How can startups get their first VC investment? Ashton Kutcher has some tips
One of the biggest problems for Israeli startups is that they have a hard time getting funding beyond seed stage, according to one observer who spoke in Tel Aviv last week.
While it's easy enough to get that first few hundred thousand dollars, it's difficult for many startups to get to a Series A, $1m-plus level – and as a result, they either sell out cheap to a foreign (usually American) conglomerate, or abandon the project and try to sell off the IP.
It's a smart observation and one not made, as you might expect, by a tech analyst or VC — but by Ashton Kutcher, who was speaking at an event organised for startup hub GarageGeeks in south Tel Aviv last week.
Kutcher was in Israel with his investing partner — music producer (and Madonna's manager) Huy Oseary — to check out potential investments. Kutcher has form as a high-tech investor who, via his A-grade investments venture fund (along with partners Oseary and Ron Burkle), has invested close to $200m in some 30 startups, including hot companies such as Flipboard and AirBnB.
It was Oseary who got Kutcher interested in the possibilities of Israeli high-tech, having invested in companies here on his own for the past seven years — under the guidance of Yossi Vardi, one of the inventors of ICQ and now "patriarch" of Israeli tech.
A start with film
Kutcher, perhaps one of the most tech-aware Hollywood figures, is famous for being the first to get a million Twitter followers, outmanoeuvring the Twitter account of CNN (Kutcher currently has about 14 million followers, making him the 24th most-followed account in teh world, according to Twitaholic). He became interested in high-tech around 2005, he said, after working in film production for several years.
"I realised that the internet was getting fast enough to allow for the growth of streaming video, and I started getting into that, and into digital analytics," Kutcher said – prompting him to begin looking at companies in the video space.
"[Along the way], I came across a lot of other interesting startups – especially in social media, which appealed to me because it fostered communication between people, and allowed new and novel ways to market ideas, products, movies, and music."
The ability to foster communication, as far as he and his partners are concerned, is one of the most important factors in his investment decisions. "The film industry brings people together, and so does technology. I see them as similar platforms," he said.
How to handle investment
Many were there to see a Hollywood star in the flesh, but there were many entrepreneurs in the audience — and Kutcher had some advice for them, using a ready example. Describing a company he, Oseary and Vardi had visited earlier in the day, Kutcher said that he was impressed by the tech, but disappointed by the way it was handling business.
"The tech in this company was really strong, user experience and interface was so-so, and the founders were OK," Kutcher said, meaning that they could probably be counted on not to panic in an emergency.
But he couldn't in good conscience invest with that company, at least under current circumstances. "They were overcapitalised, and had given away 60 percent of the company to investors already. The founders only had 30 percent left, and their incentive was eroded."
And the company still had a ways to go to finish developing their project, he added.
"When you invest, you want to make the idea, the company, and the leadership are good, and can go the long haul," meaning that the founders and directors needed to plan their funding strategy carefully.
In this case, the company had basically cut its nose off to spite its face. "At a later stage, they are going to want to bring in engineers to complete the work," Kutcher said.
Often, engineers at this point ask for a piece of the company, hoping to see a long-term benefit for their work, but this company had little, if anything, left to offer engineers – much less another large investor.
"If we put money into that company there is maybe 25 percent left for us," not enough to justify a major investment, Kutcher said.
Most likely, he added, the company would be one of those that would "settle" for a buyout that would probably garner them much less than they could have made had the project gone to term – not an uncommon sight on the Israeli tech landscape.
"I know I'm working against investors like ourselves," Kutcher said, "but you have to be really careful with the first investor. If you give away too much at the beginning you won't have what to offer later. Better to go to Kickstarter, Angel List, and other outlets to raise that initial capital than to give it away at the seed stage."