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…

5 Predictions for 2012 – The Israeli Version

I did the predictions thing for 2009 and 2010, and then skipped 2011. Now I think it's worthwhile to go at it again (Yes, joining many others). In the past 2 attempts I listed 7 predictions. This time, I will focus on 5 – 3 Positives, and 2 negatives. I even tried to have a very clear score card to measure in a year from now. So here it goes:

3 Positives

1. Israeli VCs will raise money. There are several funds out there raising money. It may be "wishful thinking", but I am positive that Pitango, Magma, and others will raise money. Some will finalize in 2012, others in 2013.
2. At least 3 large Silicon Valley tech companies will open development centers in Israel (like Apple). Some will be based on acquisitions, others just in order to tap into the talent.
3. At least 2 major acquisitions will happen (above $400M). Hope to see Google doing something substantial locally.

2 Negatives

1. No Israeli IPO. I don't think we will see any major Israeli IPOs (Nasdaq) in 2012. The good companies will wait for 2013.
2. Local cost of engineering will continue to rise. With the increase of startup and large company activity, we need to invest A LOT in local talent growth; otherwise the supply & demand will continue to hurt us.

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.

The early stages – Skip the local Israeli market

In the past few months I have been seeing a lot more Israeli startups that are focusing their initial business steps in the local market. And when I say Local, I mean the Israeli market. There is a good reason for this growing trend. With the abundance of accelerators and early stage seed funds, many company don't have the resources to launch in the US (or Europe) and prefer to spend the little money they have with closer customers.

In every meeting I have with early-stage companies I keep pushing them to stay away from the local market, especially as their primary initial target. Israel is a great place (Sometimes…), but it is completely non representative of the bigger markets out there. Here are a few examples of these differences:

1. Business Netowrk: In Israel, there is a 1-2 degrees of separation. So easy to get to the right person in ANY organization. Totally not the same when you think about the large US companies.
2. Infrastructure: Unfortunately, Israel is truly behind as it relates to infrastructure. Michael Eisenberg, in his 4-part Hummus Manifesto has been recommending for a long time the need to build local cloud computing and real broadband. Until that happens, we will stay behind and will not be able to experience the real Internet as seen in Asia. In other words, focusing local means focusing on Internet 2001 style.
3. Applications: In Israel, the current state of online services is different on all levels. No real online music (iTunes, Pandora, Spotify). No Netflix. No ad exchanges. Can you really learn something about the US when focusing locally?
4. Finally, and based on the above (and more), having a local beta/customer does create enough value with investors. What does that mean? One US-based beta is worth more than 10 paying Israeli customers.

Still, there are a couple of situations that are relevant for selling locally. First and foremost, for cash. All of the above is irrelevant if the local customer help you survive and push forward to the next milestone. Skip it if you can, don't skip it if you must. In addition, once the company is advanced and selling in foreign markets, generating some local sales can be a great financial benefit and help the R&D team interact with real customers.

In summary: Israel is great for B-round and above. Till then, skip it if you can.

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.

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.

A Journey to the land of the North

For some reason, this post got a bit of a bombastic title, a choice of words that reminds me the Lord of the Rings. In reality, I spend all of today in the Northern part of Israel, visiting 3 exciting companies that are operating in the Galilee.

As I am a VC, you would expect to hear now about some great portfolio companies, or at least about exciting product companies. That wasn’t the purpose of this trip. Together with 2 good friends, I went to visit Babcom Centers, Galila Line technologies, and Galil Software, three leading companies in the new emerging sector – the IT services industry based in the Galilee.

The rationale for this new trend is quite straightforward. There are a lot of Arab-speaking Israelis in the Galilee that are educated (Degrees from the Technion, TAU, etc.), extremely talented, yet can’t find the right position in high-tech or tech-services. Instead of losing these talents, new emerging companies in the Galilee hire them, train them, and leverage them to provide top notch services for the rest of the industry.

Here is a quote from Babcom Centers:

“Babcom is located near large Arab population centers in the Galilee, housing thousands of educated and skillful men and women interested in developing a career near their homes. The high availability of these high-quality human resources enables us to offer operational flexibility, quick response to our customers’ changing needs, as well as the ability to rapidly recruit educated employees, particularly women, meticulously selected in our uncompromising evaluation centers.”

And another quote from Galil Software:

“Galil Software is a software service company located in Nazareth. By recruiting from the highly skilled workforce available in the Galilee, Galil Software is uniquely positioned to offer high quality services at competitive prices. In addition, Galil Software’s proximity to major Israeli high tech centers ensures that customers have direct and continuous access to our R&D teams, significantly reducing the risk, cost, and management attention required to support off-shore outsourcing activities.”

We started the trip at 8AM, and were back home at about 8PM. Not a short trip, but much easier than a round trip to Bangalore. With a cost structure of 20%-40% lower than R&D in the center of Israel, the proximity (Combined with quality) of these emerging companies make them a really interesting alternative for outsourcing to Eastern Europe or India. Beyond that, providing real jobs to the Arab Israelis is a huge “small” step in making Israel a better place.

My Portfolio companies are not working with Babcom or Galil yet. Some are too small, some haven’t really checked these options yet. I was so impressed today, that I will talk about these ideas with all of my companies.