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.

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.

High Quality Reference Checks

Reference checks are an important (actually, crucial) part of the business. A lot of people look great on paper, and are lousy in reality, and some people (not as many) are lousy on paper, but awesome at their actual work. Usually, the keys for understanding the quality of the person are held in his references: the official references, and the hidden references.

In the VC business we do a lot of reference checking. After all, it’s part of any (good) Due Diligence process, and also an important part of interviewing executives for our portfolio companies. However, although I have done these many times, I have learned that good reference checking is hard. Really hard.

What factors impact a good reference check? the 2 key factors are Proximity and Culture. Here is a simple 2x2 matrix to explain that (Sorry for the MBA like template):

All this is quite straightforward, but there are a few important insights in all this:

1. Try and find a reference from someone you know, or at least someone that will have the time and energy to help YOU.
2. Don’t be confused, some references will give you all the time you need, because they are helping the person you are checking on.
3. The Culture part is always hard. If you don’t prepare for these calls, you will get fluffy answers with no real substance. The key to all this is to ask direct answers and repeat them till the “truth comes out”.
4. In addition, try to get to the distant-different-culture references last. Use the information and knowledge you got through the interview (and other reference) to ask direct and specific questions.

Final word – The Israeli-American cultural difference in giving references is always amusing. Israelis are very direct, and their reference is perceived as negative in situations where is actually quite positive. On the other hand, the Americans us the sandwich model: Positive comment –> not-so-positive comment –> positive conclusions. It’s always hard for Israelis (at least for me) to catch that middle part.

Israel Hype Cycle

By now, most Israeli related entrepreneurs and investors have read the article written by Sarah Lacy on Techcrunch. Clearly, Sara got everyone excited, as 346 comments were accepted (just as a comparison, a previous article on the failed online advertising world got 600 comments, but clearly that topic has a wider audience than Israel).

If you haven’t read Sara’s post, she basically provided data showing that Israel is a missed opportunity in the past decade, provide minimal returns. She had a lot of compliments about the overall tech scene, but a lot of criticism regarding the actual financial results.

2 key points regarding Sara’s post:

1. She got the facts wrong. Israel returned way more than $860M in the past 10 years. Gemini’s companies alone passed that number (any by a lot).
2. She got the message absolutely right. Overall Israeli VC returns are not good enough. VC backed companies are not big enough.

In the past I wrote (On Venture Beat) about the Israeli quest for a billion dollar company. Back in 2007, I thought that some major trends are going to help Israel produce larger companies. I still believe in those key trends:

1. The quality of life in Israel has gone up, and with it the desire for better financial returns. Entrepreneurs today are looking for more than $1M out of their company.
2. Investors are much more patient than before. I call it Israel Venture Capital 2.0.
3. Talent is returning to Israel from large companies, and those people are thinking BIG.
4. Finally, more Israelis have experience strong returns and are looking to do it again with improved results. Few examples (In Gemini’s portolio) include Dov Moran (Modu), Amir Ashkenazi (Adap.tv), Yaron Galai (Outbrain), and the Rakib Brothers (Novafora).

But there is one more thing that is important to point out. I think this is another great example of the Hype Cycle. Gartner invented the Hype Cycle a few years back. They called it “the technology hype cycle”, but in reality, it’s applicable to a lot of things out there (In the past I wrote about the Blog hype cycle). Specifically in this case, Israel seems to be going through the hype cycle as well:

• “Technology trigger”: Back in the 90’s, the Israeli startup scene (and VC scence) was invented.
• “Peak of inflated expectations”: Well, this happened twice, but Israel was inflated in 2004-5, when a lot of people thought Israel is soon to be the “next big thing”.
• “Trough of Disillusionment”: Today. Right now. Sarah Lacy’s post is all about the “reality”: Israel is now what we thought it was.
• “Slope of Enlightment”: This is where optimism comes in. I think that in 3-5 years, we will see Israeli companies emerging with amazing results, getting results across all tech areas: from media & internet to Medical IT & devices. everything.

As most of my close friends and colleagues know by now, I am returning to Israel next month (A dedicated blog post is coming in a few days). It’s not only because Israel is my home. I truly believe Israel is going to deliver big big time in the new few years.

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.

Israel Web Tour 3.0

Rough times. Hard times. Low budgets. No budgets. As hard as it is, it’s even a better time for another Israel Web Tour. The CICC is not dropping the ball, and is still organizing the web tour in 2009. Clearly, it’s different than the first 2 years. Back then, it was all about the hype and the optimism. Now it’s much more about survival.

With that in mind, Israel Web Tour 3.0 will be focused on companies that are a bit more mature, and will help those companies get in front of key internet executives in the valley. Overall, it will be much less about financing, and much more about revenues and business development.

If your company is looking to expand, and if you think you have something to show the top Internet companies of the Valley, you should sign up. We have 10 great companies already on the list, but there is room for 1-2 more companies.

More on the 2009 tour on the official Israel Web Tour blog.

Tech Aviv

Just before I traveled to Israel for a week (I am finally back), I had the pleasure to participate (and also be a small sponsor) of the first California Tech Aviv meeting.

Tech Aviv was started by Yaron Samid (Founder of Pando). His idea is to organize a monthly meeting for Israeli entrepreneurs and CEOs and through that develop a strong network of Israeli high-tech executives. Overall he is trying to fill a real void - The Israeli startups are competeing in a growing competitieve environment, and any help they can get from one another can be valuable. In his own words:

"TechAviv is an invitation-only global organization of leading Israeli hi-tech startups and investors gather monthly in Israel (IDC), New York (NYU), Silicon Valley (Stanford) and showcase, discuss and help fellow Israeli startups Each month members demo their products and engage in bi-directional Q&A with local peers. Casual networking happens before and after the demos. Our mission is to leverage our collective
experience and contacts to help fellow Israeli startups succeed worldwide. Together we’re building a powerful global support system."

In the Meetup that I attended, 3 companies presented: High Gear Media, Gigya, and Metacafe. The discussion was interesting and raised some interesting questions. Beyond that, Yaron asked members of the group to leverage their respective networks and help other members in their hiring process. Finally, there was plenty of time for networking (and Pizza).

Next California Meetup is toward the end of March. I will definitely be there.

Reversim - A Podcast for Developers

Are you an Israeli Developer? In other words, as Ori & Ran call it - are you part of the "Hebrew Association of Software Engineers"? (I wonder if such an association exists...)

Anyway, if you don't know, Ori Lahav is a co-founder & CTO at Outbrain (a Gemini portfolio company), based in Israel, and is working on the technology side of the company. Ran Tavori is a technology expert working for Google in Haifa. Together they launched a new podcast, in Hebrew, focused on technology and developers. In other words, the ultimate Hebrew geek show.

The podcast is located here, and it's called "Reverse with a Platform".

I have left the programming world more than 10 years ago, but I did listen to a couple of their episodes and they are interesting and helpful. For example, try episode 3 about the thin client: Funny, interesting and I even learned something.

I hope that one day I will have the pleasure of participating, although I a guarantee I can't say anything about TDD, or Hadoop.

A partial summary of CES (Consumer Electronics Show)

Last Friday I took a quick roundtrip trip to Las Vegas and spent the day at CES. It was a quick trip, and I probably missed most of the action at the show, but still, I thought it will be great to summarize my takeaways, as partial as they may be.

In general, I came to CES with low expectations. My previous CES visit was in 2005, so that was my point of reference. Everyone promised me a "slow and quiet" show. I guess it's all relative. Compared to 2005, it was just as loud, packed, and huge. I guess I skipped/missed the crazy years of 2007-8.

So many people wrote about the various themes of CES (read more on Venture Beat). I can only repeat some of these themes. The 2 big ones, from what I saw, were the following:

1. 3D is happening. Similar to HDTV a few years back, 3D is gaining momentum from the TV manufactures and from the content providers. All the big companies showed various technologies around 3D, with various options (with/without glasses, with/without original 3D content). Overall, it seems that we are getting closer to the 3D images (similar to Minority report). The one big question in my mind - Does this provide an opportunity to VCs? So far, I can't see how startups will make money in the emerging 3D trend. (Check the excellent post on Venture Beat on this topic)
2. The connected TV. I have personally complained about the non-connectivity of my consumer electronic devices. Apparently, someone was listening. It was amazing how many TVs had Internet connectivity, enabling seamless integration to Youtube, and other video websites. I need to think about my wish for 2010 (folding displays?)

Beyond trends, I focused my time on 2 big companies. I spent a few hours at the (impressive) Microsoft booth. It was a nice show of the Microsoft consumer offering, with products ranging from Zune, through xBox and all the versions of Windows. Judging from the crowd's interest, nobody cares about the Zune (The booth was always empty), and everyone wants to learn more about Windows 7.

The most important gimmick at the Microsoft booth was the Microsoft enabled car (It's called Sync). If you haven't seen it check this video here. Microsoft is handling the driving interface (Music, directions, etc.), and not the "mission critical parts", but still, I get nervous thinking about a blue screen in my Toyota.

Beyond Microsoft, I was very impressed with the Samsung booth. 4 years ago, they were the powerhouse of CES with a huge booth. 4 years later, it was 10x bigger. Samsung seems to be the tech leader of the worlds (seriously). They showcased offerings in every category, including some very impressive large screen TVs, and beautiful LED based thin displays. Together with LG, it seems Korea is dominating the CE world.

Finally, a word about Israel. There were some cool Israeli related companies at the Sands, but overall, it seems that Israel has a long way to go before we can have mainstream CE products. At this point, we are much better in providing components and software. We should make sure that we continue to excel in those categories.