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Free-wheeling Silicon Valley startups 'need substance': Israel-based VC investor

Brian Sozzi

2019 will go down as the year where many in the risk-taking venture capitalist community were handed a swift, well-deserved kick in the face.

After years of handing out fat checks to support buzzy unicorns with unproven business models such as WeWork, that company’s meltdown in the fall sent a major signal to VCs that the market had simply gotten too hot. Business models matter and so did profits, despite the mood to the contrary heading into 2019.

Meanwhile, VCs that entered in the late-stage funding of unicorns that went on to go public this year like Uber (UBER) and Lyft (LYFT) probably got their rear-end handed to them. Shares of these hyped companies have fallen like a rock in water since debuting in public markets this year as investors continue to question their future earnings potential.

In short, a year of lessons abound for VCs. One lesson among many looking back at the rubble: don’t just hand out money because a founder wows in a pitch presentation and accompanying slide-deck, the business has to be real and scalable.

“I think you need substance,” Jerusalem Venture Partners founder Erel Margalit said on Yahoo Finance’s The First Trade. “It’s good to have great concepts. It is an era of conceptual companies. But you need technology and substance to be with it. You have to have a great concept but you also have to have a business model.”

A profitable business model—or one that could be profitable within three years—would help, too.

NEW YORK, NY - APRIL 17: Founder and Chairman JVP Erel Margalit speaks on stage at the JVP (Jerusalem Venture Partners) 2012 networking cocktail party at the Gramercy Park Hotel on April 17, 2012 in New York City. (Photo by Neilson Barnard/Getty Images for JVP)

Margalit is far from a lightweight VC.  

Israel-based Jerusalem Venture Partners has raised $1.4 billion to date to help build companies in the cybersecurity space. JVP says it has aided in building 130 companies. It has brought 12 companies to public markets, notably CyberArk Software, QLIK Technologies and Cogent Communications.

Earlier this year, the firm closed a $220 million fund dedicated to financing and scaling early and pre-seed stage companies.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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