Israel Venture Capital 2.0

Pinterest = eSnips 2.0

So much has been written lately about Pinterest. The hottest web property! The next Facebook! The next Twitter! Fastest ever growing social network! I am personally not a huge believer and at this point not spending a lot of time on it. Maybe it is the next big thing, who knows.

But there is one thought that is Pinterest related that keeps coming back to me. This amazing service is really a 2010-2012 version of eSnips. Back in 2005, Yael Elish (Currently at Waze) had the idea of sharing web snippets (photos, files) based on a specific topic. Arrington called it "Content based Social Network". We funded eSnips in late 2005 and sold it a few years later. The company had a lot of users, but the overall outcome was relatively modest.

Granted, it's not exactly the same, and surely eSnips today seems quite outdated. But still, the original idea is quite similar. Like always, timing is so critical when going to market. In fact, timing is almost everything.

Talking about timing, it's always important to remember that when checking ideas that we "have seen before". Gemini funded mobile payments back in 1998, at least 14 years too early. The same idea could have been great today. Need to make sure that past failures are not the only reason for not investing in similar, new ideas.

IL Tech Talks

Today Gemini hosted another Meetup for IL Tech Talks. If you are not familiar – IL Tech Talks is a program started by Ori Lahav from Outbrain (Gemini portfolio company) with the idea to share technology-related knowledge between Israeli founder & startups. The problem is quite obvious: Many of the companies in Israel face similar technology companies, but have a hard time reaching the right (and relevant) advice that is local. As Ori says – a Meetup on the topic in Palo Alto is not really helpful for a startup in downtown Tel-Aviv.

IL Tech Talks was launched about 18 months ago and has managed to generate some nice traction in the local technology community. Just looking at the current calendar, you can learn a lot about this activity. Just in upcoming 2 months 10 talks are being offered, at various locations around the country (from Outbrain in Netanya to JVP Studio in Jerusalem). The topics are also very diverse: Agile Unit testing, project management, and Data Center Scalability – just to mention a few.

I am personally a huge believer in this activity. In a highly competitive global environment, we will all benefit if we help each other – every Israeli success story will generate additional success stories, fueling the local eco-system. Although some local companies become direct competitors, in most cases Israeli companies compete with players in global locations, and helping each other can really do no harm. IL Tech talks is mostly technology oriented, but there are other similar activities that focus on marketing and product related stuff as well (Gemini is an active supporter of another meetup: Sales & Marketing 2.0, run by Eldad Maniv and Ran Gishri)

When I told Ori I will write about IL Tech Talks, he emphasized his vision around this program, and it's important to share: More than anything, it will be great to see companies host Tech Talks in their own facility, sharing external knowledge to many employees, not only the tech leaders (CTO, VP R&D, etc.). So, if you are reading this, there is a call for action: host an IL Tech Talk Meetup in 2012.

Finally, a word about the meeting today. The conversation was around smart caching and scalability. I definitely learned a few new things…

5 Predictions for 2012 – The Israeli Version

I did the predictions thing for 2009 and 2010, and then skipped 2011. Now I think it's worthwhile to go at it again (Yes, joining many others). In the past 2 attempts I listed 7 predictions. This time, I will focus on 5 – 3 Positives, and 2 negatives. I even tried to have a very clear score card to measure in a year from now. So here it goes:

3 Positives

1. Israeli VCs will raise money. There are several funds out there raising money. It may be "wishful thinking", but I am positive that Pitango, Magma, and others will raise money. Some will finalize in 2012, others in 2013.
2. At least 3 large Silicon Valley tech companies will open development centers in Israel (like Apple). Some will be based on acquisitions, others just in order to tap into the talent.
3. At least 2 major acquisitions will happen (above $400M). Hope to see Google doing something substantial locally.

2 Negatives

1. No Israeli IPO. I don't think we will see any major Israeli IPOs (Nasdaq) in 2012. The good companies will wait for 2013.
2. Local cost of engineering will continue to rise. With the increase of startup and large company activity, we need to invest A LOT in local talent growth; otherwise the supply & demand will continue to hurt us.

Mercedes Band – Live in Tel-Aviv (Barby)!

Another 2.5 years since my previous "Rock Concert" category blog. Not that we rested during that time. A few concerts around the globe (PJ20) and some many local concerts. Somehow, I got a bit tired from seeing the same old Israeli shows (Shalom Hanoch et al.). I needed something different, something fresh. Giraffes was a bit of that, and so were Assaf Amdursky and Red Band, but nothing beats Mercedes Band. 2 Hours of pure, amazing, energetic rock. World class rock show, 20 minutes away from my house. When Shlomi Bracha went on stage to play a Mashina song together with the Mercedes, it was clear that the old generation is giving in to the new one (Or should I say – the really old generation is giving-in to an older generation, but not as old…).

I am definitely going to see them again. Soon. In the meantime, enjoy the photo below (courtesy of GZ), and Voodoo.

Ad Tech IPOs

Last week, Millenial Media filed for an IPO. There has been a lot of waiting in the market for an ad-tech IPO, with rumors around App Nexus, Tremor Video and others. With so many companies operating in the advertising technology world (Seems the LUMAscapes are updated on a daily basis), it's critical that the market opens up for some ad-tech IPOs. Since Google is dominating the M&A market in this segment, it will be great to have the IPO route as an alternative, in addition to the fact that such new public companies will create liquidity options for some of the smaller players in the space.

Business Insider published an interesting analysis on the financials of Millenial Media. In this article, Jim Edwards looks at the 40% gross margin of the business, claiming the company is much smaller than perceived.

"Once the cost of revenue is axed from Millennial's income statement its "gross profit" for the same period is just $26.5 million -- less than half its reported "revenues." It would probably be more accurate to call Millennial's "gross profits" its net revenues, because that's what they really are -- the sales dollars the company keeps."

I am not sure this is the right analysis. There are many companies with similar gross margin structure (Think of companies like Broadcom) that are traded around 3x TTM revenues. If you apply that simple multiple, Millenial should already be valued above $300M. If they continue to grow fast, that valuation will be much higher. It will be interesting to see how the market accepts Millenial Media. A successful IPO for them will be fantastic news for the industry.

In summary, here is a comic strip from AdExchanger, published back in May 2011. Hopefully the IPO sun will be shining on all buildings…

Israeli tech – 2011 Summary

2012 is already here, and it's time to list some of the more important events that happened in Israel during the past 12 months. Since my memory is somewhat limited, this cannot be a full list, and I am sure there is at least one major major event that I forgot as I compiled this list. So, to be precise, here are SOME of the important events that happened in our local industry in 2011. They are listed in random order.

1. Waze raises money from Kleiner Perkins. Kleiner has always been the most difficult fund for Israeli startups. Sequoia, Benchmark, Greylock were always very active here, but KPCB was somewhat reluctant. They invested here before, so this is not a first, but this one seems a bit different. This is a real endorsement of the quality of Waze, and their leadership position in the market. Maybe, more than anything, it shows that for great companies there are no real anti-rules.
2. Conduit distributes dividend to shareholders. In September, Conduit announced they will be distributing dividends to shareholders. In their own words: "It's well known in the Israeli tech community that a very large percentage of our employees are shareholders, and we paid them a generous dividend". M&A and IPO are so "last year".
3. Navajo Systems acquired by Salesforce. Originally, I wanted to write about Apple acquiring Anobit. Clearly, a more visible milestone. But in reality it's all part of the amazing "return of global hi-tech to Israel". In 2011, Salesforce opened offices here, Google expanded, Apple arrived, AT&T expanded, eBay acquired again, Akamai arrived, and more. We may not be performing on the political side, but we are definitely recognized as a great R&D center.
4. Shaker winning Techcrunch disrupt. On the Techcrunch Disrupt side, the Israeli entrepreneurs are doing great. In the past 2-3 years, more and more Israeli companies are recognized as innovators. I am not sure Shaker is a guaranteed winner, but I think this award is an indication of great consumer Internet businesses that will mature in 2-3 years.
5. Imperva IPO. Slowly but surely, Shlomo Kramer is building a great company. This is the model we should all aspire for. I recently wrote about the Mellanox "model", and I think Imperva is following the same footsteps. This is a multi-billion dollar company in the making.
6. The Evergreen break-up. Till now, all good news. Kleiner, Salesforce, etc. What happened to Evergreen is simply sad. The true first VC fund in Israel will probably seize to exist. Israel needs the local Israeli funds, and so far we haven't seen new entrants replacing the funds that break up. The local industry will be missing the Evergreen brand.
7. Lool ventures and others. In February, Lool Ventures was officially announced. They were one of the first in a wave of seed funds that emerged in the local market. I am not sure there is room for so many seed programs, but for the larger VCs this is great news. These seed funds will enable us to see a larger set of companies with (hopefully) some traction.
8. Avi Hasson as the Chief Scientist. Avi was my partner for 10 years. He is one of the best, and as a chief scientist he is (and will) push forward the local infrastructure to help startups. Check this Video to hear Avi's agenda.

On the personal note, it was a year full of events. Gemini enjoyed the sale of the Gift Project to eBay. Our companies were funded, including Adap.tv and Outbrain, and we even saw some awards for our companies, including Outbrain (again) and Eyeview.

UPDATE: After publishing, I became aware of a much better summary by Micha from Genesis. Read here. Nice to see we had similar views on 2011.

Finally, there are many "summaries" out there. I like the image below from Stumble Upon.

The early stages – Skip the local Israeli market

In the past few months I have been seeing a lot more Israeli startups that are focusing their initial business steps in the local market. And when I say Local, I mean the Israeli market. There is a good reason for this growing trend. With the abundance of accelerators and early stage seed funds, many company don't have the resources to launch in the US (or Europe) and prefer to spend the little money they have with closer customers.

In every meeting I have with early-stage companies I keep pushing them to stay away from the local market, especially as their primary initial target. Israel is a great place (Sometimes…), but it is completely non representative of the bigger markets out there. Here are a few examples of these differences:

1. Business Netowrk: In Israel, there is a 1-2 degrees of separation. So easy to get to the right person in ANY organization. Totally not the same when you think about the large US companies.
2. Infrastructure: Unfortunately, Israel is truly behind as it relates to infrastructure. Michael Eisenberg, in his 4-part Hummus Manifesto has been recommending for a long time the need to build local cloud computing and real broadband. Until that happens, we will stay behind and will not be able to experience the real Internet as seen in Asia. In other words, focusing local means focusing on Internet 2001 style.
3. Applications: In Israel, the current state of online services is different on all levels. No real online music (iTunes, Pandora, Spotify). No Netflix. No ad exchanges. Can you really learn something about the US when focusing locally?
4. Finally, and based on the above (and more), having a local beta/customer does create enough value with investors. What does that mean? One US-based beta is worth more than 10 paying Israeli customers.

Still, there are a couple of situations that are relevant for selling locally. First and foremost, for cash. All of the above is irrelevant if the local customer help you survive and push forward to the next milestone. Skip it if you can, don't skip it if you must. In addition, once the company is advanced and selling in foreign markets, generating some local sales can be a great financial benefit and help the R&D team interact with real customers.

In summary: Israel is great for B-round and above. Till then, skip it if you can.

Mellanox – Passing the Billion Dollar limit

4 years ago I wrote an article for Venture Beat, "the search for an Israeli Nokia". Back then, I was trying to list the reasons for the lack of large venture backed companies (large = $1bn valuation and above). 3 major reasons were listed, and also a small prediction that things will change in 5-10 years. 4 years have passed, are things changing?

This week Akamai announced their planned acquisition of Cotendo for approximately $280M. I had the pleasure to work with the 3 founders 10+ years ago at Commtouch. They definitely deserve it. The Cotendo acquisition came a few days after the announcement regarding the Anobit acquisition (by Apple). Overall, 2011 was a great year with over $3bn of value realized (Remember Provigent, and MediaMind). We even had an IPO (Imperva).

Great year, but not a single $1bn valued transaction. Still, times are changing, as can be indicated by the story of Mellanox. Founded in 1999, the company went public in February 2007. Post IPO, Mellanox was valued at ~$500M. Another sub $1bn Israeli company. But since then, Eyal and his team have been pushing hard to grow the business, growing organically, but also through acquisitions. Early this year, they acquired Voltaire for over $200M. And since then, the company has continued to grow and is currently valued over $1.2bn. Yes! A true $1bn Israeli company.

The Mellanox $1bn story will not be covered in the Israeli papers summarizing 2011. Why? The papers prefer the "instant hits" and not the slow and patient growth of companies. But Mellanox is an example of the model that will be repeated many times in the next few years. Following Mellanox, Imperva will grow to that valuation, and soon after we will see similar growth stories from companies like Primesense (A Gemini Portfolio Company), Outbrain (Another Gemini Portfolio Company), Wix and others. Constant growth, IPO, and then more constant growth.

As I mentioned in 2007, between 2012 and 2017 we will see a lot more companies like Mellanox. The quest for an Israeli Nokia is finally over.

R&D in Israel?

This week was a great one for the local high-tech scene. 35 years after it was officially incorporated, Apple decided to expand their engineering team and open a development center in Israel. Not only that, they are also acquiring a local startup, giving the new center a real project, and a good base for (hopefully) a successful journey.

As Apple (among other companies) is opening an R&D center here, it's important to look at some early stage companies, and see if the early-stage companies are also setting up their R&D teams here. The reality is that there are many Israeli entrepreneurs that are based in the US and are starting companies without hiring a single Israeli-based engineer.

As an observation, there are 3 types of "founding Israeli teams". The first type is the Israeli-based teams. In that case, they will always hire their development team here, and unless they relocate the whole team as the company progresses (Quigo as an example), these companies stay in Israel. The second type is the split-geography founding teams. One entrepreneur is in the US, the other one is in Israel. Outbrain (Yaron in the US, Ori in Israel) and Watchdox (Moti in the US, Noam in Israel) are two great examples from our own portfolio. The third type is the Israeli teams that are 100% in the US. The founder relocated through his previous venture, and is not starting a new startup with an Israeli-based co-founder. In those examples, the R&D center is usually set in the US.

The location of an R&D Center depends entirely on the initial location of the R&D manager. If one of the founders is the head of R&D, the team will always be built around him. If that VP R&D needs to be hired, it may make sense to hire him in Israel. In the past, the main reason was related to cost. R&D in Israel used to be cheaper. Unfortunately those days are gone. So why do it? It all relates to the ability to hire talent. Every founding team needs to assess their brand and network and think of they have the ability to hire a killer development team in the US. The reality is that a great business team in the US combined with a strong Israeli VP R&D will have the ability to hire the very best people from the Israeli startup scene. Hiring the best of Silicon Valley could be a lot harder. So if it's best in Israel vs. average in the US – I would vote for Best in Israel.

And talking about Best in Israel, no doubt that Apple will be hiring some of the best engineers.

Shana Tova תשע"א

Another year has passed, and it's time for the annual Shana Tova greeting. The past year was a good one, both on the personal and the professional side. If I can summarize the good professional side of the year in one phrase: "The rebound of online advertising". Clearly, the advertising business has seen a nice growth, and that was reflected in many of our portfolio companies. I can only wish for a similar strong year, and maybe, on top of that, interesting movement on the peace side (following the end-of year peace talk summit).

Last year I wished for 5 great deals (close one new investment: Sense of Fashion, but portfolio companies signed great deals, much more than 5), 3 great rock concerts (Got to see Pearl Jam 3 times…), and 1 championship (Nada. Maybe this year).

And finally, I wish for a better year for this blog. Last year I published 9 posts. The year before: 56. That's the difference between once a week, and once every 2 months. Let's hope I can get it going again.

Shana Tova.