Israel Venture Capital 2.0

Pinterest = eSnips 2.0

So much has been written lately about Pinterest. The hottest web property! The next Facebook! The next Twitter! Fastest ever growing social network! I am personally not a huge believer and at this point not spending a lot of time on it. Maybe it is the next big thing, who knows.

But there is one thought that is Pinterest related that keeps coming back to me. This amazing service is really a 2010-2012 version of eSnips. Back in 2005, Yael Elish (Currently at Waze) had the idea of sharing web snippets (photos, files) based on a specific topic. Arrington called it "Content based Social Network". We funded eSnips in late 2005 and sold it a few years later. The company had a lot of users, but the overall outcome was relatively modest.

Granted, it's not exactly the same, and surely eSnips today seems quite outdated. But still, the original idea is quite similar. Like always, timing is so critical when going to market. In fact, timing is almost everything.

Talking about timing, it's always important to remember that when checking ideas that we "have seen before". Gemini funded mobile payments back in 1998, at least 14 years too early. The same idea could have been great today. Need to make sure that past failures are not the only reason for not investing in similar, new ideas.

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…

Ad Tech IPOs

Last week, Millenial Media filed for an IPO. There has been a lot of waiting in the market for an ad-tech IPO, with rumors around App Nexus, Tremor Video and others. With so many companies operating in the advertising technology world (Seems the LUMAscapes are updated on a daily basis), it's critical that the market opens up for some ad-tech IPOs. Since Google is dominating the M&A market in this segment, it will be great to have the IPO route as an alternative, in addition to the fact that such new public companies will create liquidity options for some of the smaller players in the space.

Business Insider published an interesting analysis on the financials of Millenial Media. In this article, Jim Edwards looks at the 40% gross margin of the business, claiming the company is much smaller than perceived.

"Once the cost of revenue is axed from Millennial's income statement its "gross profit" for the same period is just $26.5 million -- less than half its reported "revenues." It would probably be more accurate to call Millennial's "gross profits" its net revenues, because that's what they really are -- the sales dollars the company keeps."

I am not sure this is the right analysis. There are many companies with similar gross margin structure (Think of companies like Broadcom) that are traded around 3x TTM revenues. If you apply that simple multiple, Millenial should already be valued above $300M. If they continue to grow fast, that valuation will be much higher. It will be interesting to see how the market accepts Millenial Media. A successful IPO for them will be fantastic news for the industry.

In summary, here is a comic strip from AdExchanger, published back in May 2011. Hopefully the IPO sun will be shining on all buildings…

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.

Web Tour to Germany

Last week I took a short trip with Orna Berry to Germany. We went to check out the local Internet Scene. The logic was simple – As our portfolio companies (and companies we evaluate) expand their target markets beyond the United States, its important to establish a network and an understanding in new markets. Germany was our “pilot trip”, and we will now try to do similar trips to other countries.

The trip was rather short. We spent a day in Munich and a day in Berlin. We met a couple of investors (Action, Doughty Hanson), 2-3 media companies (Axel Springer, Holtzbrinck), few Angel Investors and 4-5 startup companies. The focus was Internet and Internet only, so our conclusions are probably relevant to this sector and don’t apply to areas like semiconductors and communications. As we met people, we constantly compared what we saw to Israel.

Overall, there were 3 main takeaways from the trip:

Berlin is becoming a center of Internet startups – Since Berlin is rather cheap, and yet a true metro, the number of young people and Euro immigrants is rather large. As such, more and more companies are being started there, and based on that, entrepreneurs are even moving to Berlin to start their companies. A great example was Soundcloud. Amazing company founded by 2 great entrepreneurs from Sweden. When they started they made a decision to settle in Berlin for their business. Could Tel-Aviv become such a center like that? Probably not. We have our political problems (How unfortunate), and we are also not as cheap (See below).

In some ways, the attraction of Berlin resembles Silicon Valley, but not really. Why? Seems like it's a great place for starting a company, but the full Eco-system still needs building.

The majority of the business models are still “copy cat” – The entrepreneurship in Germany is very different than Israel. If we are all about “innovation” and using that to break into new markets, many of the startups that we met in Germany are a German version of a successful US business. Think of the “Etsy of Germany”, the “Yelp of Germany” and the “Bounty Jobs of Germany”. To be fair, not all were copy cats, and some started from a copy and evolved into a slightly different version, with much more innovation.

Clearly, this is not the right model for Israel. We can’t leverage our local market, and although it makes sense to have an Israeli Yelp, Netflix, etc. these ideas cannot be VC backed. However, is there a potential for Israeli copycats to the European markets? We have seen a few in the past, and maybe that will be an interesting new path for Israeli startups.

Israel is expensive – Many of the startups that we met have reached nice scale and business success with less than $500K investment. Very few Israeli companies have done the same. The overall compensation in Germany is lower than in Israel. This may be great for the individual employees, but is a huge issue for our industry. We need to learn how to create more with less money. Otherwise, we won’t be able to compete in global markets. We have met a few “micro funds” in Germany, starting companies with less than $50K. Could that work in Israel today? No. Should it? Yes.

Overall – great trip. Thanks to Stefan Tirtey from Doughty Hanson and Inon Elroy from the Israeli Embassy for organizing this trip for us. Hopefully, we will be visiting other countries in the next 12 months.

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.

Summary 2009 – The Late Version

A year ago (on the day), I made some predictions regarding 2009. The fun about predictions is the ability to look back and compare them to the reality. Here are my 6 original predictions, with the relevant scorecard:

1. No new VC entrants: That was an easy one. There were absolutely no new US VCs in Israel this year. Norwest opened their office, Battery expanded, but all these are old news. Expectations to see an Index/Accel/KP office resulted in nothing. I get full score here (10), but it was truly an easy prediction.
2. Cleantech is Semiconductor 2.0: I thought that 2009 will be the year of cleantech explosion on the deal flow, with every ex-Semi executive starting a new green company. In reality, it didn’t happen in a big way. We did see a bunch of power management deals during Q4, but by no means an explosion. score: 7.
3. Google (and Microsoft) will (finally) acquire in Israel: Wow, I was wrong. Google are still with 0 local acquisitions, and Microsoft was also inactive this year. Now I am sure this will change in 2010, and I am even more sure that if I will continue to predict this for every year going forward, I will hit it right at some point. Score: 0.
4. There is a world beyond the US: I was sure we will see more companies going after the Asian markets. That didn’t happen, but we did see a whole bunch of companies that are focused on Europe. We even invested in one of those (eKoloko). I identified the trend, wrong regarding the geography. Score: 7.
5. Yozma 2.0: I was sure we will government programs to help the hi-tech sector. Nothing happened. The market rebounded fast, and the need was reduced. Score: 2 (Just because there is some government work on the biotech side).
6. Web 2.0 Acquisitions: I was expecting some acquisitions of the leading Israeli web companies. Jajah was the only one (And it’s not really Israeli). I was correct in predicting a wave of M&A as we saw in Q4 (Dune, Guardium), but the web was quite ignored. Score: 5.

Total Score: 5.1 (F!) In summary, I could have done a better job. I had some good ideas, but overall I missed the amazing stock market recovery, the iPhone arrival in Israel, the nice Q4 tech acquisitions. Tomorrow I will post my 2010 predictions, hopefully I will get at least C+ when I grade this in January 2011.

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”.

Ouriel

Here they are again, the winds of change… At the end of this month, the Lightspeed Gemini Internet Lab will officially end, and Ouriel will be leaving. Ouriel? If you don’t know what I am talking about, you have not been part of the Israeli and European Internet scene during the past 3 years.

In 2006, When we started the (LGiLab) we were looking for a great GM. Our thought – someone who has a great understanding of the industry, with good contacts and strong knowledge. We looked hard, and finally found Ouriel Ohayon, who was then the editor of Techcrunch France and doing Biz Dev at ICQ.

Back to 2009, I can easily say we made the right decision. Ouriel did a great job as he became the master of knowledge on everything that was consumer internet and mobile. He helped us find great opportunities, and analyze all of the many projects that came through the lab. He was personally responsible in finding us both Outbrain and Eyeview.

Now, after 3 years of working together, Ouriel is going back to his roots: Being an entrepreneur. He will be leaving the Lab in order to find the best possible project for him. It may be Appsfire, it may be Topify, and it may be a whole new project (that I haven’t seen yet). All I can say, he has A LOT of great ideas. Check out his blog to read more about his specific plans.

In regards to our lab, as I said, we are officially done. We will continue being best friends with Lightspeed, but the official partnership is over. Both funds will continue to invest in early stage (seed), and we will definitely do joint deals when relevant. As it relates to Gemini, we will continue having a lab-like program, but it will be run with internal resources. In other words, we are still very open to invest in early stage Internet companies.

In fact, with the help of Ouriel, we just closed an Internet seed deal (on our own). We are officially announcing this deal later today (Check later today on this blog). I am sure there will be many more like those in the next 24 months.

Ouriel – good luck on your new journey. I am sure you will build great things.

Analytics forever

A few days ago I sat down with the BI (Business Intelligence) manager in one of my portfolio companies. He showed me some key metrics on the business, and what they are measuring as they try to understand the fundamentals of the business.

Analytics is a key part of any web business, and in today’s world – any business, web or non-web. Everything needs to be measured, and it’s important to measure the right things. A lot of times, it’s the trivial stuff (# of users, growth, conversion) but other times it’s much more sophisticated (repeat users, traffic sources, segmentation, churn, etc.).

Having good metrics is important as they provide good information, and GREAT stories. Sitting with the BI manager taught me a lot about the business of that portfolio company. What is really happening? What customers are profitable? Where can we make more money? What are the current bottlenecks? With such insights, you can addicted to analytical information, as much as you can be addicted to the performance of a public stock. As such, I ask my companies to share data on a monthly basis. That’s the minimum resolution where you can see real changes, that are beyond just noise. I never want to get access to Google Analytics. As a board member, getting daily information can kill you.

A lot has been written on the importance of analytics. Check 360innovate as one example. Or just search Google for “importance of analytics”.

Now, here is a personal thought on analytics. I sometimes wish I could have analytics on my life. Some sort of a measurement tool on everything. Just for me. How many flights did I ever take? How much km did I run to date (total)? How many people did I meet? I can’t get this information. Is it interesting? Not sure. But maybe my grand kids will have all that in a database one day.