Israel Venture Capital 2.0

Internet Connected Devices - CD Player 2.0

"One of the hottest items we saw at the Consumer Electronics Show in January, the Internet-connected Dash Express GPS navigation system, is finally on sale. For the next 30 days, it will be available exclusively at Amazon.com's electronics store (and Dash's own site), for $400." (Check out the rest of the article on PC World).

I haven't bought the Dash yet (I will do it at one point), but at first glance it looks like a great product. GPS 2.0 – Internet connected GPS. Great idea, but why is it coming out only in 2008? Why are so many CE devices still not Internet enabled? I have been asking this question for at least 8 years (Since 2000). Take CD players as an example. Although iPods are taking over the world, most people still buy CDs (and a lot of them). Wouldn't it make sense to have a CD player that connects to the internet and displays CD information from Gracenote? I would have expected this functionality to be in every music-playing system, from my home stereo to my car, to my Bose iPod speakers.

I did a quick search on the internet, and the top CD players (like the one below, Onkyo DX-7555) are still exactly the same as they were 15 years, displaying songs in a "modern" 1-1 format. There are some products out there like the Olive Symphony CD Player, but those are very expensive systems with integral hard drives. All I want is an old-fashioned CD player with an internet jack.

Now that we have GPS 2.0, I am waiting for CD Player 2.0, DVD Player 2.0, and Alarm Clock 2.0.

MSN Street Ad reveals VC truth

As I was driving to San Francisco yesterday, I spotted the following MSN advertisement. What a simple, short way to describe the VC business. Unfortunately for MSN, I still use Google to fake my own knowledge.

Menashe Ezra – New Partner at Gemini

Yesterday we officially announced that Menashe Ezra will join Gemini as a General Partner, focusing on semiconductor and communications related investments. Needless to say, he is a great addition to our team. Menashe has a great track record in management (His military service), entrepreneurship (Founding and selling WaveAccess to Lucent in 1998), and venture capital (Invested in Oplus that was sold to Intel in February 2005 and in Passave that was sold to PMC Sierra in April 2006).

Potentially, this information is telling enough. In Soccer terms, Menashe is a proven scorer and could have found a place in any VC in Israel. But being a successful investor (and soccer player…) is not enough.

The great thing about Gemini is its partnership. I truly believe that each team member is excellent, but it's our synergy that makes us proud, successful, and unique. We spend hours together, trying to help each other on every deal and opportunity. In the past few months Menashe spent many hours with all of the Gemini partners. During that process we learned a lot about each other and found a great fit in ethics, personality and views regarding the future of venture capital. In other words, we have not only added a great investor to our team, we added a real partner. For me, that's the most important thing.

Menashe – Welcome and good luck.

The KP/Apple iFund

On Thursday (March 6^th), Kleiner Perkins announced their new iFund initiative. $100M dedicated to invest in the iPhone and iPod Touch platforms. Clearly, the iFund is a nice marketing initiative, but it also highlights the fact that KP and Apple expect the iPhone/iTouch to be game changing platform (Check out the Matt Murphy's interview on CNET).

Not everyone believe in this new initiative (Check out Om Malik). I am actually quite supportive of this (Not that someone asked me...). It is a game changing platform, but I thought to do some analysis to understand this initiative a bit better.

With a $100M fund, especially when managed by KP, you should expect at least a 5x return - $500M. Assuming KP will hold about 25% equity in these companies (on average), it means the iFund companies should reach a total market cap of $2bn.

$2bn Market cap? Nokia acquired Navteq for $8bn, with Navteq running at $200M revenues per quarter. Taking this as a comparable (10x on revenues - a bit optimistic), a $2bn iFund market cap value should mean at least $200M net revenues on top of the iPhone/iTouch platform, $300M gross revenues (Apple takes 33%). With 5M phones sold, that is ~$100 revenue per phone.

$100 revenue per phone? That doesn't look like a big number at all, especially if you compare that to the $50 mobile ARPU in North America (must smaller in rest of world).

Is that enough to create a fund? It's probably important to look at the iPhone and iFund as the initial step in building the next-generation smart phones/mobile phones. The "iPhone like" devices won't the the only ones in the market, and KP won't invest in iPhone only companies (As Apple won't work in KP backed companies only). In other words, the $100-revenues-per-user is a nice short term opportunity, but the reality is that KP it trying to lead the investment world into Mobile Phones 2.0.

Finally, a word about 700 Mhz. I am not a communication expert, and I don't have a real opinion in regards to pros & cons of the current 700 Mhz auction. The reality is that 700 Mhz is supposed to unlock the iPhone and enable it to be legally available for the entire world (700 Mhz is tied to openness). Soon, the market will be much larger.

I am a big believer in the iPhone/iTouch potential. Over the weekend I made 2 important decisions:

1. I have no iFund, but will be happy to look at relevant deal flow. Michael Eisenberg already invested in an Israeli company (Stealth mode), but I am sure there are many more opportunities (Israel is the real capital of mobile phone innovations).
   
2. I am buying an iTouch. It's called Due Diligence.

eSnips – The journey continues

Last week Mike Arrington wrote about the changes that are happening at eSnips (He called it eSnips Drama). As he mentioned, Yael (founder & CEO) left for personal/family reasons (In this case, it's really personal reasons. I always think that "personal reasons" is a nice way to hide something. Not in this case). The company is now run by Nahum Sharfman, the best possible candidate. Nahum is not only a successful Internet entrepreneur (Commtouch, Shopping.com) but also knows eSnips well, as he is an investor and has been the chairman of the company since its inception.

The past couple of months have not been easy for us. Yael was the heart & soul of eSnips, and her departure was hard to digest. However, we are now back on track and the site is alive and growing. Here are some data points:

1. eSnips is still ranked as one of the top 350 sites on Alexa.
2. According to Comscore the site had over 8M unique visitors in January.
3. The DJ and Karaoke communities are still growing, with thousands of active members.
4. The company is planning to be profitable this quarter.
5. The user growth continues, and we hope to enhance it with a few product changes that will be introduced in the near future.

In general, the departure of a founder/CEO is always hard for a company. I have learned the hard that the long-term commitment of an entrepreneurs cannot be taken for granted. It wasn’t an easy lesson to learn.

Goldman Sachs Technology Conference

Last week I flew over to Las Vegas and spent 2 days at the Goldman Sachs technology conference. In general, I don't think these tech conferences are really relevant for early stage VCs (and entrepreneurs) as the audience is composed of mostly public market funds and equity managers. However, it's a great way to get a pulse on the current public market and also to hear about the future strategic directions of the larger public companies. Anyway, here are my 4 major takeaways:

1. Clearly, the recession was the most important topic, and was constantly discussed with every company presented. The overall feedback from most companies was the same "We are cautious, but still optimistic about the upcoming quarters". In other words, most companies are worried, but not feeling the recession yet. Specifically, I liked the comment made by Jerry Kennelly, founder & CEO of Riverbed: "Recession? Flights are full, restaurants are full, and I can't get a decent hotel room in any city I go to. Not sure at all that the recession is here". I totally agree with that observation.
2. One area that is having a negative impact on the technology vendors – Financial services. For many of the public companies this is not a big issue (They can compensate with sales in other verticals). For the startup community this is hard. The banks are usually big tech spenders and early adapters.
3. M&A was a topic that was constantly discussed. Microsoft – Yahoo, Activision – Vivendi, and many others. Again, these mergers are overall bad news. The startup community needs a lot of potential buyers, and every public company that disappears has a negative impact on the overall venture results. As I was listening to companies like Riverbed and Data Domain, I was happy to hear about their inorganic growth plans, yet worried that in a year from now both will merge with the companies like Cisco and IBM.
4. Finally, It was interesting to hear Microsoft Chief Strategy Office, Craig Mundie, talking about the potential in innovating the desktop. He claims that the desktop hasn't changed at all in the past 10 years, and there is room to re-create the fixed computer desk (I guess Microsoft's table top is the first step). As Microsoft talks about the desktop, Apple's COO, Tim Cook, (Boring presentation) talked about the iPod touch as the ultimate mobile Wi-Fi/data device. Interesting to see Microsoft and Apple taking 2 very different views on innovation.

Finally, a word about Israel. I was very proud to hear Craig Mundie's view on the next big thing: "As far as we know, the next big thing will come from a small startup company in Israel". In addition, Mark Loughridge, IBM's CFO, talked about XIV, their latest acquisition in Israel. "This acquisition positions IBM to grow in emerging opportunities like Web 2.0 applications, digital archives and digital media. So, we're excited about this addition to our storage family."

It's nice to see that Israel is taking center stage in the technology world, both in innovation and in overall brand and perception.