“Not All Unicorn Valuations Are Real”

Venture Capitalist Dovi Frances thinks more startups are unicorns than are warranted. On the heels of closing his fourth fund of $75M, he attributes it to “over-excitement.”


In recent months, there has been a disconnect between technology companies and traditional industry in capital markets. The COVID-19 pandemic hit the global economy hard, but technology stocks are surging and trading at an all time high, which doesn’t seem to make sense. Investor Dovi Frances, of venture capital firm Group 11, explains the interplay between the macroeconomic situation and the high-tech industry as a two-way process. On one hand, GDP is not growing as it has in the past, which may actually benefit technology companies to some extent as businesses accelerate their adoption of automation processes in order to be more efficient. But on the other hand, Frances warns that “this will hurt high-tech. You can say ‘software is eating the world,’ but if the global economy is in trouble, then software will eventually be in trouble as well.”

This contrast between rising unemployment rates, global debt, and collapsing businesses, and optimism about the high-tech industry causes one to step back and think about all of the factors in that industry including investors and entrepreneurs. Frances, for example, paused fundraising for his latest fund for 150 days, and only recently completed Group 11’s fourth fund with $75 million raised.

“I started raising money in January, but people were faced with a looming existential threat, so I paused raising money for a few months,” he tells Globes. During that time, while people were fearing for their health and financial well-being, the startups in which Frances is invested – all in fintech – have flourished.

In recent weeks, several of his portfolio companies have announced funding rounds: digital insurance company Next Insurance has raised $250 million at a more than $2 billion valuation; Tipalti, the leading global payables automation solution, raised $150 million at a valuation of more than $2 billion; Papaya Global, a cloud payroll management system for companies, raised $40 million, only a year after its previous round; and Lili Banking, which provides mobile banking services to freelancers, raised $15 million.

“Investor over-excitement”

“The aggregate value of unicorns [companies worth $1 billion or more] stands at $1.5 trillion. About 300 of them, close to two-thirds, have appeared in the last two years. I argue that this isn’t real, that it’s related to investor over-excitement. There surely is a revolution happening, but we shouldn’t get too excited about its velocity. It can’t be that there are 500 category-defining companies, because there aren’t 500 categories to disrupt. We also have to remember that we have a global market here that has essentially stopped growing,” he says.

What about the unicorns you’re invested in?

“In my opinion, they’re genuine. Most of them are in huge markets, are growing at a tremendous rate, bring in recurring revenue with an almost zero churn rate, and have unique technologies.”

Part of the optimism about the private market stems from the rise in publicly traded technology stocks, which are benefitting from a rise in revenue multiples. Frances, however, explains that it begins with the bond market: “It’s a market that is ten times bigger than the stock market. These days, it’s impossible for an institutional investor to get a proper return on investment in government bonds, for example, which forces them to transfer investments to other channels. Their money goes to companies like Apple and Microsoft, where the investment is not based on the revenue multiple, but on dividend yield. Institutional investments in venture capital have also increased, and that explains why venture capital funds have raised so much money in the last few quarters.”

Frances (42) grew up in Holon, Israel and currently lives in Los Angeles, California. He served in the IDF in the Nahal Brigade, earned his dual BA from the Ben-Gurion University in Business Administration and Psychology, and received his Masters in Business Administration in Finance and Marketing from UCLA Anderson School of Management. Since then, he worked in financial management, first at Deutsche Bank as a wealth manager for high net worth individuals, and for the past decade as a venture capitalist. Along the way he also set up a mortgage company and a life insurance company. In Israel, he is known for being one of the investors in the local version of “Shark Tank,” a TV show where entrepreneurs present their ideas to five different investors, in an attempt to obtain investment from them.

“I don’t believe in joint decision-making”

Frances raised $75 million for his new fund, following two previous funds of $50 million apiece which he raised over the past four years. “I invest 70% of the money within two years, and I still have no desire to raise hundreds of millions of dollars. I like our boutique positioning in the market, so I choose not to raise more than $100 million. Raising a larger fund would require me to speak in a different way, and bring in more partners. The average fund size nowadays is $300 million and the big funds are getting even bigger. This creates an opportunity for me, because big funds find it hard to invest a million dollars in a seed round, which allows me to lead these sorts of rounds. It’s interesting to see that many large institutions like Battery and Lightspeed Ventures do join us in these smaller investments.”

Still, why not bring in more partners?

“I don’t believe in joint decision making. I have my intuitions and I don’t necessarily see how another partner would add value, certainly not at a fund of this size.”

Although Frances is based in California, he maintains close ties with Israel, with 70% of the startups in which he invests being related to Israel (i.e., a startup with its development center in Israel, or an Israeli entrepreneur). “Despite this, the only Israeli institution that has joined me in Fund IV is Hachshara Insurance Holdings, whose chief investment manager is Roi Kadosh. I believe things will change in the near future and that is because investment institutions now understand that they need to build up their venture capital underwriting capabilities, and also invest in US funds. There aren’t a lot of funds specializing in fintech, and we’re one of the best around.”

In an unusual move for a VC, Frances revealed his funds’ returns: the first fund, which was small ($14 million), has a 2.2x return, and an internal rate of return (IRR) of 20%, after deducting the fund’s management fees and share in the upside. The second fund has a 3.5x return, and has an IRR of 38%. The third fund, launched two years ago, has a return of 1.9x, with an IRR of 70%. All figures correctly reflect the present day, and the funds still include active companies, which could improve the returns even further. “In my opinion, the first fund will reach 5x net return, the second fund 10x net return, and the third fund 7x net return. My goal, ultimately, is to find companies that will make the Fortune 500.”

“We’re in a world where all the paradigms are shifting. Companies are moving to the cloud, using artificial intelligence, processing a great deal of information, and implementing automation, along with offering a better user experience. I think this is what will ultimately win. When I worked at Deutsche Bank, its share price was $108, and today it’s $9 – that’s to show you how things have developed in such a short time-period, on the other hand, there are young digital banks with no branches that are now priced the same.”

“There is no area that is not being disrupted”

The recent capital raising activity by fintech startups, including those in Frances’s portfolio, reflects optimism in a sector that had appeared stagnant over the past few years.

“The fintech revolution began in 2008-2009, when governments prevented banks from lending at high interest rates, thereby allowing fintech companies to create products around loans. That gave rise to companies like Lending Club and SoFi, to name a few. I think we’re in the second wave, at the point where legacy systems are being now replaced, and the ways in which life insurance policy underwriting and money transfers are carried out are ultimately changing. There’s almost no area that isn’t undergoing disruption,” Frances says.

And yet, the challenges faced in recent years by companies in the fintech sector cannot be ignored. Competing with traditional banks and insurance companies is not easy, as they require complex regulatory approvals, gaining customer trust, and vast expenditure on customer acquisition. Many have come to the conclusion that the way for startups to succeed, at least for most, is through working with traditional financial institutions, rather than competing against them. Frances only partially agrees with this idea.

“I think there’s excessive hype around neo-banks [digital banks]. Everyone is fighting for the same private customer in a world war where lifetime value (LTV) is low and unsustainable. There aren’t enough financial products. Companies that really disrupt something – that don’t just take an old product and build something new on top of it – those are the ones that are shifting the paradigm. Shopify, for example, which has grown at an insane rate recently, isn’t competing against Walmart. It’s simply looking differently at how to open digital stores.”

Lili is a digital bank and Next Insurance is a digital insurance company. They also have to spend lots of money on marketing, gaining public confidence, and obtaining licenses.

“True, but Lili appeals to freelancers and Next Insurance caters to small businesses. This means they sell to businesses that are profit units. I think the licensing requirement changes the economy scale, because if you get a banking license, for example, you also enjoy benefits like the ability to extend loans. Licenses also provide a competitive advantage. It’s difficult to obtain licenses for direct banking, so nowadays most digital banks use the licenses of other banks, but looking ahead – the weakening of (traditional) banks will also weaken their power in Washington DC.

“Think what behemoths like Deutsche Bank and Wells Fargo used to be. But the generational change means that young people don’t care about the name – what interests them is whether they can transact over their smartphones, and the quality of the interface. Banks will lose their exclusivity around licenses, in favor of technology startups. Uber and Lyft built an empire, and then recently mobilized lobbyists to pass a law in their favor [concerning the need to pay social benefits to independent contractors]. The same thing will happen with fintech and banking. We have only just begun.”


Interview by Omri Zerachovitz, Globes