Chapter 5: How We Raised $1.3 Million, What Makes a “Gold Investor,” and Why Physical and Digital Products Differ
The summer of 2015 broke global heat records dating back to the start of official temperature measurements. Israel was no exception. Perhaps the heat outside reflected the heat in the Israeli startup scene.
According to Geektime’s research article, 228 early-stage Israeli companies raised about $687 million that year, an increase of roughly 8% in the number of companies raising money and 44% in the amount raised. That was significant, especially after 2014, another year of record-breaking Israeli fundraising activity.
About 1,400 startups were founded in Israel in 2015, and I played a part in establishing five of them, in different roles. By my rough calculation, there was about an 80% chance that one of the companies I worked with would raise a substantial amount, more than $500,000. It happened, and in a big way.
Moving from my previous venture to the newly funded one quickly taught me the differences between physical and digital products
My fifth client, Viewly, completed a first round of about $1.3 million from private investors, somewhere between seed and Series A. I had developed its new business plan, including extensive market research, a dynamic financial model, and a strategic plan.
After my consulting project ended and the round closed successfully, the founders asked me to join the team. I became the company’s second employee.
As Viewly’s head of finance, operations, and business development, I learned about the company’s investors, their preferences, their characteristics, and how to work with them.
Combining that experience with insights from other investors I had worked with, other experts, and information circulating in the local startup scene, I developed a simple framework for classifying investors:
- Gold investor: An investor who brings smart money—not just capital, but also connections, partnerships, employees, knowledge, customers, and other benefits—and behaves positively. They meaningfully support management, maintain a constructive attitude, and remain optimistic and committed to the management team’s work.
- Silver investor: An investor who brings money without additional strategic value, but works positively with management.
- Bronze investor : an investor who brings smart money but behaves negatively toward management, obstructing the company, making it harder to manage, pushing it in directions they do not understand, or spreading pessimism.
- Mud investor: An investor who brings money without additional value and behaves negatively. These are investors to avoid at all costs. As the name suggests, they drag the startup into the mud.
Israel has many types of investors—angels, funds, corporations, government bodies, and others—but they can all be positioned within the four quadrants above.
Most investors have clear investment criteria. Some are relatively public, as in Eden Shochat’s well-known list, while others are less visible.
My advice to founders who want to raise money, are fundraising, or are preparing to do so is not to waste their own time or an investor’s time when the venture clearly falls outside that investor’s criteria, or when the person may turn out to be a mud investor.
A founder’s chances of finding a gold investor also improve considerably when they clearly map the investors best suited to the venture.
Ventures in familiar Israeli sectors—cybersecurity, biomedicine, medical technology, SaaS, digital products, fintech, communications, and so on—may find many prospective investors. Investors may even compete to invest, a good position for founders. In other sectors, especially consumer electronics and other B2C products, the familiar cliché is that those investors simply do not exist in Israel.
The following paragraphs explore some of the main differences between physical and digital products that may influence Israeli investors’ relative reluctance to back physical product ventures.
Key differences between physical and digital products
- The laws of logic versus the laws of physics
The rules governing the two types of products are somewhat different, or at least have different names. Physical products must obey the laws of physics; digital products are governed by logic.
You could call physics the logic of nature. Either way, the distinction becomes clearer when you look at who in the company is responsible for making the product comply with those rules.
At the physical product company I founded before joining Viewly, product development was handled by an industrial designer, a mechanical engineer, and a carpenter.
At Viewly, development was led by the CTO and product manager. Comparing the physics team with the digital logic team made the difference immediately visible. Writing code allows creativity within the logical constraints of a programming language. Designing a physical product is not bound by a programming language, but it certainly is bound by physics.
2. External dependencies versus internal factors
Most digital products depend on several underlying systems, such as servers, operating systems, social networks, or computers. Most physical products do not depend on additional systems, apart from something like an electrical connection.
To me, this remains a major disadvantage of digital products compared with physical ones, although it has advantages too.
At Viewly, and at other companies in the field, we saw how a version change in a social network on which our product relied could delay or substantially change development schedules. That is before considering companies that collapsed or had to change their business models after Facebook or Google pulled the plug.
Digital products are hosted on third-party servers, run on operating systems, synchronize with information providers, and depend on the smooth operation and goodwill of dozens of other companies along the chain. All of that increases risk and uncertainty.
Physical products, by contrast, may not rely on any outside party at all—bicycles, kitchen utensils, or tools, for example—or may rely on relatively dependable infrastructure, such as electricity or transportation networks.
Of course, some physical products have many dependencies, including smartwatches and virtual reality headsets. But broadly speaking, physical products have fewer external dependencies than digital ones.
3. Development: usage surveys, feedback, changes, and testing
Surveys and different forms of A/B testing that lead to product changes are critical to development. Experienced teams know how to integrate and make the most of such tests throughout the process.
The difference in the speed and simplicity of making changes between developing our physical product, Desky and developing Viewly’s digital product quickly taught me how much easier digital products are to test and change.
At Viewly, we ran countless usage surveys, A/B version comparisons, focus groups, and usability tests involving thousands of users a day. The statistically meaningful data supplied by the measurement and analytics systems embedded in the product helped us quickly understand which versions performed better and whether our changes affected the KPIs we had set.
For our physical product, we had to send surveys to dozens of potential users and wait days for responses, only to find that the answers were inconclusive.
Changes to the physical product also took a long time and cost a great deal, whether because we had to wait for additional materials to reach the manufacturer or pay for more industrial design and remodeling hours.
The speed of feedback and ability to reach large numbers of users help improve and optimize a digital product. A physical product, by its nature, is harder and more expensive to distribute to thousands of users and gather feedback on easily, efficiently, and cheaply.
4. Ongoing maintenance and development versus one-time development
The inventor of the Hungarian cube, better known as the Rubic’s Cube, Professor Ernő Rubik, spent months developing it. But once he had finished thinking it through and patented it, much of his work on the venture was done.
Rubik and Ideal Toys, which acquired the rights about two years after the cube’s debut, went on to sell more than 300 million units. It became one of the best-selling toys in history.
That example leads me to argue that many physical products do not require ongoing maintenance by the company or founder after they have been developed and sold, unlike digital products, which do.
Ongoing maintenance and continual development of new products can weigh heavily on digital companies because the employees doing that work are highly paid. Physical product companies, such as tire or furniture manufacturers, may have lower production labor costs.
On one hand, constant development and high margins have helped digital companies dominate global company valuations. On the other, at the time of writing, we did not know whether those valuations reflected a dot-com-style bubble, or whether the high ongoing maintenance requirements would steadily erode these giants’ profits.
*Image: a comparison of the ten largest companies by market capitalization in 2006 and 2016, and their sectors. Five of the ten companies in 2016 were digital product businesses, compared with one in 2006. What would the table look like in 2026?
Will digital products keep winning, or will hardware return to center stage?
This chapter is intended to broaden the thinking of founders, investors, and others working at the intersection of physical and digital products.
The clear shift by investors, followed by founders, toward digital products in the years leading up to this article changed the rules of the game. It pushed physical products in Israel into territory perceived as offering lower returns on investment.
My wonderful adventure at Viewly, which had recently ended when I wrote this, taught me a great deal about digital startups, a vision that can bring people together, an amazing team, unconventional office life, and learning through mistakes, experiments, and friendships.
In my view at the time, shared by other experts, the years approaching 2020 would bring a growing combination of the digital online world and the physical offline world.
Startups beginning to work at that intersection and creating smart products that connect the two worlds might, I believed, reach the top of the table during the following decade, by 2026.
To give founders a push, the next chapter will discuss momentum, motivation, and a founder who keeps moving forward despite the difficulties.
I will also add another article to my resources folder about preparing to raise capital from investors, with an emphasis on physical products. I would love to hear in the comments how you see the differences between physical and digital products, and how you think combining them could succeed.