Israel Venture Capital 2.0

IL Tech Talks

Today Gemini hosted another Meetup for IL Tech Talks. If you are not familiar – IL Tech Talks is a program started by Ori Lahav from Outbrain (Gemini portfolio company) with the idea to share technology-related knowledge between Israeli founder & startups. The problem is quite obvious: Many of the companies in Israel face similar technology companies, but have a hard time reaching the right (and relevant) advice that is local. As Ori says – a Meetup on the topic in Palo Alto is not really helpful for a startup in downtown Tel-Aviv.

IL Tech Talks was launched about 18 months ago and has managed to generate some nice traction in the local technology community. Just looking at the current calendar, you can learn a lot about this activity. Just in upcoming 2 months 10 talks are being offered, at various locations around the country (from Outbrain in Netanya to JVP Studio in Jerusalem). The topics are also very diverse: Agile Unit testing, project management, and Data Center Scalability – just to mention a few.

I am personally a huge believer in this activity. In a highly competitive global environment, we will all benefit if we help each other – every Israeli success story will generate additional success stories, fueling the local eco-system. Although some local companies become direct competitors, in most cases Israeli companies compete with players in global locations, and helping each other can really do no harm. IL Tech talks is mostly technology oriented, but there are other similar activities that focus on marketing and product related stuff as well (Gemini is an active supporter of another meetup: Sales & Marketing 2.0, run by Eldad Maniv and Ran Gishri)

When I told Ori I will write about IL Tech Talks, he emphasized his vision around this program, and it's important to share: More than anything, it will be great to see companies host Tech Talks in their own facility, sharing external knowledge to many employees, not only the tech leaders (CTO, VP R&D, etc.). So, if you are reading this, there is a call for action: host an IL Tech Talk Meetup in 2012.

Finally, a word about the meeting today. The conversation was around smart caching and scalability. I definitely learned a few new things…

Israeli tech – 2011 Summary

2012 is already here, and it's time to list some of the more important events that happened in Israel during the past 12 months. Since my memory is somewhat limited, this cannot be a full list, and I am sure there is at least one major major event that I forgot as I compiled this list. So, to be precise, here are SOME of the important events that happened in our local industry in 2011. They are listed in random order.

1. Waze raises money from Kleiner Perkins. Kleiner has always been the most difficult fund for Israeli startups. Sequoia, Benchmark, Greylock were always very active here, but KPCB was somewhat reluctant. They invested here before, so this is not a first, but this one seems a bit different. This is a real endorsement of the quality of Waze, and their leadership position in the market. Maybe, more than anything, it shows that for great companies there are no real anti-rules.
2. Conduit distributes dividend to shareholders. In September, Conduit announced they will be distributing dividends to shareholders. In their own words: "It's well known in the Israeli tech community that a very large percentage of our employees are shareholders, and we paid them a generous dividend". M&A and IPO are so "last year".
3. Navajo Systems acquired by Salesforce. Originally, I wanted to write about Apple acquiring Anobit. Clearly, a more visible milestone. But in reality it's all part of the amazing "return of global hi-tech to Israel". In 2011, Salesforce opened offices here, Google expanded, Apple arrived, AT&T expanded, eBay acquired again, Akamai arrived, and more. We may not be performing on the political side, but we are definitely recognized as a great R&D center.
4. Shaker winning Techcrunch disrupt. On the Techcrunch Disrupt side, the Israeli entrepreneurs are doing great. In the past 2-3 years, more and more Israeli companies are recognized as innovators. I am not sure Shaker is a guaranteed winner, but I think this award is an indication of great consumer Internet businesses that will mature in 2-3 years.
5. Imperva IPO. Slowly but surely, Shlomo Kramer is building a great company. This is the model we should all aspire for. I recently wrote about the Mellanox "model", and I think Imperva is following the same footsteps. This is a multi-billion dollar company in the making.
6. The Evergreen break-up. Till now, all good news. Kleiner, Salesforce, etc. What happened to Evergreen is simply sad. The true first VC fund in Israel will probably seize to exist. Israel needs the local Israeli funds, and so far we haven't seen new entrants replacing the funds that break up. The local industry will be missing the Evergreen brand.
7. Lool ventures and others. In February, Lool Ventures was officially announced. They were one of the first in a wave of seed funds that emerged in the local market. I am not sure there is room for so many seed programs, but for the larger VCs this is great news. These seed funds will enable us to see a larger set of companies with (hopefully) some traction.
8. Avi Hasson as the Chief Scientist. Avi was my partner for 10 years. He is one of the best, and as a chief scientist he is (and will) push forward the local infrastructure to help startups. Check this Video to hear Avi's agenda.

On the personal note, it was a year full of events. Gemini enjoyed the sale of the Gift Project to eBay. Our companies were funded, including Adap.tv and Outbrain, and we even saw some awards for our companies, including Outbrain (again) and Eyeview.

UPDATE: After publishing, I became aware of a much better summary by Micha from Genesis. Read here. Nice to see we had similar views on 2011.

Finally, there are many "summaries" out there. I like the image below from Stumble Upon.

Mellanox – Passing the Billion Dollar limit

4 years ago I wrote an article for Venture Beat, "the search for an Israeli Nokia". Back then, I was trying to list the reasons for the lack of large venture backed companies (large = $1bn valuation and above). 3 major reasons were listed, and also a small prediction that things will change in 5-10 years. 4 years have passed, are things changing?

This week Akamai announced their planned acquisition of Cotendo for approximately $280M. I had the pleasure to work with the 3 founders 10+ years ago at Commtouch. They definitely deserve it. The Cotendo acquisition came a few days after the announcement regarding the Anobit acquisition (by Apple). Overall, 2011 was a great year with over $3bn of value realized (Remember Provigent, and MediaMind). We even had an IPO (Imperva).

Great year, but not a single $1bn valued transaction. Still, times are changing, as can be indicated by the story of Mellanox. Founded in 1999, the company went public in February 2007. Post IPO, Mellanox was valued at ~$500M. Another sub $1bn Israeli company. But since then, Eyal and his team have been pushing hard to grow the business, growing organically, but also through acquisitions. Early this year, they acquired Voltaire for over $200M. And since then, the company has continued to grow and is currently valued over $1.2bn. Yes! A true $1bn Israeli company.

The Mellanox $1bn story will not be covered in the Israeli papers summarizing 2011. Why? The papers prefer the "instant hits" and not the slow and patient growth of companies. But Mellanox is an example of the model that will be repeated many times in the next few years. Following Mellanox, Imperva will grow to that valuation, and soon after we will see similar growth stories from companies like Primesense (A Gemini Portfolio Company), Outbrain (Another Gemini Portfolio Company), Wix and others. Constant growth, IPO, and then more constant growth.

As I mentioned in 2007, between 2012 and 2017 we will see a lot more companies like Mellanox. The quest for an Israeli Nokia is finally over.

R&D in Israel?

This week was a great one for the local high-tech scene. 35 years after it was officially incorporated, Apple decided to expand their engineering team and open a development center in Israel. Not only that, they are also acquiring a local startup, giving the new center a real project, and a good base for (hopefully) a successful journey.

As Apple (among other companies) is opening an R&D center here, it's important to look at some early stage companies, and see if the early-stage companies are also setting up their R&D teams here. The reality is that there are many Israeli entrepreneurs that are based in the US and are starting companies without hiring a single Israeli-based engineer.

As an observation, there are 3 types of "founding Israeli teams". The first type is the Israeli-based teams. In that case, they will always hire their development team here, and unless they relocate the whole team as the company progresses (Quigo as an example), these companies stay in Israel. The second type is the split-geography founding teams. One entrepreneur is in the US, the other one is in Israel. Outbrain (Yaron in the US, Ori in Israel) and Watchdox (Moti in the US, Noam in Israel) are two great examples from our own portfolio. The third type is the Israeli teams that are 100% in the US. The founder relocated through his previous venture, and is not starting a new startup with an Israeli-based co-founder. In those examples, the R&D center is usually set in the US.

The location of an R&D Center depends entirely on the initial location of the R&D manager. If one of the founders is the head of R&D, the team will always be built around him. If that VP R&D needs to be hired, it may make sense to hire him in Israel. In the past, the main reason was related to cost. R&D in Israel used to be cheaper. Unfortunately those days are gone. So why do it? It all relates to the ability to hire talent. Every founding team needs to assess their brand and network and think of they have the ability to hire a killer development team in the US. The reality is that a great business team in the US combined with a strong Israeli VP R&D will have the ability to hire the very best people from the Israeli startup scene. Hiring the best of Silicon Valley could be a lot harder. So if it's best in Israel vs. average in the US – I would vote for Best in Israel.

And talking about Best in Israel, no doubt that Apple will be hiring some of the best engineers.

Microsoft’s On-line

Tomorrow (In about 12 hours) the HTIA conference will officially launch, with a full day of presentations by companies, VCs, and presenters from all over the world. There is an exciting agenda (Check here). I am personally looking forward to hearing Haim Shani (Ministry of Finance), Chen Dongzheng (Chairman of the Shenzen Stock Exchange), and Pat Gelsinger (EMC).

But there is much beyond these plenary session. I will be moderating a very exciting session with Microsoft’s Xuedong Huang, or XD in Short. XD has been with Microsoft since 1993 (That’s more than 17 years…) and has seen some of the more interesting developments at Microsoft through the years. He will provide a great perspective on Bing (and the competition with Google), Mobile Search, and innovative speech technologies.

In this session, XD will give a 30 minute presentation, followed by a short interview. In this interview, we will cover many topics including online search, the Microsoft – Yahoo history (and future), the impact of iPad on the market, and many others.

After this interview, 2 exciting companies will present, EPOS and Outbrain (Gemini portfolio company).

Hope to see you all tomorrow at 1PM.

Best Practices for Introduction Emails

Introductions are a key part in my business. I get introduced to a lot of people (entrepreneurs, other investors, potential business partners) and I constantly make introductions to other people (portfolio companies, entrepreneurs, and people looking for new positions). Through the years I have developed some “best practices” regarding introductions, and I thought to share those. Clearly, it’s not a big strategic issue, but I do wish that some of these will be adopted in the industry

Ask (Permission): Before making an introduction, always ask the permission of the people you are introducing. Many times I get introductions out of nowhere. I feel obliged to respond, although sometimes its irrelevant for my current focus. I always prefer to get an email ahead of time asking for my desire to get the introduction. I do the same – ask people if they are interested. It increases the response rate, and it also saves time for everyone involved.

Mention (Names): Introduction emails should always include the names of the people being introduced. Why? It helps the follow-up on these emails. When you send a lot of emails with the subject “Intro”, you get a long list of emails in he inbox with the same topic, yet all of them are not related. By adding the names, I easily know (when people reply) what is the context for this email.

Provide (Context). Always provide some business context. I recently got an introduction to an entrepreneur, out of the blue, with no information regarding his new company. How can I respond to that? A simple 2 line topic on what is general context makes life much easier as this email is being handled.

Respond. I truly hate "no responses". I agree with a someone regarding an introduction, I make the intro, and then I get no response. Wow – do I look stupid. That’s why I ask for permission. If we agreed on an intro, I truly expect a 100% response rate.

Free (the Introducer). After the connection was made. free the introducer from the loop. I make the intro, and then I need to follow 15 emails regarding the scheduling of a conference (and I am not even invited…). Do I really care if who is available on Thu at 9:45?

Share (Results). Finally, share the results of the introduction. You had a meeting? Meeting was successful? Always important to send another “Thanks” email and share the results of what happened.

Ask-Mention-Provide-Respond-Free-Share. That complicated? I will appreciate quick and wide adoption…

Predictions 2010 – The Israeli Version

As I promised last week, I am keeping my tradition (second time in a row) and trying to lay out some predictions towards the new year. Since so many people give predictions for the industry as a whole (check out my favorite: Jeremy Toeman), I am going to focus on Israel:

1. VC Consolidation will continue BUT some funds will be raised for local VCs. As we enter 2010, there is still a big (global) question mark around the venture capital. Some are still believers, but others keep talking about the broken model. In 2010 we will see a trend similar to the US, where we some funds are over subscribed (Greylock, Accel) and others won't be able to raise at all. Same in Israel - I would expect to see some of the bigger Israeli funds with fresh money, but some funds will go away.
2. 2010 will be great for Israel M&A. I am very optimistic regarding the overall “exit” market for 2010. The IPO window is open, and the M&A pace is increasing. Q4 was excellent for Israel, with companies like Dune, Jajah and Guardium being acquired for nice amounts. The M&A trend will continue (Even this quarter), but we will see a small number of Israeli companies going public this year. In other words, the big Israeli IPO will wait for 2011.
3. Internet Acquisitions will increase. I just KNOW that Google will buy here at the end. But I don’t think it will happen in 2010. However, Microsoft is a bit more aggressive in Israel. As such, I expect Microsoft to acquire, but Google will not make their move before 2011 (or maybe Q4 2010). In general, I do expect one large web acquisition in Israel, unrelated to Microsoft and Google. It could be a startup company, or maybe a large spin-off …
4. Global tech leaders will continue visiting Israel. In the past couple of years we had the honor of seeing Larry Ellison, Steve Ballmer, Sergey Brin, and others. I would expect this trend to continue, and I am definitely waiting for Eric Schmidt to fill the new Habima. Steve Jobs and Apple? Not in 2010.
5. AOL. AOL has been the most active global internet company in Israel. Similar to the US story, some local AOL assets will be sold BUT new ones will be acquired. In other words, AOL will be exchanging their local asset base.
6. Angels will increase investments. As markets improve, the angel activity will increase, with some Silicon Valley angels investing in the local market. The angels have been a real alternative for the VCs in the past 2-3 years, and that trend will increase.
7. Deal Flow. I expect our deal flow pace to rise (More entrepreneurial activity), more focus on Europe/Asia, and some companies being started by returning Israeli entrepreneurs.
   

Overall, and without being over optimistic, I expect 2010 to be a good year for the Venture. I hope it will be a good year for the Israel Venture, and specifically for the web scene.

Why?

Every time I evaluate a company for a potential investment, I ask the founders (and myself) tons of questions. Still, I think there is one question that is critical, and that needs to be answered in every startup company. The question is Why? Why did the founder(s) start this company?

There are many potential answers to the Why? question. “Make money”. “Be Famous”. “Make a difference”. “Prove something to myself”. “Prove something to someone else”. Maybe every entrepreneur has its own unique answer. There is no right or wrong here, but the true answer can have a huge impact on the end result.

One of my goals in the due diligence process is to answer this question (in the best way I can). Why? Because in the best cases, the motivation behind a company is aligned with our interest to invest in potentially long-term large scale businesses. In other words, hunger breeds results.

Founder & CEO, CEO & Founder

Last week I had an interesting call with one of the founder/CEOs in my portfolio. This is someone I highly trust, and I truly believe he has the potential to take his company all the way, from zero phase to a successful IPO.

During our conversation, we talked about the stage of the company: A working product, growing distribution, a good team, and some initial revenues. We both agreed that it’s time to take the company to the next stage. Leverage the existing foundation of the venture and build a real company: Roles & responsibilities, clear processes, scalable models. It’s time to graduate from elementary school to Junior High.

As the company grows, it’s also time for the CEO to change its title. No longer “founder & CEO”, but rather “CEO & Founder”. Think about it – at the early days of the business, the founder roles are the most critical: Being agile, identify quick opportunities, recruit fast, make unusual bets. At the second stage, it’s about professional management: all the structures I talked about before.

Not all founders can grow to become great CEOs. But I actually do think that many of the founders can make that leap. Maybe the first thing they need to do is to change their business card and embrace their CEO title.

Crazy M&A Week

There are rumors floating around that Google is in the process of acquiring Brightcove for $500M-$700M. In addition, Adobe already announced the acquisition of Omniture for $1.8bn. In the “mid-range” deal category, Intuit swallowed Mint.com for $170M.

Aren’t we supposed to be in a downturn? Isn't the venture model seriously broken? Give us 52 more weeks like that and we will be just fine.

But still, this is not good news. A few years back I saw Paul Deninger speak at an Always On conference. Paul is a very smart guy, and extremely knowledgeable about the Venture Business. He said that one of the worst trends in the VC world is the growing gap between supply and demand. In other words, too many sellers, not enough buyers.

I saw Paul earlier this week at the E&Y Journey conference. We talked about the need for patience, and how the long term view of early stage companies is highly correlated to patience (both for the entrepreneurs and the VCs). Back to this crazy week of M&A, and we have 3 examples of short term gains, and no long term view:

• Omniture: Already public, could have acquired a few companies in the upcoming years.,
• Brightcove: Supposed to be profitable and very strong. Great potential for a 2010 IPO.
• Mint.com: Early traction, at least 2-3 years away from real early success.

So – here is a wish for the new year, a post called “Crazy IPO Week”.