Israel Venture Capital 2.0

Self Interview

Since no one is really interested in interviewing me, I decided to do a self interview. This is my version of “self portrait”, especially since I can’t draw (or sing. or dance. Shows something about the qualities of VCs)

Why haven’t you blogged for since mid September?

Can’t really say. For some reason, I couldn’t bring myself to write. It’s not that I didn’t have anything to say. I actually had a lot to say, but my typing hands were heavy.

Do you think you are now officially back to blogging?

I can’t promise anything. But I will try. I will also be blogging at the Gemini blog.

Can you highlight the top 3 events that happened in your life in the past 60 days, just to fill the gap.

Sure. Business: We made another investment (eKoloko, an official post to come tomorrow). Music: I saw Pearl Jam live again, and I also saw Shalom Hanoch live. Sports: Patriots are back at it, Hapoel Haifa are not. Overall, seems like everything is “normal”.

Do you feel the Venture Industry in Israel is active again?

Absolutely. Deals are happening, especially since a lot of funds have dry powder to invest. However, Israel is part of the global venture industry, which is going through some turmoil. Nothing dramatic will happen in Israel in 2009/10, but we may see some changes in the local investment scene in 2-3 years.

What makes you optimistic?

AdMob. Mint. Gomez. Good companies are being acquired, and it feels that if we invest and support good companies, we will be rewarded.

Oogiot (Hebrew for Cookies)

This post is for the Hebrew reading crowd. I have recently started writing for a new blog called Oogiot (Hebrew word for cookies). Overall, there are 7 bloggers participating, and they are all writing about the Internet from various aspects. Here is a free translation (Hebrew to English) from the About page:

"Oogiot is a joint blog written by professional Internet people from various disciplines, focusing on Internet trends from technological, philosophical, cultural, and business aspects"

Probably not a great translation, but you probably get the idea. Anyway, I enjoy reading it, and I think it's worth a visit. I would try to post something there every month or so. I am quite enthusiastic about this, although I am amazed that it takes me much much longer to post (type) in Hebrew than in English.

Sramana Mitra on Strategy

Lately I have been blogging less. There are a few reasons for that. First of all, I have been working with exciting new companies (Adap.tv, Timeless Cities) and some exciting 2006 companies (eSnips, SupportSpace). But beyond that, I have been putting some effort in writing guests posts for Sramana Mitra's blog on strategy. So far I wrote about the Israeli Internet Bubble, the Launch of the Microsoft R&D Center and my latest has been titled Silk Road 2.0 (I basically wrote about the new trend of Israeli companies skipping the US market and picking China as their initial and primary market. This is the return of the old Silk Road between the Far East and the Middle East).

In the upcoming months I will try to write there more about the Israeli news (What's happening? Who is funding who?) and focus my own blog on the Israeli Internet trends, and additional posts on Rock Music and Venture Capital.

Why I'm Eating Doritos

Today's musings on Doritos is a guest post by my colleague, Fara Hain

Will Doritos (Frito-Lay) walk away from Madison Avenue? After a couple of years of lackluster superbowl ads - I vaguely remember something about flying doritos in a laundromat (and I don't remember last year's ad at all - was there one?) - Doritos is trying something great this year.  They recently announced a contest for the best user generated ad for Doritos, which they will broadcast during the 2007 superbowl.  They are working with Yahoo!Video - details here.

Not that they are the first - Sony, Loreal and a few others are already encoraging UGC ads on Current TV - but the number of potential viewers is obviously much greater with a superbowl ad.  I'd venture to guess that this is the biggest format yet for UGC. 

So far, I think users generating their own content will be happy with the results - global recoginition and the $10k prize for winning.  And other companies will follow suit - Doritos has apparently saved hundreds of thousands of $ on production costs by not producing this year's ad.  Eventually users will catch on and probably want to get compensated for their services - but for now it's a win/win and the announcement is a great way to drive people to the eventual ad.

So meanwhile, I'm eating lots of Doritos to get my creative juices flowing - and I already have an idea...

Thoughts on Open Source

The following post was written by Fara Hain, who is Gemini's Director of Marketing, and a very smart (and great) lady. She has been doing some research on Open Source, and wrote this piece. Here it is:

If Enterprise Software Is Dead, Why is Open-Source Enterprise Software Alive and Kicking? Funding is flying towards Open-Source Software (OSS) companies - see here. But, if enterprise software (ES) is "dead" (or so the theory goes) then why is investment in enterprise software with open code popular? Enterprise OSS must be considerably distinct in order to warrant investment, right?

So - why are investments in enterprise software considered unwise today? And - how are OSS investments distinct from ES investments?

A good summary of the generally accepted theory behind the difficulties facing enterprise software start-ups can be found on Jeff Bussgang's blog (he's from IDC Ventures) - actually written by guest blogger Chip Hazard. I have used his major points as the basis for discussion here.

1. Corporate IT departments are looking to reduce, not increase their number of vendors and are therefore not inclined to work with start-ups. While this seems to be the dominant trend, it does not necessarily apply in the open-source realm. Every developer I spoke with for this article already uses some OSS tools and when s/he encounters a problem, turns to the open source community to look for solutions. This includes developers from within the big vendors. Many of the big vendors include open-source components in their proprietary offerings today. So even if IT departments reduce the number of vendors they are willing to work with - the vendors themselves may provide a steady stream of revenues for OSS tools or an exit strategy for OSS companies.
2. Customers are looking for integrated suites over best-of-breed. Success of IBM's WebSphere and Oracle's Fusion suite are good examples. However, open-source companies are offering suites of their own to compete. A customer can implement an Apache Web server, MySQL database management system (DBMS) and PHP over Linux and have all the benefits of a vendor "suite". Plus - according to a recent Gartner presentation I saw, "The complete alignment with a single shop standard or vendor remains an illusion". IT managers are still in the market for additional applications that run on the platforms they choose, and open source applications are low-cost and often good alternatives to one-off problems they need to solve.
3. Sales and Marketing costs are so high that early stage companies can't compete. According to most, this rings true. Larry Augustin, founding father of sourceforge.net and a leader of the open-source movement, recently said, "Goldman Sachs estimates that in 2005 software companies will spend 82 percent of new license revenue on marketing and sales efforts[!]" Open-source companies fare well in this regard for two reasons. For one, open-source companies distribute their wares primarily through viral means - where sales costs are lower and perhaps even non-existent. The second is that having a community developing a given product is a de-facto sales method. A whole community of "buyers" is already tuned in to the product's existence. And not just any community, those who develop the software are themselves the target market - those who have encountered a problem that the current solutions don't address and devise something better.
4. The overall rate of growth of the software industry has slowed and there are few areas for innovation. This generally tends to be a chicken and egg discussion. Are there really fewer areas for innovation, or have the other three points made software development less exciting/tenable for entrepreneurs and therefore we're seeing the innovation focused elsewhere; in which case new innovation in enterprise software exists, we're just not funding it. For VCs, who should be investing in new technologies long before the pendulum swings back, this provides some food for thought.

So it seems that OSS companies fare well or better than their closed-source counterparts in that: start-up status is irrelevant in the OSS world, software suites are still missing key components that OSS provides and OSS companies have far lower sales and marketing costs. IMHO, investing in these companies seems like a valid trend in the making.

Gil Ben Artzy - Yahoo

Following on the interviews that I already did (If you haven't read them, check all previous Interviews: Ofer Adler and Talmon Marco), I recently did a short interview with Gil Ben-Artzy from Yahoo. Beyond his own answers, I will add that he lives in the Bay Area and that he loves Soccer (I envy him, because I think he is going to see the world cup in Germany in June).

I think that people like Gil can have a great impact on the Israeli Internet scene in the future, as they are the basis for the future Israeli Internet eco-system. With that being said, here it is:

1. Can you say a few words about yourself and your background.

I was born and raised in Israel, but I have spent the last 6 years in the US. In 2000 I attended Wharton's MBA program, followed by 3 great years in New York working as a consultant for the Boston Consulting Group, focusing on the consumer goods sector. This past summer I decided to join Yahoo!'s Corporate Development group located in the company's Headquarters in Sunnyvale, California. Prior to my move to the States, I spent two years working for an Israeli consulting firm, focusing on advising media and telecom clients. I also spent time working for a start-up company that developed virtual reality software, and served for 3 years as a tank commander in the Israeli army. I hold a BA in Economics and Business Administration from the Hebrew University of Jerusalem.

2. What is the role of the Yahoo Corporate Development team.

Yahoo's Corporate Development team has three main functions: (1) Develop and shape Yahoo's high-level strategy (2) Evaluate, acquire and invest in innovative companies, management and/or technologies (3) Integrate acquired companies, management and/or technologies into our business units and product lines. We are a global team that works closely on multiple projects that aim to keep Yahoo at the forefront of this rapidly moving industry.

3. What do you think about the potential of Internet in Israel?

I recently visited Israel for the second time in the past 6 months, as I accompanied Simon Levene, Head of Yahoo's Corporate Development Group in Europe, who leads our Israel efforts. Overall we felt that there is an increased momentum in Israel's Internet industry, which was apparent by both the number and quality of ventures that we met. We were fortunate to attend Yossi Vardi's fantastic Kinnernet event and The Marker's vibrant Internet conference, where we were able to really see the potential and excitement at many start-ups. As VCs increase their Internet investments and more funding is allocated for R&D, we look forward to seeing the continued growth of this industry in our future visits.

4. What are some of the key trends that you see in the Internet world today.

As the Internet industry continues to evolve and maintain its rapid pace of innovation, a few trends that I find particularly interesting are:

• Emergence of Social Networks: Various social sites, including MySpace and Facebook in the US, MSN Spaces in Europe, and CyWorld in Korea, are offering users (especially youth) the ability to create their online personalities, express themselves and communicate with each other. Many of these companies aspire to become a personal homepage and entry point to the Internet for their users, but it is too soon to tell if they can sustain their rate of growth or stall (e.g., Friendster).
• Sharing and creation of rich media: Video is quickly becoming a huge part of online activity. Many online players are acquiring rights to video programming to attract users. Amateur video is also becoming more popular as well as remixed content.
• New ways to deliver services beyond the browser on mobile phones: Carriers and content producers are looking for new ways to deliver services on mobile phones. With the increase in higher-speed mobile Web services and more powerful handsets, we are likely to see a rise in live video, music downloads, and web search by mobile users.
• New advertising formats and devices: Advertising inventory is expected to evolve and grow; display ads will adopt new technologies that offer greater interactivity with the users, more opportunities are created for developing ad capabilities off the PC and through internet-connected video games, and better behavioral targeting.

Guy Horowitz on the Beatles

This post is going to be a bit different. I am hosting Guy Horowitz, an associate in our fund. Guy and I have a lot in common: we grew up in the same city (Haifa), we support the same team (Hapoel Haifa), and we both love the Beatles. Guy has been putting a lot of effort in researching current trends around the Beatles, with a special focus on the potential availability of their songs online. I asked him to write something about this, so here is guy's post on the Beatles:

If I have to think of one good thing that came out of the bizarre Michael Jackson affair, it's probably the guy's dire need for cash. So, in addition to selling his megalomaniac's estate and park, Michael reached deep into his safe and dug out the rights for the Beatles' songs, which he is now reselling to Sony. It's going to make me very happy, knowing that the lunatic no longer stirs the Yellow Submarine. But actually that's not what I wanted to write about.

Have you ever tried searching for an original Beatles song available for online sale? Your search is likely to have returned zero results, unless you were using a legal P2P service such as the new iMesh - in which case you should have failed to complete the download. It's not iMesh's fault - the Beatles' music is not available online, at least not legally. There have been many rumors about Apple Corps (the company overseeing the Beatles' business interests and controlling release of their music via EMI) planning to release the Beatles' music for online sale, but the Corps kept denying it. Until last week.

Last week, after a few years of litigation, concluding statements were made in the Apple vs. Apple lawsuit (can't help it, always reminds me of the great Meryl Streep / Dustin Hoffman movie). A few years ago, Apple Corps sued Apple Computers for trademark infringement - using the apple logo. They also claimed that Apple Computers agreed in 1991 not to go into the music business - which it clearly does with iTunes, despite whatever legal mambo jumbo Steve Jobs' attorneys tried to pull. The trial has finally concluded two weeks ago, not before the Corps' managing director testified that his company is in the process of digitally re-mastering all the fab-four tracks for digital distribution. In other words, the Beatles' music should be finally available online, legally and in better quality.

Great news, isn't it? Finally, the Beatles on iTunes, instead of ripping or illegal file sharing, which is clearly un-cool. The Beatles' digitally re-mastered tracks should be a blockbuster.

Not so quickly. There's one tiny problem. It's called DRM. To be more specific, it's called FairPlay - Apple's DRM. There are more iPods in the world than any other brand of portable music players. iPods could only be (legally) fed from CDs or from Apple's online store, iTunes, which is the only store on the web selling FairPlay-protected music. Just to make sure we're on the same page - iPod does not allow you to play music legally purchased in any online store which is not iTunes. You bought on Napster, Yahoo or iMesh? The rights owners got paid, thank you for not stealing, but sorry, can't play that. And this entire baggage belongs to the public enemy, one Steve Jobs, who is coincidently the guy being sued by Apple Corps, and not the music industry's darling notwithstanding. In other words, there's a fair chance that the majority of owners of digital music players will not be able to enjoy that treasure - at least as long as the bad blood between the Apples ceases to simmer. If you asked Yoko Ono, it will never happen. When she released John Lennon's catalogue in digital format, she allowed every online store to carry it, except one. You guessed it: Steve's corner store.

So - Corps have a strong card they can play when negotiating a settlement. Actually, they could now quote one of the Beatles' least famous songs: "If you want it, here it is - come and get it, but make your mind up fast… If you want it, anytime, I can give it, but you better hurry 'cause it may not last… Did I hear you say that there must be a catch? Will you walk away from a fool and his money?

If you want it, here it is come and get it, but you better hurry 'cause its goin' fast".

Until these guys settle, iPod owners will also have to settle for ripped versions (only from our own CDs, of course ). The music industry can definitely mark a big fat "F" on its score-card. As Peter Lee of Disney has once said, "If consumers even know there's a DRM, what it is, and how it works, we've already failed".

Talmon Marco - iMesh

It took me more than a month to continue the "Israeli interviews" process, but finally - here is the 2nd one. Talmon Marco is a real serial entrepreneur, as he actively founded a few companies, most of them before the age 0f 30. Gemini did not invest in his past companies, but I hope we will manage to do so in the future.

He is currently with iMesh, one of the first legal P2P download music sites, and the only site (to date) that has managed to settle with the music industry (See Coverage on Red Herring, MP3.com, and ZDNet). Personally, I am not a subscriber to iMesh (Not possible from Israel), but I am planning to do so when I move to the US.

here it is:

1. Can you give a bit of background on iMesh and about yourself

Launched in 1999, iMesh is the world's longest standing file sharing service. iMesh enjoyed instant popularity, due mainly to innovations such as multi source downloads (the ability to download the same file from multiple users at the same time), offline downloads, support for multi file types, reliability, and many other features that made it better than other file sharing services available at the time.

In 2003, the Major record labels sued iMesh, claiming that we contributed to massive copyright infringement online. In July 2004 we announced a settlement agreement. Under this agreement iMesh was to migrate to a legitimate service. In late 2005, we launched iMesh 6.0 - an authorized file sharing service that blended free and paid content with an active community, allowing users to not only share music, but also explore music by other users, chat, and more. You should try out iMesh. It's free and includes no adware, spyware and all the other things we all hate.

As to me, I am one of the original founders of iMesh. I am also the founder of Expand Networks a venture backed company that provides enterprise network optimization gear. The company employs over 100 and boasts several thousand customers worldwide with millions in sales.

I'm currently President and Chief Marketing Officer at iMesh and live in Manhattan. You can find at the local Starbucks or in one of the many Bars in Tel-Aviv…

2. What is the most challenging moment you remember through your entire career (Expand, iMesh)

I'm afraid this is not going to be a typical business moment. Standing in front of our US employees a few days after 9/11 and talking about recent event was probably more challenging than any other moment in my professional career.

3. What are the 2 or 3 most promising (or just good) startups in Israel today (in the Internet space).

Google Israel

4. What do you think about the hype around Web 2.0, and do you see this reflected in Israel.

Web 2.0 is a really term coined by analysts/media (specifically O'Reilly and MediaLive International). It's a trend that shows that the Web - both from the technology as well as usage side - is evolving. This is normal behavior and happens everywhere there is technology. It's easier to open a can of coke today, compared to the cans used 20 years ago, Continental has adjustable winged headrests. If you wish, you could call these CokeCans 2.0 and Headrests 2.0.

At the end of the day, Web 2.0 reflects the fact that the Internet is evolving. Yes, it's important. And yes, it's happening in Israel too. Enough said.

5. Any specific areas or technologies, on the web, that you feel are very exciting.

I think "webficiation", while about 10 years late, continues to happen and indeed poses a long term threat to classic installable applications. Long term, most applications will be server driven with very little code, if any running on the local PC.

This means that local storage will eventually become irrelevant (though we are likely more than a decade from that happening) and the control of the entity controlling the operating system will be diminished. While Google is making every effort to accelerate this trend, it's not clear whether they can survive long enough against Microsoft. Microsoft has another 5-10 years until things get difficult for them. By then, Google may be gone.

Other interesting technologies have to do with portable delivery of information, foldable screens, direct projection to the eye, natural speech recognition, augmented reality, and other technologies in the space will likely change the way we interact with information and with each other. I guess this is not a web technology, but it's still cool.

Ofer Adler - Incredimail

As I described in previous post, here is the first interview. Ofer Adler was the founder of IncrediMail (Together with Yaron Adler). He is a great guy, and very knowledgable about Internet and emerging technologies in general. In the past I wrote about Incredimail going public.

So, here it is:

1. Can you give a bit of background on Incredimail and about yourself

IncrediMail was founded about 7 years ago. The idea was inspired by the first 'mission impossible' movie, where I saw Tom Cruise using a very cool email program with graphic effects. I was intrigued by it, so I tried to look for something like this and during my search I installed many and many email products only to find out how little fun these products had to.

After exploring very deeply the email market and products, I came to the conclusion that although the web has gone through a major change when the graphics came in, in email no big change was made in years.

Before IncrediMail I spent about 8 years working in the Israeli capital market at companies like "Hevra merkazit", " Betucha", and Clal insurance investment department mostly as a trader.

I also spent about 3 years trading at the Tel Aviv stock exchange before it all got computerized. During that time I worked a lot with Excel and did lots of tests with macros and Excel's VBA.

I have found out more and more that usability was something that I was very interested about, and also that I spend more and more time in the Internet. For the last 8 years I think that I saw really a great number of software, sites, services and ideas of various subjects, and I constantly look for new and interesting things. Interesting things for me can be programs, add ons, sites, services, nice graphic, nice user interface, nice graphic user interface, gadgets, ideas anything which is cool in some way.

I also tend to save a lot of examples (splash pages, order pages, banners, software dialogs, graphics, icons and any other things that looks cool or interesting)- so I have a quite large amount of screenshots, flash files, text files, etc that I have been saving through our the years. (And it's constantly growing)

Because I started to save so many things, and I wanted to find some of them every now and then I started using tags while saving data. I have been doing it for more then 5 years; it was interesting to see how the tag concept got so big lately.

2. What is the most challenging moment you remember through the years at Incredimail.

When the bubble days were over, and we knew we had to make money, and that we will probably won't be able to raise any additional money, so either we survive with what we have, or we won't survive.

3. What are the 2 or 3 most promising (or just good) startups in Israel today (in the Internet space).

I think the Oberon media (it probably shouldn't be called a start up) the gaming company is probably one of the most promising private company that many people even don't know about, but at some point we will hear about them in an exceptionally big way.

Also I think that Metacafe is one of the fastest growing companies lately in the video area and I believe we will also hear good things about them soon. I am invested and a little involved in Metacafe, so it might seem I'm not objective, but I really think they are looking good, and their traffic is growing very nicely.

In Oberon media, I am sorry I didn't have the chance to invest.

Also I think that fixya.com has a very good and experienced entrepreneur, and therefore have a good chance in being successful.

4. What do you think about the hype around Web 2.0, and do you see this reflected in Israel.

I think that there is definitely a very big hype around this name, and there many interesting ideas, but I think that one of the most significant things about the 'web 2' concept is that in most of the cases , web 2 companies are not very interesting in the perspective of VC, or even Angels, because in most cases, even very nice ideas (which there are many of them), will be either be bought in a relatively small (small for VC or Angles, in comparison to the risk) amount, or will continue to work and maybe breakeven and earn some money, but in most cases it will not be in a way that that investors will enjoy it.

I think that some of the web 2 companies can be very good or nice to their founders, and employees, in the sense that they can be a nice business that operates on it's own, and In many cases don't need too much investment to begin with.

I think that it's very difficult to find examples of big exits, by 'web 2' companies.

From what I saw in Israel, It looks relatively similar to the rest of the world

5. Any specific areas or technologies, on the web, that you feel are very exciting.

I think that one very interesting area is of face and object recognition, for personal digital photography. I think that with all respect to Flickr and such, most people will not sit and write tags to their 1000's of picture, and these things will have to be automatic.

I tried to write a patent in this area about a year ago, but I saw that many companies where already there.

Today I think that one of the more promising companies in this area is riya.com, but Microsoft (and probably others) is very hot on this subject. There is also an Israeli company I saw that is also in this space.

I think a future photo manager should be able to instantly and automatically (without me entering any tags) be able to show me all the pictures that I appear in, that contain any specific object, or that were taken in the sea or any other place.

Not exactly web, but I think that if apple is not developing a media center computer in the about size of a VCR, or a DVD player, it's a really big shame, because it can be like the next iPod. (and I'm not talking about Mac mini)

Israeli Internet Interviews

I am very excited about this post. In my (small) quest to try and promote the Internet Activity in Israel, I thought it will be nice to launch a series of interviews with some of the leading (& emerging) Israeli Internet executives & entrepreneurs. In a sense, it is similar to the eHub interviews lead by Emily Chang, but focused a bit more on the people (than the ventures) and dedicated ONLY to Israel.

The first interview will be posted tomorrow, and I hope that it will be followed by many more. I hope to put out a new one every 2 weeks. Would be happy to hear feedback and input and how to make this more interesting.