Israel Venture Capital 2.0

Shana Tova!

Tomorrow night is officially the new Jewish year, and a great reason to wish everyone reading this blog a great year, or even better than that: Shana Tova. As I said in the past, it seems that the past few years everything is 2.0 (including this blog), so it's seems relevant to make a few Shana Tova 2.0 wishes.

• Leadership 2.0: it's time to see new leaders emerging around the globe. Personally, I truly hope that Livni succeeds, and that we won't return to Ehud Barak and Netanyahu. I also hope that Obama wins, and that he will succeed in establishing a new way of leadership.
• Health 2.0: This means health to my children (They are really the next generation). 
• Middle East 2.0: Shimon Peres had a vision (years ago) about the new middle east. Will be great if that dream becomes real. 
• Hapoel Haifa 2.0: It's time to make it back to the Israeli premier league, and maybe win another championship (If that happens, it will be bigger than web 2.0). 
• and finally, Israel Venture Capital 2.0: That Israel will lead in BOTH innovation AND financial returns. 
  

Shana Tova!

Don’t Shop Hungry, but Invest when Full

Through the years I realized that I always have a hard time planning for dinner, right after lunch. After eating, I am completely full, and the idea of dinner sounds truly disgusting. It's funny, because I KNOW I will be hungry, but I just can't focus on dinner plans with a full stomach. Isn't it stupid? The same (yet opposite) phenomena happens when you go grocery shopping hungry. It's a simple and easy rule - you will save money if you shop after a good meal.

So – what does this have to do with venture capital?

Clearly, we are facing a very difficult period. And in these times, many prophets people are predicting the end of venture capital/startups as we know it. Others are a bit less pessimistic, but still focus on the difficult times that lie ahead, and the local resiliency that will be tested. I guess that's true, and 2009 will not be a great your for our business. However, if that's the case, there is a good chance that 2011 and 2012 will be great years. This means, that companies that will be funded now, will be ripe for success in 3-4 years, right when the crisis is over, and the economy picks up.

Jeff Bussgang from Flybridge capital wrote a great piece on this topic. His take is simple, short term Bear, long term bull. Personally, I couldn't agree more. Jeff reminds us all of the last downturn:

"But the VC and entrepreneurial community went through a far rougher period only a few years ago and most firms are run by executives who remember those times and remember the prudent actions required:  cust costs, but don't cut to the bone; raise more capital than your plans suggest you need to cover the dry period; in general, increase fund reserves and assume longer holding periods; with employees and investors, set expectations for patience and long-term business building rather than quick hits and quick flips."

What does this mean? Going back to the hungry/full analogy, it seems that investing in startups now is similar to planning dinner right after lunch. It's hard, but it's the right thing to do. The analogy also works in the opposite direction. Investing in good times is like shopping for grocery when hungry. Personally, I have done 2 deals this year (Confidela, and another one to be announced soon), and I hope to continue investing at the same pace. I think the 2008/09 A round companies will turn out to be real winners.

Adap.tv – B Round

Adap.tv, a Gemini portfolio company, announced today the completion of a B round. The $13M round was lead by Spark Capital. Redpoint and Gemini also participated. Here is the direct quote from Dennis Miller, who is joining the board from Spark:

"Amir and his team have created a technology platform that addresses key pain points for publishers of online video as well as online ad networks. By removing roadblocks that have prevented the growth of online video advertising, Adap.tv OneSource has the potential to open up vast new areas of monetization, and is rapidly delivering on that potential."

I agree with Dennis. I think OneSource is a killer product, because it focuses on helping the publishers manage their advertising campaigns, giving more visibility AND better financial results.

With the current financial turmoil, this round is a critical step for the company. Adap.tv can now focus on building the business, and leveraging a strong balance sheet to gain market leadership. Overall, I think Adap.tv is the perfect venture investment: Big market (video monetization), great team, and strong underlying technology/product.

More on this round on NewTeeVee, Venture Beat, and Techcrunch.

VMWorld – Quick Summary

Last week I attende d the VMWorld conference in Las Vegas. It was quite an interesting conference, especially in timing. VMWare was trying to celebrate it's great product/market, and the financial markets were burning… Still, there a few key points worth mentioning:

1. Too much energy was spent around the VMWare-Microsoft competition. Many companies (large & small) have managed to fight Microsoft successfully. It's true that the VMWare CEO is an ex-MSFT guy, but still – they are giving the Redmond guys too much respect.
2. The virtualized server market is well defined, and although there are some good opportunities in that area (disaster recovery), the real action is around the desktop, endpoint (Disclaimer: We have a portfolio company in that space, Neocleus). The amount of startups in the desktop virtualization market was overwhelming.
3. 15,000 people attended. It was well organized, and well attended. Clearly, "virtualization" and "cloud" are the 2008 software buzzwords.
4. On the Israeli side, there was a strong presence of companies and people. Beyond Neocleus, I spent some time with InstallFree. All the Israelis were talking about the recent Red Hat – Qumranet acquisition.

On the VMWare front, the company is definitely going through some growing pains, as some of its long-term experienced executives leaving. On the Israeli VC side, virtualization is clearly a lucrative market. It's an area where we have tech and biz experience. I would assume that more Israeli startups will emerge around virtualization in the near future. Hopefully, innovation won't be held back by the financial turmoil. Banks are huge consumers of virtualization technologies, and in the short term this market will be hurt.

Sports as portfolio management

As a New England Patriots fan, yesterday was a bad day. We have lost a regular season game for the first time since Dec. 10^th, 2006 (Dolphins then, Dolphins now). As the game ended, I thought about all my beloved teams (Hapoel Haifa, Patriots, Mariners), and decided to show similarities between the teams and a VC portfolio.

1. Hapoel Haifa – Clearly, this is the rising star. Think of a cute company (ok management, niche market, high motivation) that is really showing great results in the first 2-3 quarters of sales (won all 3 games of the season so far, without giving away any goals to the opponents). It's clear that tough days will come (This winning streak won't last forever), but hopefully the current momentum will help in the future (Similar to cash collection).
2. New England Patriots – The unexpected disappointment. Think of a great company (big market, A+ management) that loses its star CEO. With an interim CEO running the company (Cassel), it's hard to show the same results, and the company (team) seems to be completely lost. 1^st quarter without the star CEO seems somewhat ok (last week), but the quarter after is a disaster (today).
3. Seattle Mariners – A clear dog. Not worth mentioning at all. The Mariners are currently the worst team in all of Major League Baseball. That's like having the worst portfolio company in the industry. Thinking about the mariners, the good news is that the sports portfolio starts all over with the new season.

Pictures below tell the whole story. In the meantime, good luck to all.

What Now?

In the past 2 days I have been thinking of a conversation I may have had 2 years ago. I was probably in a coffee shop in Israel, talking to one of Gemini's CEOs. "Who do you think has a better chance to survive, you or Lehman Brothers?" I asked. The response was quick: "Who do you think has a better chance to win the Champions League, Hapoel Haifa or Man. United?"

Who would have thought... Well, the financial world is melting, and all my blogger friends are writing about it. Check out Michael and Ouriel. After giving it some thought, here are 3 key questions:

Should you care? Oh yes. Correct, unlike the 2001 fire, this one didn't start in our building (startups), but it is expanding fast, and some startups are already feeling the heat.

Is there anything I can do to help? At the Macro level, probably nothing. Unless you are the current or future US president, there is not much you can do. Actually, even if you are the president I am not sure there is much to do.

Finally, is there anything I can do for my own company? For sure. Below is a direct quote from a letter that was sent from one of my CEOs to his management team:

"Guys - the world is obviously going through a tsunami of historic proportions. So, I want a complete hiring freeze. Lets also stop all discretionary spending (non-critical trips, etc.) and look extra carefully at ongoing expenses that we can cut without affecting the business (examples: calling international via VOIP instead of phone company; killing all of our redundant old hosting programs; etc, etc). The finance people should take the lead on this. Every line item counts. There's no nice way to say this, but - times like this are a huge opportunity for those that keep burn low and survive through the storm. Competition gets washed out; access to talent and cheap resources goes way up, etc, etc. We just need to all make sure that the long term sustainability of our business is our #1 priority."

I couldn't agree more.

Patents – Do you really need them?

In the last Venture Capital Journal, Thomas Klein from Wilson Sonsini wrote a great article (Actually link doesn't work – this article requires subscription) about the diminishing value of patents for early stage technology companies. In the short article he quoted 5 recent court decisions that have created limited the value of patents. I will not repeat all the 5 cases that he quotes, but his overall verdict is clear: Leveraging patents in the courtroom is becoming harder and harder.

Thomas Klein took the legal view, but his claim has a strong business case as well. In a patents war, the startup is weak, and is constantly getting weaker. The larger companies have become patent machines. IBM is proud of its patent portfolio, and the fact that they produce patents at a rate of 10 a day. With such an extensive arsenal of patents, backed by unlimited legal funds – what chances are left for the VC backed company? This is like the US going to war against Micronesia.

In addition to that, the overall list of patents is impossible to handle. What patents are out there? What patents are in the pipeline? Even if a company files a provisional patent, it's really hard to know the value of that patent overtime, and how it will be seen vis-à-vis other patents that will emerge 3-5 years later.

The bottom line – I usually tell my portfolio companies to stay away from patents. It's a waste of time and money. Unless the company is based on a true, core, innovative IP (Usually not relevant for SW or Internet companies), I think patents should be completely avoided. Let's leave the battlefield for IBM and Intel, and spend our money on creating business value.

One last comment on this: The NVCA is doing a lot of work in Washington, to make reforms in patents law that will level the playing fields, helping smaller companies. You can read more about it on their Patent Position Paper from October 2007.

Israeli Web Scene – Ready for Phase III

This week was a big conference week, with Techcrunch 50 in San Francisco, and Demo in San Diego. I couldn't attend both (too many board meetings…), but I still have some comments post TC50. Ouriel (General Manager of the Lightspeed Gemini Internet lab) wrote about all the Israeli companies. Roi Carthy also summerized the strong Israeli showing. Overall, it was a strong showing. Out of 51 companies (including the Demo Pit winner), there were 8 Israeli companies: Personalria, Alfabetic, Tweegee, Mytopia, Devunity, Playce, Videosurf, and Iamnews. That's 16% of the overall list – clearly top geographical representation outside Silicon Valley.

If we look at the Israeli Web Scene in the past 5 years, I think it can be divided into 2 phases:

1. Phase I: The re-emergence of the industry. Post 2001, there were 0 web startups in Israel. The 1^st one to emerge post bubble was Metacafe (2003-4) and the rest of the companies emerged in 2005. Till 2006 it was all about the re-creation of the local Israeli scene.
2. Phase II: Establish quality: The initial wave of startups was ok, not great. Some winners emerged (Metacafe, Gigya, Fixya, and others), but the quality level was overall mediocore. The entrperners (and VCs!!) needed to putt a lot of effort in reaching the Silicon Valley web quality and experience.

With so many Israeli companies appearing in the big leagues, it's clear phase II is over. We can create quality internet companies, and we are proving it. I think it's time for phase III: Establish winners. Create exits. Hopefully by 2010 we will talk about the Israeli Skype and the Israeli YouTube.

The other type of spam

Like many people in our industry, I have a love/hate relationship with my email. On one hand, it's pure addiction. I look at my blackberry every 5 minutes, except when I'm sleeping and when I'm doing emails on my Outlook… On the other hand, it's a complete overload. I get too many emails, and I need to spend hour to be on top of the emails. I usually have somewhere between 100 to 600 emails in my inbox (flights are the best opportunities to clean up the inbox).

I recently tried to analyze my daily email stats:

• 25%-35% of the emails are important, relevant, and actionable – messages I needed to see (Some good, some bad) and that are relevant to the business. These are emails that only I can handle.
• 10% are pure spam (diet pills, other type of pills, lottery victories, and other junk). The Gemini spam solution does a great job in handling those.
• 25%-30% are relevant, but not interesting. Thank you emails (Totally redundant), general information on the company, building, etc. Some FYI stuff that I don't really care about, but I have to live with.

That covers about 60%-75% of the emails. The rest are the "pseudo spam emails". Oh – I hate those. These are emails that are sent to me because they are somewhat relevant to my business, but totally not relevant for me. Conferences about medical VC investing in South America, CVs of people I don't know and are completely unrelated to the Israeli VC scene, newsletters that I can't get out of, Success announcements by investment bankers.

I wish someone could invent a solution to get rid of those emails. I haven't found one. After all, it's hard to know that VC investing in South America is spam, but VC investing in Europe is relevant. There are many new and interesting solutions around email (Xonbi as an example). But those still don't help me highlight the really important emails.

Summer Summary (Back from Israel)

Summer is over and I am back in the Bay Area after spend a month+ in Israel. Although it's about 100 degrees outside here in the Bay Area, I decided that am officially out of summer now, and it's time for quick summary. Overall, we had a great time. On the business side, the overall atmosphere is still great, and seems that innovation rate is continuing to grow. Beyond that, here are some specific takaways.

Real estate development: A week before I flew back, I had a meeting at Airport City. I fell in love with that place. After years of poor real estate development in Israel, finally someone built a high-tech park that makes sense: Big, Lots of Parking, Easy to access, close to the airport. A truly amazing place. Beyond Airport City, there is strong growth in Hotels, mostly around Boutique Hotels. I tried to reserve a room for my next trip in Hotel Montefiore , but it's way too expensive

Tourism: The current forecast is that 2008 will be the best tourism year in Israel ever. While we were there, hotels and restaurants were packed (A lot of French tourists). More than anything, this shows increased confidence in the region, something we clearly see on the VC/high-tech business as well.

Mobile Opportunity: With the strong buzz around the iPhone, there seems to be strong confidence that the Mobile Software category is finally taking off. This is clearly reflected in the Israeli startup scene, with a lot more new Mobile App companies, and with many of them being very confident about their chances to succeed.

Exchange Rate is king: I am going to write a specific post about this issue, but it's amazing how much entrepreneurs talks about the exchange rate. The $/NIS conversion is a key issue for everyone in the high-tech sector.

The consolidation of the Israeli VC market: Calcalist wrote an interesting article about the future of the Israeli VCs, and how the US VCs are taking over the market. I can say a lot about this issue, but I won't. If this is the feeling in the summer of 2008, we need to make sure the summer of 2009 is the summer of the Israeli VC.

No time for blogging: I was much more busy in Israel. This was reflected in a very low blogging rate. I am planning for a much more active September.