An Israel-based technology company-cum-investment fund claims to have worked out the recipe to finding future successful technology start-ups.

Tel Aviv-based Liquidity Capital offers an alternative route to fast growing start-ups, hoping to make bets on those that are on their way to the fabled ‘unicorn’ status, or those valued above $1bn.

In February, the company announced it would invest $500m of growth capital into technology start-ups throughout 2020, showing confidence at a time when coronavirus was beginning to rip through the global economy.

Backed by Israeli investment house Meitav Dash and Mitsubishi UFJ Financial Group, the Japanese financial services giant, Liquidity Capital is offering start-ups an alternative to the traditional venture capitalist model — where entrepreneurs exchange equity in their companies in return for cash. Instead, Liquidity Capital provides debt financing where their equity is not required.

Last year, focusing on start-ups with annual recurring revenue of more than $3m and year-on-year growth of 30%, the company provided more than $200m to start-ups across the cloud, e-commerce, and software-as-a-service sectors, including two unicorn start-ups, Infinidat and Le Tote. Liquidity Capital also has US offices in New York and Miami.

Challenges

Technology start-ups that are successful enough to reach the growth stage face “the most awkward situation in the world”, says Ron Daniel, Liquidity Capital’s co-founder and CEO.

The bigger a start-up gets, the more cash they need to acquire new customers, due to a need to grow exponentially, he explains. Unfortunately, as banks are often too cautious to offer commercial financing to start-ups, the only option for entrepreneurs is to dilute their stake in the company.

By connecting to the start-ups application program interface — which enables them access to the data behind the company — Liquidity Capital can understand the inner dynamics of the company.

Using an AI-powered predictive model, the company then tracks the 15 most important parameters that define a start-ups success, predicting their future revenues and providing financing on the hunch that they will reach that growth.

Unicorn characteristics

While success can only be found in the data, Mr Daniel says that if consumers “don’t understand the product immediately, it will not become a unicorn”.

The “unit economics” of the start-up is the primary driver of its success, he explains, including the cost to bring in a new paying customer and their lifetime value, meaning how much to generate from that customer.

Beyond that Mr Daniel says that, while dependent on the business model, international expansion is essential to start-ups growing out of smaller markets, citing his home country of Israel as an example.

“You have to expand — a company which is not becoming global at some point in this business cannot survive,” he explains.

When asked where he believes the next unicorn will come from, Mr Daniel says that geography is not as much of a factor as the business area, suggesting machine learning, security and e-learning as areas he strongly believes in.

“No one knows from where [the next unicorn will come from] as it is in the data and the character of the entrepreneurs to generate the right DNA for a company,” says Mr Daniel.

“I think culture is the most important thing,” he adds.