Merlin Ventures is the venture capital affiliate of The Merlin Group, a network of companies with over 25 years of success bringing technologies to the U.S. government market. And Merlin Ventures rapidly scales visionary companies and introduces disruptive solutions designed to help enterprises address today’s most critical cybersecurity challenges. Pulse 2.0 interviewed Merlin Ventures managing partner Seth Spergel to learn more about the company.
Seth Spergel’s Background
What is Seth Spergel’s background? Spergel said:
“My partner at Merlin Ventures Shay Michel and I both come from operator backgrounds, but with different skill sets that complement one another. After founding his last startup, Shay worked at an Israeli product design firm called Inkod, where he worked closely with some of today’s most successful cybersecurity startups when they were still in their ideation phases. That background gives him both a deep network and an inherent understanding of how to build companies.”
“I came from a more technical background, starting out as a software developer before eventually becoming a VP of Engineering (while also spending a few years learning the sales world working in enterprise software sales at IBM).”
“In 2013, I joined In-Q-Tel, a VC firm created by the CIA to help bring startup technology into the US intelligence community. That was my entry into venture capital, and provided a great introduction to the industry. In 2018 I joined our sister company Merlin Cyber to start Merlin Ventures.”
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Evolution Of Merlin Ventures’ Thesis
How has your firm’s thesis evolved over time? Spergel noted:
“We originally formed Merlin Ventures as a corporate venture capital (CVC) firm for our sister company, Merlin Cyber. Merlin Ventures acted as a strategic investor to help find new partners for Merlin Cyber to work with by investing in them.”
“In 2021, we saw an opportunity to open an office in Israel. With a team on the ground in the market, we were able to build up a strong pipeline of companies, and pivoted away from being a strategic CVC into a more traditional returns-focused investor. Our focus remains enterprise cybersecurity software, especially software that addresses the needs of regulated industry and government. But as we built out our platform, which today includes access to over 300 US security executives from across commercial industries, we were able to pivot into earlier stage (typically seed) companies, where we could take a more active role in their development. Today we are one of the most successful VCs in the Israeli early-stage cyber ecosystem, largely based on the value we drive for our startups through our value creation platform.”
Favorite Memory
What has been your favorite memory working for your firm so far? Spergel reflected:
“Last year we hosted our first “Merlin Safari,” an event in Denver that brought together our portfolio company founders, advisors and partners for three days of networking and fly fishing. It was an idea that started out based on a joke my co-founder made after seeing photos of all the wildlife near our founder David’s house in Colorado, and exceeded our expectations in ways we never imagined. I’m so proud of our team for all the work they put into pulling the event together, and the friendships formed go beyond simple business relationships. While the whole three days was pretty amazing, going fly fishing was a new experience for most of us, including me, and something we all still talk about today. We’re doing the event again this year and will form even more great memories.”
Significant Milestones
What have been some of your firm’s most significant milestones? Spergel cited:
“Last year was a big year for us. Despite only opening our office in Israel in January 2021, we had four companies get acquired since June of last year, including two in November by Palo Alto Networks for nearly $1 billion in combined value. Those acquisitions really helped validate not only our approach to how we select companies, but also to how we help them grow. Hearing the feedback from our entrepreneurs on how much our involvement with them helped position them for acquisition really helped reinforce that we have built a fund with staying power.”
Investment Success Stories
When asking Spergel about investment success stories, he highlighted:
“Dig Security is a great example. We invested in Dig early on largely based on the feedback from our network of security executives. We do monthly calls with our network where we discuss companies we are evaluating, and when we presented Dig the response was overwhelming. Over a quarter of the people on the call asked to meet with the company, which helped us assess the investment and decide to invest. By working closely with members of our network to understand their needs around cybersecurity, we were able to connect Dig with even more relevant security executives after we invested, eventually helping to drive significant early revenue for them.”
“Nineteen months after we invested, Palo Alto Networks acquired Dig for over $300 million. Our team worked closely with the company from the moment we invested, and after the acquisition the CEO of Dig let us know that not only did we bring sales, but we also shared product advice. which was a key reason for Palo Alto Network’s acquisition.”
Industry Focus
What are some of the industries that your firm is focused on? Spergel noted:
“We focus on enterprise cybersecurity, so really any company developing a product to protect large enterprises. Within our network of advisors, we have representation from banks, insurance companies, food and hospitality companies, retailers and many more, so we cast a wide net when we look at startups.”
Differentiation From Other Firms
What differentiates Merlin Ventures from other firms? Spergel affirmed:
“There are two primary things we view as our differentiators, but both essentially boil down to collaboration.”
“The first is how we work with other VC firms. While most seed investors in the Israeli market will typically do seed deals on their own and only bring other investors in at the next round, we see value in collaborating with other top firms at the seed stage. We regularly co-invest with leading VCs, both from the US and from Israel. While it may give us a slightly smaller ownership stake in a company, the value when multiple VCs bring together their platforms to help accelerate a startup drives much faster growth for our companies. This approach has been very popular with US VCs in particular, who see Merlin opening up the Israeli market to them in ways they could never do before.”
“The other side of that collaboration approach is how we leverage our network of over 300 US security executives to understand the market, vet investments and help portfolio companies gain traction in the market. While some VCs take a more transactional approach, paying security executives to be advisors, we have built our network around information sharing. Our advisors benefit from the market insights they gain working with us, while we gain a better understanding of the needs of budget owners to help us make better investment decisions.”
Challenges Faced
What are some of the challenges you faced while working at the firm? Spergel acknowledged:
“We are not the first seed-stage cybersecurity fund to try to break into the Israeli market. It’s a market that can be hard to navigate, and even harder to stand out in. The companies we invest in have many choices when it comes to taking investment, and when we started out it was much easier for them to take money from an established VC than from an unknown fund. We started out by making small investments where we could in order to start to build our reputation.”
“Once we invested in companies, we were able to show outsized value for each of them, bringing them advice and access in ways most of the funds could not. Israel is a small market, and people talk. As word of the value we were bringing our portfolio spread to other founders and VCs, we saw the market begin to open up for us. Today we are one of the first calls most cyber entrepreneurs make, and we did it by delivering value to our portfolio where it mattered.”
Future Goals
What are some of the firm’s future goals? Spergel concluded:
“We’re still young and small relative to other funds. But we’ve built an amazing team that feels real ownership in everything we do, and that has made us successful.”
“We continue to build out the team, and a great example is our recent addition of a CISO-in-Residence, Andy Smeaton. Our network of advisors has been a key element of our growth, and adding folks like Andy to help us align even more closely with the cybersecurity community will strengthen that community even more. When I first visited Andy in Boston at a dinner we hosted for the local cybersecurity community I was amazed by the number of other CISOs who came up to me and told me how Andy had been a mentor to them and helped them grow into the roles they have today. That really validated for me that Andy was the right person for the role, aligning with what we look for in our team – people who want to help others succeed.”
“We still have a lot more to do. Our team will only continue to grow, but it’s not just about numbers. It’s about innovating in our model and coming up with new ways to help our portfolio companies succeed. Today we are viewed as a leading player in the Israeli cyber VC ecosystem, but this is a very dynamic market, and we know that if we stop pushing for one minute, we will fall behind. We don’t intend to do that.”
