The Art of Pre Seed Funding with Guy Katsovich 

On today’s episode of Startups On Demand, I am joined by Guy Katsovich, Managing Partner in Fusion VC – Israel’s leading & most active pre-seed fund & accelerator, backed by top-tier global VCs and 70+ serial founders. We talk about his journey from being a social entrepreneur to a startup investor, how Fusion VC works, the challenges of pre-seed funding for anonymous founders, and building a media machine.

Omri: Hey everyone, today I’ve got Mr. Guy Katsovich, Managing Partner in Fusion VC. Probably the most, I would say, vocal early-stage Israeli VC out there. Currently, some people say you guys are like the YC of Israeli startups. First, let’s talk a little bit about yourself. Can you just give a bit of a snippet of your background, where you’ve been, and what you’ve been doing?

Guy: So first of all, thank you for having me. My name is Guy, like a dude. My Starbucks name in the States is David – it saves a lot of questions from the baristas who are serving me the coffee. Just a short snippet, I would say that I’m a social entrepreneur who turned into a VC. I started my career after finishing my IDF service. I served as an Intelligence Officer in an intelligence unit within the Israeli Army for six years. I got out into civil life and then I went into the media. I was a tech and economical correspondent at an Israeli daily local newspaper called Globes which is kind of like the equivalent of let’s say the Wall Street Journal. I did that for three years and then moved to work as a business development and sales manager in a marketing agency that operates also here locally in Israel. And after 2 and a half years of doing that, I transitioned into the startup and VC world. I ran an accelerator in Israel that operates on behalf of the Veterans Association of Unit 8200, it’s the national cyber intelligence unit of Israel. It’s very famous here in the local ecosystem because a lot of entrepreneurs and VCs that served in that unit within their army service went on afterward and built prominent successful tech companies and startups. Even VCs, some of the most prominent managing partners in VCs in Israel are 8200 alumni. I run this accelerator that has operated on behalf of the unit Alumni Association for three years. I was the Managing Director of the accelerator, and after, I did this role and I realized that I really liked it, so I decided to make the bold and stupid move and build my own firm which is Fusion VC. What we basically try to do is to change the way pre-seed investments are being done in Israel.

Throughout my career path, I also built a lot of social-related and impact-related ventures. An educational, not-for-profit, and a lot of incubators that actually aim to help underrepresented communities tap into the Israeli tech scene. So that’s the overview of my career path starting from journalism and nonprofit moving to sales and then to acceleration of startups – that’s what I’m saying that I’m like a social entrepreneur turning into a VC. 

Omri: When I think about you or when I talk about you with other people in the industry, it seems like you got your hands on so many different things. You’ve got several very early-stage startups that you guys are investing in. You have a great podcast where you interview people. You also have a great presence on LinkedIn, which is a major platform where you guys invest lots of time, energy, and probably funds. When you started to build out Fusion together with Yair, what was the main goal? You said you guys want to tackle pre-seed differently. What does that mean exactly? 

Guy: That means that when we look at the Israeli Venture funding landscape, I would say that it changed a lot over the last two decades. Now, it’s pretty decent. You have a lot of options for raising your money from VCs. You have a lot of Super Angels. You have serial entrepreneurs, and second and third-timers that have already been through their rodeo more than once exited their startups, and are now trying back again. The fact that the ecosystem developed so much is a unique advantage because you have a lot of network and know how to tap into it when you want to build a startup. But it’s also a disadvantage if you’re a first-time founder, tapping into the ecosystem and trying to build a startup where a lot of the local VCs didn’t have a lot of success investing in that space early on. So when Israeli entrepreneurs meet us, they always understand what is the pitch of Fusion, while for some external – like people that are external to the ecosystem – it’s pretty hard to grasp. But I think that if you want to dump it down, the Israeli Venture landscape is very fond of different types of founders and different types of companies. For those startups that are tapping into those Industries, it’s pretty easy to raise funds. But if you are a first-timer into a market or an industry that we at Fusion like to call an “overlooked industry,” which is pretty much everything nowadays, except let’s say cybersecurity and artificial intelligence, and sales tech maybe, then you have a pretty challenging time raising your first money from prominent experienced investors locally in Israel. Unlike, by the way, other ecosystems are more general in terms of the appetite that investors have for new deals. 

That’s why I think in Israel, it’s important to have a flourishing pre-seed category where you have different types of angels, different types of incubators, some accelerators, and even some micro and nano funds that are aiming to that category of funding, where first-time founders that are tapping into those overlooked markets can reach out to those investors and raise their first funds. This was the vision of Fusion since the day we started and we also have, on top of the money, an added value layer where we give them an accelerator with mentorship and connections to their first clients for extra funding. So this is what we basically do, very similar to what Y Combinator has done in Silicon Valley since 2006. So we’ve been trying to do that in Israel for the last seven years. Just in terms of numbers to keep it concrete, over the last seven years since we established Fusion, we raised no more than $30 million combined and we already deployed money into more than 120 Israeli startups, in all of them – if not to most of them, we are the first check. And we have a bunch of companies that have already privately raised an A, B, and C round. 

Omri: Is it one fund? 

Guy: It’s not one fund, We started with $4 million that we raised from two different LPs, and we already deployed that capital into 65 companies. We use the track record, the know-how, and operational excellence of having to build an accelerator, which may sound “sexy” from the outside but it’s an operation. You need to have an office and bring mentors and investors together with the founders of the core that you run. We have a core that runs twice a year both in Israel and then afterward we take the founders to the US for a three-week roadshow, so it takes a lot of effort to build this type of operation. So this is what we do: we prove that we have the track record, and then we go on to external LPs and raise a $20 million fund, which is our official first fund.

Omri: How do you address the challenges of investing in pre-seed startups, particularly when dealing with founders lacking a strong track record, and how do you navigate this when explaining your strategy to potential investors?

Guy: It’s an amazing question and I would answer that very shortly and then we can expand the conversation about that. We claim that there are a few ways to be successful investors within every landscape, specifically within the Israeli one. I agree with you that there are the positively biased teams that you mentioned whether they’re serial funders or funders that graduated from technological units within the Israeli Army that went on to civil life, and built a cyber security startup – this is the most simple example that we can give at this medium – and then went on to raise a seed only with an idea and maybe an early validation of the idea. This makes sense because Israeli investors, in general, have a very good experience in investing in cyberspace, there’s a lot of big technological cyber companies in Israel or with affinity to Israel that are looking to acquire new technology and new teams in that space. So that makes sense. But when you’re doing something in sales tech or vertical SaaS to undisrupted Industries, you don’t have a lot of experience or a lot of very good and amazing experience within the Israeli landscape in that sense, and if you’re combining that with a team, as you mentioned that is maybe slightly inexperienced or don’t have the right “pedigree,” then it becomes challenging. I agree with you but I also agree there are few ways to succeed, and when you look at Israel, I would call that $100 million club in terms of ARR. Most of the companies that are actually there at the moment and also survive the latest turmoil within the Israeli economy, with the interest rate going up, the jurisdictional reform, and the war are companies that are not in our obvious spaces, those are companies that actually built great products usually in competitive spaces whether it’s SaaS for business units or for specific industries that most Israeli founders are not tapping into and actually made just very good execution and build those companies to last for the next few years or few decades even if you if you want to be positive about it, that’s for sure. And we claim that you’re going to have amazing companies growing out of Israel from both segments of companies. You’re going to have those “Wiz” companies, those are second timers, operating in cyberspace and wanting to build a bit more than a unicorn company that will go all the way. But you’re going to have also the “Monday” type of companies that build software for running your to-do list, they weren’t second-timers, they didn’t have the proper experience. They actually pivoted out of a project from Wix and tried to do it on their own, and for a long time, they’ve been actually lagging with building the business and reaching the proper KPIs to raise a further run and they were actually struggling to raise money. You have a bunch of examples like Monday equivalent in Israel of companies that made it big still exist running a valid business and are not operating in deep tech, cloud enterprise, cybersecurity, or AI, and we believe that there are two ways to be successful and we chose the more challenging way, but we are also very much big believers in what we do and we also love the ability to actually be meaningful for the founders, not just with the check that we give them when nobody else invests in them because we really invest first and it’s unconditioned, whether you raised additional money or not. And we also have to give the added value part where we actually mentor them which is a soft verb, but then you can in terms of connections I think this is what we mostly do. Our program is more of like a buffet where you get a list of a lot of people that you can interact with and we know how to cater to the right interactions at the right time whether it’s for clients, design partners, and additional investors. 

Omri: What does the deal flow look like? How does that game play out and how do you manage that so you’re not wasting time on people who are not relevant at all?

Guy: So first of all, there is no right way to reach out to us. This is also something that we want to change. We actually answer every cold call that has been sent to Fusion and we make a lot of investments from cold calls because we actually believe that not all of your good investments will come from introduction, and when we looked backward and researched backward on which of our top performing companies came from intros, this is almost like 50/50, so half of them came from warm intros and half of them just came from “the street” – they just reached out, we met them at a coffee place or a conference, so there is no right formula in that space because we invest so early there’s no right way. Of course, we also get a lot of introductions from different types of players, whether it’s investors who are alumni – we have more than 120 companies, so more than 250 Founders in our community, 400 mentors, 80 LPS – it’s a vast community of people that want to see Fusion successful. We see more than 1,000 companies a year, all of them are Israeli related meaning Israeli Founders wherever they are. 

In terms of how we assess, we usually ask the founders to apply through an application form that it’s on our website. It takes 10 minutes. You also upload a video of you pitching the company for two to three minutes whether it’s in Hebrew or English, we don’t mind. It’s not a test. You can do that in Hebrew if you feel more comfortable, and then afterward, we look at a form, and then we make an initial decision whether we want to move forward or not. After that, we invite the founder to a call. It’s a very short call where we ask them some questions and then we get a big hunch whether we want to move forward or not. If not, we say no and we always explain why. Then if we want to move forward, we have either one or two more meetings and study due diligence. We try to connect with current customers, talk with all the founders, and then also mainly connect the team that we are doing due diligence on with our network, so if it’s a gaming company, we’ll connect them to gaming founders that we already invested in, and other gaming investors and other gaming experts, and so on. The same goes for any other industry.

Watch full interview here.