Israel Venture Capital 2.0

Milk and Honey and High-Tech

In 1993 I was barely half way through my BA studies at Tel-Aviv University, highly focused on improving my pool game. I didn’t realize it was one of the more important years of my life – Gemini opened it’s doors on January 1st, 1993, lead by Ed Mlavsky, one of the key people in the history of the local high-tech.

Ed’s story is an amazing one. Born and raised in the UK, he moved to the US and held key executive positions in companies like Tyco and others. He landed in Israel in 1979, almost by accident, planning to stay for no more than 2 years. Plans changed, and Ed lead the Bird Foundation for more than 13 years, later leaving to start Gemini.

All this and more is well documented in Ed’s new and exciting Autobiography, just published by Weill Publishers. It’s an exciting book, telling Ed’s story while providing a great view into the early days of the Israeli high-tech scene.

Truly recommended, Ed’s book can be ordered by downloading an order form.

Gemini Round Table - Robert Swerling from Google

Yesterday we hosted another round table event at Gemini. We have done these round tables in the past (Few examples include: Cloud Computing, Future of the Internet, and many many others).

Our main guest today was Robert Swerling, New business development principal at Google. I never met Rob before, but it turned out he is a great guy, with a great sense of humor. He has also been an entrepreneur in the past, so he related to the crowd, which mostly consisted of current Internet entrepreneurs (Or in other words, young and very energetic).

Overall we had a great turnout, with almost 40 people joining us. Robert prepared a nice framework to discuss the current trends and prediction in the web world. I can’t say that what he presented was really new, but it did create an interesting discussion (even debate). The 3 key topics that Robert discussed were, in order of appearance:

1. Mobile Internet, with a key focus on the interoperability of various devices, and the idea that we still did not reveal the true potential of the mobile internet. The discussion was interesting, and some people had interesting ideas on how the handset fragmentation will stop (and reverse it’s trend). Check out @yanivg on Twitter regarding this.
2. e-Commerce, which was the most interesting part of the presentation. Robert spent the past 2 years focusing on e-commerce at Google, so he had a critical view on this industry. To summarize his view, he thinks that e-Commerce is way behind the offline retail. I would tend to agree (Check out the difference between Apple Store offline and online). In any case, we are looking at companies that are innovating in e–commerce
3. Privacy. Robert ignited a very interesting debate regarding the future of privacy. Many people talked about the privacy “paradigm shift”. After all, so much of the information on the younger generation is in the public domain. Still, I am not sure there is a real shift here. It will be interesting to see how the perception of privacy changes over time, especially when these kids grow older.

IVA 2009 – Business as Usual?

My last IVA conference was 3 years ago, back in Spring 2006. Since then, A lot has changed for me personally, mostly on the gain side (gain more companies, and probably more weight). Still, everything looked very familiar at the 2009 IVA today, and pretty much as expected. In other words, business as usual

Why do I say that? It was pretty much the same ritual, entrepreneurs looking for money, VCs discussing existing deals and some new deals. We had guests from the US and Europe, journalists writing and taking pictures, and even some active twitter postings. Overall, the eco-system is holding up, and the game continues. Same as last year, and the year before. But all this was on the surface. In reality, a lot of things were different.

Entrepreneurs: For the Entrepreneurs, this IVA was the best so far. After many years, they got the center stage. The usual (and very boring) VC panels were replaced by company presentations. So refreshing. I hope that the companies that presented got real value from these presentations, and that this format will survive for next year.

VCs: For us, it is almost like nothing happened. Most VCs have fresh money, there is good deal flow, and a lot of VCs are back in action, so follow-on rounds have a better chance of happening (compared to 3-4 months ago). However, the problems of the VCs are not now. Our problem is in the medium-long term. When will exits return? Will our previous (and new) investment be realized in good value before the next fund-raising cycle?

LPs: Did anyone see LPs? There were a few LPs, but overall, we didn’t see the reps of the global pension funds land in Israel for the IVA. This is due to their own problems. Also, I am not sure LPs were present in the past, so maybe this is the normal state.

Finally, it seems we have a new tradition. Last year (I did not attend) Tim Draper sang in front of the audience. This year David Cowan played a Naomi Shemer song on this iPhone. I can’t wait for next year – how about John Doerr live on guitar hero.

Nahum – 2 Weeks After

It's been 2 weeks since the accident, and a week since the Funeral of Nahum and Nava, and I have been thinking about them a lot. Clearly, Nahum was not a close friend of mine. We interacted a lot around eSnips, and some point (late 2008) we spoke on a daily basis. However, there is much I didn't know about him.

Still – his sudden death made me think about his legacy, and I now know that I have learned a lot from Nahum. Not all things can be written, but still, there are few things I took from him that will always be with me.

First of all, Nahum looked at the business in a very unemotional way. Every challenge was treated in the best way possible, without ego, and without personal emotions. I admire that, and I really think that putting emotions aside creates the best outcome for all people involved. That was the way Nahum treated the many challenges we had at eSnips, especially toward the end.

Second, Nahum always emphasized the big picture. It's never about the details, but the need to focus on the large, and important issues. I think that relates to his physics background, and for me – it's a critical part of my day-to-day job.

Finally, It was all about the attitude. No matter when we met, Nahum was always joking, always smiling, and always "playing the game". Even when I disagreed with him, it was always a pleasure to interact with him.

Yesterday I looked through all the old emails from Nahum, and I have many of them. I was hoping to find some emotional nugget, or something personal. Nahum, like Nahum, was always right to the point. Here is the email I got from him once all the eSnips transaction was finalized:

"All, we finally received all signatures on the Logia agreement this morning. Thanks to all involved. Nahum". What a way to summarize 6 months of hard and frustrating work.

I will definitely miss him.

Gemini’s Spring Party

Last week we held a small party here in Silicon Valley. Officially, we were celebrating our new fund. But beyond that, it was a great personal opportunity to say good-bye to friend and colleagues. As I said before, these are my last few days in Silicon valley, as I will be landing in Israel at the end of April (after some time off).

I personally had a great time at the party. Success factors included the great weather, the amazing location (Allied Arts Guild), great food (All organized by The Red Currant), great photos (by Adi Nevo)and a lot of good friends. This photo tells (almost) all.

Below is a nice photo of the Gemini team (not everyone, but more than 50%). From left to right: Adi, Dror, Menashe, David, Orna, Yossi, and myself.

The Headquarters of an Israeli Company

2 weeks ago, at the 1st Tech Aviv California Meetup, one of the participants (Eyal Herzog from Metcafe if I recall) brought up for discussion one of the oldest dilemmas of the Israeli startup scene. Should the CEO of the company be based in Israel or in the US?

This dilemma is part of the DNA of every Israeli company. As Israel has no market, the company needs to establish a clear US strategy from the get-go, and that strategy is closely linked to the location of the CEO. Clearly, there is no right or wrong here. Some of the best Israeli companies were directed from Israel (Checkpoint, Saifun), but others succeeded after moving their entire operation (R&D included) to the US (Quigo). I have listed below some issues that are relevant as companies debate where to place their CEO.

	Israeli-based CEO	US-based CEO
Management	When a company is HQ out of Israel, overall management is usually easier. Most employees are based in 1 location, and although remote offices exist in the target markets, those are usually managed by sales executives that are easier managed remotely	Management is always a challenge. The employees in Israel (R&D, Support) are far from the action, yet usually want/need to get involved in key decisions. Management meetings become a key success factors. The success of this model is usually linked to a strong site manager based in Israel, and a CEO that is highly involved in the Israeli office
Acquisition of Talent	Much harder in the US. Top-notch marketing/BD executives will not feel comfortable in joining a company with the CEO being 8000 miles away	Talent acquisition is much easier, definitely at the VP/GM level.
Market Understanding	Probably the #1 negative for Israeli-based CEOs. In some verticals (Semi, Telecom) this is less of an issue (It’s a technical sale), but in SW/Internet this is a huge disadvantage. You need to run the company with a real hands-on experience in the target market.	Again – it’s a no brainer out of the US. No wonder 5 of my 6 portfolio companies are HQ out of the US (1 in NYC, 4 in Silicon Valley).
Access to Capital	Easier when raising money from Israeli VCs, and sometimes easier when raising money from East Coast VCs	Key if you want to reach out to the wide net of Silicon Valley based VCs. Some VCs will invest in CEOs in all territories, but most VCs still prefer proximity to their CEOs.
Cost	Probably the #1 positive for a single geographical location. Opening the US HQ (with an Israeli based R&D) has a huge cost implication.	In some cases, non Israeli-CEOs ague against the Israeli R&D altogether. This is where Israeli engineering teams need to show their real value, and how they stand out compared to lower-cost alternatives in Eastern Europe or Asia

What’s the bottom line? I guess the current rule of thumb is quite relevant and useful. CEOs of SW/Internet companies are based in the US, and CEOs of HW/Semi companies are based in Israel. As target markets shift from the US to Europe/Asia, and as Israeli talent continues to improve, we will probably see more Israeli SW companies leaving their CEOs in Israel.

Great acquisitions are not (just) about financial returns

The "exit" is a key parameter in our industry. Through the years, I found that word to be a bit misleading. On one hand, it's all about "exiting" the business and making a profit, on the the other hand the business itself (if successful) never "exits". The ball  moves on to someone else, who thinks he can move it forward to be even more successful.

In other words, and this is obvious, our "exit" is someone else's "entrance".

Why am I writing about this now? When I joined this industry, there were a lot of stories about successful financial exits that turned out to be unsuccessful assets for the buyer. Examples may include Chromatis that was a Great $4.7bn exit and later shut down by Lucent, and Gemini's Precise that went public in 2000, sold to Veritas in 2002, but later spun out to Vector capital in 2008.

However, this seems to be changing. In the past few weeks I have heard of several Israeli start-ups that were bought by large US companies, and are doing very well post M&A. Examples include some Gemini companies like Diligent (Acquired by IBM) and Itemfield (Acquired by Informatica) in addition to non-Gemini companies like Onaro (Acquired by Netapp), and Kashya (Acquired by EMC). All these companies are substantially growing their revenues inside their new homes.

Like many other businesses, the VC success is based on "repeat business". You want invest in entrepreneurs that were successful with you, and you want to sell companies to acquirers that were successful with start-ups that they bought from you in the past.

In summary - Great post M&A achievements are a crucial part of a successful VC story.

Outbrain - B Round

Outbrain, a Gemini portfolio company, announced today the completion of a B round. The $12M round was lead by Carmel Ventures. Lightspeed, Gemini and Glenrock also participated. Here is the direct quote from Shlomo Dovrat, who is joining the board from Carmel:

"The amount of content published online is exploding. Finding great content is getting both more difficult and more important. Outbrain provides web publishers with a turn-key, intelligent recommendation service that drives back significant traffic. Outbrain’s personalized recommended links offer great value to readers by combining their collective wisdom and using unique algorithms. We're excited to partner with Outbrain’s experienced founding team and help them build a great company".

I couldn't agree more. Outbrain provides a great product for the publishers (Increased traffic) and the users (Access to improved content). I does that by promoting most relevant and personalized articles, making the consumption of written content easier and more enjoyable.

Since we invested in Outbrain they have grown dramatically, adding more and more publishers, and reaching a larger audience. Personally, I think their success is based on excellent execution, but also because of the company's strong focus on generating real value to all parties in the value chain.

This round is just the beginning for Outbrain 2009. There are some great plans ahead of us, and as Shlomo Dovrat said, it's all part of building a great company. 

More on this round on Venture Beat, The Inquisitr and CenterNetworks. 

 

Deals you do, Deals you don't

Last week I had some drinks with a good friend from the industry. We compared notes on our respective portfolio companies, and like always, some are doing ok, some are lagging behind. Personally, I was mostly interesting to hear on 2-3 great companies that I could have an invested in (had access to those deals), but decided to pass on them.

All that reminded me of an old saying in the VC world: "Worry about the deals you did, not the deals you missed".

Is that true? I think our LPs expect us to be in the best deals in Israel. Not only that, there is a lesson to be learned from all the deals we rejected and that later became good companies (Examples include Actimize, Radware, Passave, and others). The reality is we have to worry a bit about the deals we didn't do, so we are sure we won't make the same mistake twice.

But overall, it's much more important to focus on the deals you did. Assuming there are enough good deals in Israel to support the leading funds (or most of the leading funds), it's important that we have a fair share of those great deals, even if it's not all of them. It's much more important to focus on current investments and make them great (future looking) than to analyze past investments and why we missed them (backward looking).

Isn't that true about life in general? Here is a short list of a few(Music & Sports) opportunities that I missed throughout the years:

• Dire Straits live in Tel-Aviv, 1985 (I decided that Dire Straits are too popular for me...)
• Pearl Jam live in Seattle, July 4th 1991(Instead, I went to see the fireworks with my parents)
• Hapoel Haifa Championship game, May, 1999 (I was living in France)
• Paul McCartney live in Tel-Aviv, 2008 (Living in the US)
• Led Zeppelin live in London, 2008 (I was in London on that same day!)

However, I had my fair chance of great moments, just to name a few

• Hapoel Haifa beating Maccabi Haifa 2:1, 1995 (After 20 years of no Hapoel victories in the city derby)
• Bob Dylan live in Beer Sheva, June 1993 (Could you believe it - Bob Dylan in the Beer Sheva soccer stadium)
• Pearl Jam live in Mountain View, 31st October 2000 (Seeing the go on stage dressed as the village people)
• Kaveret live in Tel Aviv, 1984 (Together with 500K other people...)
• Rush Live in Montreal, Canada, March 1986 (They were my favorites at the time, and I happened to at the right place at the right time).

The bottom line - you can't have all the good deals (or moments in the portfolio). Just need to make sure that you have some, and to optimize on those as much as possible.

Government Support for Israeli high-tech

In the recent weeks, we are starting to hear more and more about the intention of governments to kick start and/or revive tech innovation in their countries. The UK government announced a $1.2bn fund to support British startup companies. At Le Web, Ms. Christine Legarde talked about tax relief for startup investors (which is another way to help funding of early stage companies). In fact, Business week summarized some key takeaways from Le Web on that issue:

"Participants in the Innovation Board session recommended a series of measures to keep the money spigot open for small companies. They include:

- At a time when governments in countries such as France are planning to spend billions of euros on economic stimulus, they should include measures to ensure funding for innovation, research and development, and the growth of high-tech companies.

- Governments should provide matching funds to universities that find private investors for their new spin-out companies. There's already a track record for such experimental programs in individual EU countries. The innovation board is calling for an expanded effort, coordinated across the EU, to ensure that private sector funding for university spin-outs doesn't dry up.

- A pan-European initiative is needed to give special recognition, under EU state aids and member-state fiscal policies, to young, innovative companies. A French initiative begun in 2004 that Pouletty has been championing at the European level, has successfully benefited more than 1,700 high-tech companies with special tax breaks. If scaled up to an EU level, it could assist an estimated 5,000 to 15,000 new companies."

What about Israel?

In the past week, top Israeli executives have been pushing on the Israeli government to provide financial support to the Israeli high-tech sector. Well, Is government intervention in the tech economy a positive thing? I would love to hear your view on this (see below). Without sharing my own opinion, some points to consider:

The Pros	The Cons
In a global competitive market, with a crisis on us, local governments have to intervene and make sure their countries have the ability to compete. Recent studies show that in Israel, every $1 of government investment in high-tech returns 5x or 6x to the local economy. Think: Yozma!	As Ouriel wrote, government intervention will artificially support mediocre companies. In addition, they will enforce policies and rules that will hurt the ability of startup companies to work in an open business environment. After all capitalism (In the pre-Sep. 2008 definition) is all about free markets. Think: Incubators!

What do you think?