most inspiring things about being an American working in the Israeli ecosystem, the Israeli ecosystem commercializing all over the world on all continents with all types of businesses and seeing that for all of the politics that consume our world and that creates so much division, the human-to-human interaction is still there. And the desire to build and to bring yourself up and to increase your economic potential and to lift those up around you, that happens in the world of technology and startups in a way that I haven't seen anywhere else and so I'm bullish on the future of our world through the lens I get to see in my day-to-day business and I'm just pleased to have the opportunity to share that with you.

EMS:

Daniel, I want to thank you so much for sharing your perspective with our listeners.

DF:

So, appreciate the opportunity to be here and look forward to coming back soon.

EMS:

And thank you for listening to the EisnerAmper podcast series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.