A venture firm gets rewarded for selling at the market top

It used to be that venture capitalists couldn’t sell their stake in a portfolio company before it sold or went public without raising questions about the outfit’s prospects. As startups began staying private longer, VCs and management teams grew more comfortable with selling some of their holdings to new investors, but many VCs are likely right now wishing they’d sold even more over the last year or so.

One firm that’s happy it pulled the trigger on two of its own deals is YL Ventures, a now 15-year-old, U.S.-Israeli venture firm that specializes in seed-stage cybersecurity investments and that just closed its newest and biggest fund to date with $400 million in capital commitments.

In March 2021, when the now five-year-old cybersecurity asset management startup Axonius was raising a $100 million round at a $1.2 billion valuation, YL Ventures — the outfit’s first investor — sold its stake for $270 million to ICONIQ Growth, Alkeon Capital, DTCP, and Harmony Partners.

The amount was more than three times the size of YL Ventures’s $75 million debut fund, which had backed the outfit and through which YL Ventures wound up investing $15 million in Axonius altogether, including through several special purpose vehicles.

“Multiples were so high a year ago that we felt like, in normal conditions, we’d need [more time] to get to that same outcome,” says YL Ventures founder Yoav Leitersdorf, who is based in Mill Valley, Calif. “There was a lot of demand for Axonius shares and looking back today, with this current market . . . ” he trails off.

YL Ventures similarly sold much of its stake in the four-year-old cloud security company Orca Security to new buyers when Orca extended its Series C round last fall, a $550 million tranche that boosted the startup’s valuation by 50% in just seven months to $1.8 billion.

“We didn’t sell our full position,” Leitersdorf says, but his firm wrung a whopping $250 million out of the deal nevertheless.

Indeed, 2021 was a good year made even better when another of YL Ventures’s portfolio companies — the healthcare IoT security startup Medigate — was sold to the industrial cybersecurity vendor Claroty back in December as it was closing a $400 million Series E round co-led by SoftBank. Leitersdorf’s firm walked away from the deal with more than $100 million.

They’re all solid returns for a firm that now has $800 million in assets under management and has seen earlier exits, including Hexadite’s $100 million sale to Microsoft in 2017 and the sale of the container security startup Twistlock, which sold to Palo Alto Networks in 2019 for $410 million. (YL Ventures was Twistlock’s biggest shareholder, investing so early that it plugged just $12 million into the company over its four-year run as an independent outfit to build its position.)

So what’s YL Ventures’s secret sauce? It has been from the start — and continues to be —  investing as early as possible in a very specific type of company. As we reported the last time we covered the firm several years ago, almost all the founders in YL Ventures’s portfolio have not only served in the Israel Defense Forces but specifically within its 81 and 8200 units, elite parts of the organization that have become the training ground for some of the buzziest cybersecurity companies in the world.

The units reportedly accept less than 1 out of every 100 high school graduates, so it’s little wonder that venture firms with a cybersecurity focus then try to cherry-pick among these when their service is completed.

YL Ventures just seems to be particularly adept at succeeding in these efforts.

Leitersdorf credits Ofer Schreiber, a senior partner and the head of the firm’s Israel office, for much of the heavy lifting on the recruiting front, bragging that YL Ventures has “first dibs at every seed deal coming out of Israel” largely because Schreiber is “so deeply networked there.”

He also says the firm’s success to date depends heavily on the work of the firm’s other senior partner, John Brennan, who oversees a large network of chief information security officers — 120 of them, says Leitersdorf –who collectively receive 5% of the firm’s carried interest in exchange for vetting deals and sharing what pain points are not being addressed at their own companies.

These CISOs aren’t limited partners in the fund, says Leitersdorf, but he says that the outfit’s investors include ultra-high-net-worth individuals from largely the U.S., Europe and São Paulo, Brazil, and you can imagine there is at least some crossover.

Leitersdorf also tells us that YL Ventures promoted two colleagues as part of this new fundraising process. Sharon Seemann — who also served in Unit 8200 — has been named a partner. She oversees the firm’s marketing output. Michael Cortez, who is focused on business development and is “part of the group that’s writing checks,” says Leitersdorf, has also been named partner.

Leitersdorf — who remains the firm’s sole general partner — meanwhile says the collective plan for the team is to keep doing what it’s doing, which is to specialize in Israeli cybersecurity startups of all kinds, at a far more deliberate pace than many of its rival firms.

Almost surprisingly, the idea is to fund just three new startups per year, or 10 startups altogether.

Then again, YL Ventures has invested in just 30 companies altogether since it was formed. Just one, Leitersdorf says, has been a “wipe-out.”

Pictured above: team YL Ventures, courtesy of the firm.