Forestay’s New $220M Fund Targets the ‘Inflection Point’ in AI Startups

High interest rates usually spell trouble for venture capital (VC) firms. But with a hot hand to play like AI and cybersecurity, and a shrewd evaluation strategy for potential investments, VC companies can still find plenty of opportunity.

It’s a formula that Geneva-based Forestay Capital has worked effectively recently. On Monday (July 8), it announced the closure of its second fund at $220 million. Forestay II will focus on investments in the enterprise AI and Software-as-a-Service (SaaS) sectors, targeting early-growth companies typically making lead investments in the $10-15 million range.

The success of their first fund, Forestay I, gives the company a good track record: It invested in 13 companies, with three achieving unicorn status (valuation exceeding $1 billion) and two acquisitions.

The Forestay II fund has already begun deploying capital, partnering with startups like Veriti (cybersecurity) and Neural Concept (engineering intelligence) in the enterprise AI space.

“We’re a tech fund focused on enterprise AI, which is a broad term and a broad sector,” Frederic Wohlwend, managing partner at Forestay Capital, told PYMNTS. “But what we mean by that AI component for us is everything around process automation, everything about data, everything about cyber and everything about intelligence.

“And the enterprise component is important because we’re not into consumer, we’re not into marketplaces,” Wohlwend added. “We like to invest into AI companies for the benefit of large enterprises.”

Wohlwend is a chief digital officer by way of background and a data analytics professional at heart. Having worked at pharmaceutical firms Serono and Merck, he knows how enterprises work, how they grow and how they do data.

All those lessons have set him in good stead in his current role, where he takes a surprisingly people-first approach as he evaluates more than 3,000 companies per year, by his own estimate. During the conversation, he stressed the importance of the team at a company the fund works with before he talks about the dollars his company has invested.

“With what’s happening with the new AI, or generative AI, the new version of AI, we are opening a new cycle and we are at the beginning of that cycle,” he said. Wohlwend anticipates both advancements and failures as AI technology matures, a dynamism that requires investors to be exceptionally careful and strategic in their approaches.

Trusting The Process When Investing Into the Future

Forestay Capital’s investment process is characterized by high selectivity and thorough due diligence. Forestay focuses on companies at their inflection points, aiming to help them scale significantly.

“We take companies at the inflection point, so, as soon as they make some revenue, four or five million in revenue. And our game is to bring them to 50 or 100 million in four to five years. Timing is very important because the cycles in tech are very short,” Wohlwend said.

He noted that Forestay offers more than just financial investment.

“We like to say that we go beyond capital and we provide entrepreneurial capital, meaning that the contribution part is super important,” he said, highlighting the firm’s active role in supporting and advising the companies they invest in. This approach involves close collaboration with management and board teams to ensure successful scaling.

Neural Concept, a portfolio company, serves as a case in point. Forestay identified the company well before it began raising funds, allowing time to build a relationship and ensure a good fit.

“We had all the right components with Neural Concept. Doesn’t mean it’s easy to scale. But, you know, the founders were willing to work with us and accept our advice. We’re not spray and pray type of investors at Forestay Capital. We don’t play statistics in terms of numbers,” Wohlwend said.

Wohlwend sees a significant opportunity for AI in enterprise applications but warns against hasty adoption without proper alignment.

“The winners in the enterprise space will be the ones who are smart at adopting the new AI technologies. You will have those enterprises that will just be sleeping in, adopting this opportunity, and will lose vis a vis competition,” he said.

He also stressed the importance of data quality in AI applications.

“AI, we talk about LLMs and all these models and GenAI and ChatGPT,” he said. “That’s all great, but if you feed ChatGPT with garbage, you get garbage at the end.”

Drawing from his experience as a chief digital officer, he highlighted the challenges large enterprises face with scattered data across multiple applications, which complicates AI integration.

Looking ahead, Forestay Capital plans to continue focusing on the enterprise SaaS, B2B and AI spaces while exploring potential vertical funds in cybersecurity and digital health. “Enterprise SaaS, B2B, AI space … all of these are here to stay and what we want to do is be the best at what we do,” he said.

Geographical expansion is also on the horizon, with plans to establish a stronger presence in the U.S. while maintaining roots in Europe and Israel.

“We believe in growing systematically. Europe is our base, but we see significant opportunities in the U.S. Establishing a branch there would make a lot of sense for our portfolio companies,” Wohlwend said.