Big Red Ventures’ Yaron Klein sits down with Daniel Frankenstein, co-founder and partner at Joule Ventures, to discuss his path into venture capital, raising a first fund, and building an investment strategy. Joule invests in early-stage Israeli technology companies and helps them enter and scale in the US market.
Key takeaways
· Fund size is strategy. Build the fund around the ownership, reserves, and outcomes needed to generate returns, rather than raising as much capital as possible.
· Investors need two track records. Returns earn LP trust; meaningful support earns founders’ trust and helps win future investments.
· Independent judgment matters. Daniel argues that willingness to be wrong alone is essential to being right alone, and that LP interests should guide fund decisions.
Edited and condensed for clarity. The opening question was reconstructed; Daniel’s answers are drawn from the recorded conversation.
Yaron: Before Joule, you advised corporate executives at CEB. What led you to move into venture investing and start your own firm?
Daniel: I was quite happy and very fulfilled doing my work at CEB. Advising and partnering with executives from large businesses was very interesting. I had done it for five years in the US and then for a couple of years in Israel, working with large Israeli companies.
Around 2010 and 2011, two things became clear. There was an unbelievable technology ecosystem in Israel starting to grow after the financial crisis. But these entrepreneurs did not have great connectivity outside Israel. They knew their peers and their local networks, but the domestic ecosystem was very small.
Meanwhile, I had built a network of corporate executives who were hungry for best practices, new technology, and anything that could give them an edge. There was power in connecting those dots.
It also became clear that, with an early-stage business, you did not get a voice at the table unless you wrote a check. There was an opportunity to create an investment business that took my career to the next level. Instead of just providing executives with benchmarking data and best practices, I could provide real solutions to real problems.
The career path into venture was less defined then. Today, someone might work at a fund, build LP relationships, and leave to raise a fund of their own. That path was not established in the same way when we started. In large part, it happened by accident: I saw a need and an opportunity to close gaps that I felt uniquely positioned to address.
Yaron: When you raised your first fund, what convinced the first limited partners to back you before you had an established investing track record?
Daniel: There was not a lot for them to go on, and I am very aware of that. We had a model, we had an idea, and we built real relationships with investors who took a chance on us. I am very grateful they did.
We still have many relationships with those initial LPs. They have seen returns and reinvested in our subsequent funds. Because of that early support, we always try to take care of them. Our LP base is more institutional now, and our investment sizes are larger, but we still find ways for our original investors to participate with us.
Yaron: Is there a piece of advice from those early years that still guides how you build the business?
Daniel: One piece of advice came from almost my first or second day at CEB. One of the founders spoke to our incoming class and said that if you are always thinking about the money, it will never come. If you think about doing right by your clients first, the money follows.
He wanted clients at the center of our decision-making, knowing that this was how we would achieve long-term financial success.
In venture, I think some funds lose sight of whom they serve as fiduciaries. They prioritize relationships within the venture ecosystem or avoid difficult conversations with founders. But your LPs put you in business, and you are a fiduciary to them.
I want our LPs to be looking through a glass door at everything we do, knowing we are protecting their interests. When that is your North Star, decisions become clearer: when to stop writing checks, when to invest more, and when to buy or sell. That advice is something I think about every day.
Yaron: Joule’s original thesis connected US investors with Israeli founders who needed help entering the US market. As that ecosystem has matured, has your original advantage become less distinctive?
Daniel: First, the growth of the Israeli ecosystem has exceeded my wildest imagination. The levels of investment, M&A, public market activity, and returns have been extraordinary.
When we started investing around 2011, we sometimes got pushback from founders about entering the US. They would ask why they should not go to Asia or Eastern Europe, or beta-test in Israel. Today, we get very little pushback.
I actually think our advantage has become bigger. We are better at recognizing the deals where we can have an impact. Our network of potential customers, integrators, acquirers, and investors in the US has improved significantly.
We can validate opportunities faster and make more relevant introductions, often before we write a check. Founders also recognize the importance of what we bring, and our portfolio track record makes it easier to win new investments.
Yaron: You have said AI allows companies to accomplish more with less capital. If you were designing Joule’s first fund today, what would you change about its size, ownership targets, or follow-on reserves?
Daniel: Our first fund was a very small $5 million fund. Interestingly, I think funds like that could come back into style because of AI. You can get companies off the ground for less money, acquire customers, and generate recurring revenue faster.
I have said for years that your fund size is your strategy. If you do not recognize that, you are going to underperform. A $5 million fund does not need multibillion-dollar outcomes or huge ownership positions to deliver strong results for investors.
Of course, $5 million does not leave much room for reserves, and that was a significant challenge for us. That experience helped us become intentional about sizing later funds. We worked backward from portfolio construction and modeled returns rather than simply raising as much money as possible.
What I would change most about our first fund is that we were too sector agnostic. We were not always thoughtful enough about where we could have the greatest impact or the strongest go-to-market advantage.
We invested in direct-to-consumer, a medical business, and companies targeting Asia, Eastern Europe, and South America. Only a minority of the first fund’s investments were enterprise software businesses going to market in the US. But that is where all the returns came from. That helped us sharpen our strategy.
Yaron: Was that also how you developed your expertise, connections, and value to founders over time?
Daniel: Absolutely. We came with a network, but our early portfolio companies and their customer relationships helped establish our legitimacy.
I tell our LPs that I have a track record with them measured in cash in, cash out, IRR, and returns. But I also have a track record with entrepreneurs. If I want to win deals, that record needs to be strong too.
It includes business connections, introductions to investors, help with key hiring decisions, being a valuable board member, and advising founders through difficult periods.
It also means knowing your boundaries. In our first fund, we probably became too operationally involved. Today, we are clear that we back domain experts. They run the business. We help with situations we see repeatedly that they may have encountered only once or twice.
That might mean financing terms, SAFE agreements, round size, option pools, or cap table balance. Helping with those decisions allows founders to focus on their domain expertise.
Yaron: I saw that kind of support during my time at IronVest.
Daniel: IronVest is a good example. I have been through a lot with Avi, including his prior company, BioCatch, where we were the first investor back in 2011. Those experiences are how you develop that skill set.
Yaron: Some AI companies are raising enormous early rounds. Does greater capital efficiency make a startup a better venture investment, or can it reduce the opportunity for funds to deploy capital?
Daniel: It goes back to fund size being fund strategy. Venture capital is concentrating in large, well-known funds. Those funds have to deploy very large checks. Their fund size influences the checks they write, rather than only the needs of the business.
We deliberately avoid some of the overhyped, overfunded sectors attracting those enormous checks. We see real opportunities elsewhere, where we can make a difference and where check size does not determine whether we win the deal.
That requires independent thinking. You cannot claim to be a disruptor if you are simply doing the deals everyone else is doing, assuming someone else did the diligence, and trying to get into large rounds with prominent co-investors. You are effectively indexing someone else’s strategy.
You are also avoiding the risk of being wrong alone. If you are not willing to be wrong alone, you cannot be right alone. Our LPs trust that approach because we have a track record behind it.
Yaron: To outperform, you need to develop your own judgment rather than follow everyone else.
Daniel: Exactly. Nobody beats the market by acting on consensus.
Yaron: You have discussed using secondaries to return capital from a concentrated portfolio. How do you decide when to sell part of a winner, knowing that your best companies can drive the fund’s returns?
Daniel: It is one of the arts of this business, rather than a science. First, you need to identify your winners early and invest as much as you can in them. In my view, venture returns are driven by concentration and by how much of an outcome you own, not just how large that outcome is.
You need a meaningful ownership position to have flexibility in the secondary market. You also want to retain ownership so you can benefit from further appreciation.
Secondary sales can serve different purposes. You might want liquidity and a more balanced portfolio, or you might no longer believe in the business. One useful development from 2021 was the normalization of the first category: a smaller fund could sell part of a large position without signaling a loss of confidence in the company.
The key is to make prudent sales because they improve the return profile, rather than just to show activity. Time matters. The longer a position takes to realize, the more it can weigh on performance.
We have used secondaries to generate returns, and the companies have continued to do well afterward. We still have to manage the portfolio, while trying to retain a position that lets us benefit from continued appreciation. Learn more about Joule Ventures and its portfolio at joulevc.com.