ReversExit seeks a ‘virtuous circle’ to guarantee start-up success

Fewer than 1% of Israeli start-ups make it, but entrepreneur Yehuda Regev thinks he can up that figure

Illustrative photo of a software developer at an Israeli start-up working on a project. (Gili Yaari/Flash90)
Illustrative photo of a software developer at an Israeli start-up working on a project. (Gili Yaari/Flash90)

If only four out of 500 Israeli start-ups can be defined as “successful,” as a recent study claimed, there’s a reason for that, according to Yehuda (Jude) Regev, CEO of funding firm ReversExit, which co-authored the report with Israel Venture Capital (IVC).

“To get to the next level, which is revenue, you need to get to the first level, which is Series A – and that’s where many start-ups that have great business ideas fail. Our Reverse Fundraising system helps solve that problem, making start-ups that have yet to come to market much more attractive to investors, and ensuring that they will be able to survive until they can actually start selling something, and out ReversExit platform brings together those investors with the start-ups.”

The report released last month shines a perhaps unwelcome light on the less successful side of the Start-Up Nation – but the picture uncovered by that light is perhaps not surprising to those familiar with the Israeli start-up ecosystem. The report examined three indicators of success: annual sales, number of employees and an exit ratio that reflects a positive return on investment from the sale of a company’s shares.

The report found that more than 46 percent of the companies established in the last 16 years have been closed and are no longer active, while the remainder continue their activity in various stages of development. Among the companies that are no longer active, 662 (14 percent) were acquired and only half were acquired for a positive exit ratio, i.e., for an amount larger than the total capital invested in the company between its establishment and the exit – which can be considered successful. Of more than 5,400 companies active today, only 139 companies can be defined as successful (about 2.5 percent), with a successful active company defined as one with annual revenues of $100 million or 100-plus employees.

A lot of the failure, said Regev, is due to the “Series A crisis” that many Israeli start-ups suffer from, in which they get initial seed funding from an angel but can’t get further funding just when their project is getting off the ground. According to the report, many of the start-ups that are in business are still at seed stage, established in the last three years.

Banks only give money to people who already have money, the old saying goes, but it applies to tech investments as well; investors feel comfortable when the company they are investing in already has a market-tested product or service and a business plan that is already active. But without money, there’s no way for a company to get the attention of investors.

“People invest when they see others investing,” said Regev. “It’s like a Catch-22 – if you can’t get the attention of one VC, you won’t get the attention of others.”

Yehuda (Jude) Regev (Photo credit: Courtesy)
Yehuda (Jude) Regev (Photo credit: Courtesy)

That problem, said Regev, is what his novel Reverse Fundraising system is designed to solve. Underlying the system is a bit of a psychological insight.

“Investments in start-ups are sometimes made before anyone knows if the venture will succeed, and such decisions are taken at high risk,” said Regev. “Investors use various instruments to reduce the risks involved in investing in a start-up, like examining start-ups proposed by accelerators. Thus they aim to find the one with the best chances of success compared to the other start-ups examined at the same time. For example, a start-up led by a team of partners who complement each other will be preferred over one led by a single entrepreneur.

If it’s lessened risk that investors are looking for when deciding to invest in a start-up, Regev has a solution – the “Pending Funding” model.

“Let’s say you have a mature company with 100 million users,” said Regev. “They know what they are looking for in start-up technology, and they have the resources to buy or license the tech. But ideas on paper, or even small pilot programs, aren’t always enough to convince those in charge of investments in these companies, because of the fear that the company will run out of money before the tech is ready for market.”

The solution is as simple as a piece of paper – called a Letter of Intent. With a LOI in hand that says that the big company will buy or license technology X when it matches their needs and criteria, the start-up can go to venture capital firms and show that they they are a sound investment.

“With the LOI, start-ups immediately become much more attractive to investors, because they’ve already closed their first sale,” said Regev. “And once one investor is convinced, others are likely to come on board – ensuring that the start-up not only survives, but thrives. Instead of a Catch-22, you have a virtuous circle that breeds success, not failure.”

ReversExit, Regev’s new company, is the platform that will match big companies with start-ups, and secure them their LOI.

“There are a lot of other benefits for everyone involved as well, such as a reduction in investment dilution,” said Regev.

Usually, a seed investor in a start-up will find that they get less back than they should when the successful start-up teams up with a bigger, richer partner. But since the model is built as a reverse process, the two funding rounds (the Seed round followed by the Series A round) are carried out simultaneously, thus reducing the dilution of the holding later on for the early investors and increasing the return on investment, said Regev.

Regev, a serial entrepreneur himself, has been working on this idea for years, and brought it to life just a few months ago. ReversExit is working with a few test clients, but Regev is very optimistic about the platform’s future.

“Right now there is no practical way to solve the Series A funding crisis. Everyone has been basically working blind, trying this and that and hoping for the best. Reverse Fundraising finally provides a scientific answer to this dilemma, and I am positive ReversExit will become the next major trend in start-up investing.”

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