ICQ – Ten Years After

The 1^st week of June has always been an important week in the short history of Israel. Mostly known in relations to military history (Six Day War started on June 5^th, 1967, and the Lebanon war started on June 6^th, 1982), the most famous Israeli Internet exit was completed on June 5^th, 1998, exactly 10 years ago.

On June 5th, AOL announced the acquisition of ICQ, paying $400M in cash ($287M + $120M earn out). The 4 founders of ICQ (Arik Vardi, Yair Goldfinger, Sefi Vigiser, and Amnon Amir) became local celebrities.

Back then, in 1998, this acquisition made some big headlines in Israel. $400M in cash? For a company with no revenues and not even a business model? In the US market, such deals were already happening, with Hotmail being a great comparable. However, in Israel this was a first. As I was not at Gemini during the ICQ exit, I went an asked a friend who was working for an Israeli VC back then. He said that everyone passed on the ICQ deal, as it was hard to digest a company with no revenues, and not even a business model. After all, Yossi Vardi was quoted after the acquisition saying that "Creating revenue is a big distraction". To give Vardi a lot of credit, he understood the Internet play before everyone else did. 

Check this great article from the New York Times, dated June 9^th, 1998. Check out the opening paragraph: "America Online said yesterday that it would pay at least $287 million for a company that has never taken in a penny in revenue and has no plans to start charging money." Also check out the quote from Bo Peabody, now with Village Ventures: "When you chat, you look at what you are writing, not what other people are writing. Moreover, advertisers worry that their advertisements will be associated with content that they do not control and may be embarrassing. As a result, chat services that do take ads receive the lowest rates of any type of Internet service." What was true in 1998 is still true in 2008.

10 years later, the ICQ deal is still a unique event in the local Internet history. Since then, there were many great exits (even in the ICQ space, with Skype being the best one), but the local Israeli scene did not manage to replicate the success. In fact, there were 3 unique attributes to the ICQ deal that were quite rare:

1. A successful distribution of a direct to consumer play, with a real global brand. The other 2 real Israeli internet success stories are quite different (888.com operating in the gambling word, with a lot of white label assets, and shopping.com, being a leader in a relative smaller niche).
2. A market leader in one of the core sub-segments of the Internet (After all, instant messaging is one of the top applications along with email, shopping, etc.).
3. A company started by 4 very young entrepreneurs with no real business experience. In the US, there are many like that, with Facebook as a most recent example. In Israel, we rarely see startups with big ambitions started by entrepreneurs that are young (and naïve…).

Having a 10 year perspective, why haven't we seen more ICQs emerging out of Israel? I think there are 3 fundamental reasons for that:

1. Since there are not enough Internet success stories, the local entrepreneurs lack the relevant role models and don't have the belief that a large-scale exit is possible. In a world where success-breeds-success, another Internet success story will inspire other entrepreneurs to follow suit.
2. The bubble hit the Israeli Internet scene hard. Unlike in the US, where many of the VCs made a lot of money and had a strong belief in Consumer Internet offerings, the industry post bubble was reduced to 0. There was not funding, and no entrepreneurial activity. With a slow recovery post bubble, all the recent Internet companies in Israel were created in 2004/5 or later.
3. Building on the slow recovery, Israel has been lacking relevant talent. This has been improving recently with the entrance of Google into the local market, and with talent emerging out of ICQ/AOL and 888.com.

Would things have been different if ICQ was not sold in 1998? What if Yossi Vardi and the Mirabilis gang would have kept going? I don't think that would have changed much, since AOL did a good job in maintaining the local ICQ business unit, not moving it to the US.

I have to finish this post with a positive note. As an investor in the Israeli internet scene, I am POSITIVE that we will see ICQ (and bigger) exits in the next few years. Beyond the Gemini portfolio (Always biased), there are already Israeli companies that are demonstrating large scale offerings, including Metacafe, Gigya and Oberon. Hopefully those companies (or others) will reach $1bn by early June of 2009.

Comments

[Eran Galperin]

Wow, I completely forgot that Hotmail wasn't always a Microsoft product... nostalgia :-)

Regarding Israeli entrepreneurs, I think it would be wrong to say we don't have the talent. There is ton of talent here, the problem is mentality. We have very good instincts and feel for starting up, however when the start-up gets beyond a certain point and becomes a viable company, Israeli entrepreneurs largely lack the skills to manage it from that point on end. This is amplified by the fact that we have a hard time letting go of our ego and bring in qualified outside professionals to take over managing a growing corporation.

It is the transition from early stage to successful company where most Israeli start-up fail, but we are getting better. There are several current start-ups that in my opinion are on their way to a big exit.

[Ouriel Ohayon]

Great post.

Shopping.com was a bigger success than ICQ from a business point of view (both in exit and revenue) although the background was different.

What i regret regarding ICQ, is that it failed in maintening its leadership and became a secondary player in the messaging world. Like Mike Morritz said recently: one thing is to get a critical size. the other is to keep it and this is where the most difficult challenge is.

Like you i have no doubts new ICQs will be around. the question is will they stay around a few years from now.

[ICQ 2 go fan]

Wow, really impressive blog. I'm glad there is still someone out there who uses ICQ and I'm not alone.