Friday, January 30, 2009

Half a Dozen for BVP

Yesterday, Forbes published its annual Midas List, which is a ranking of sorts for the most successful venture capitalists. I am extremely proud to write that no less than SIX partners from Bessemer Venture Partners appeared in this list of 100 investment professionals, including: Rob Stavis, Bob Goodman, Felda Hardymon, Ed Colloton, David Cowan and Rob Chandra. This is the most of any venture capital fund, which I attribute to the unique and indepenent culture of BVP. Congratulations to my partners and keep up the fantastic work! The bar is set very high for the rest of us.
Surprisingly, not a single venture capitalist from the Israeli VC sector appears on the list this year, perhaps owing to the dearth of high profile exits in recent years. Whatever the reason, I would expect to see several Israeli names on the list in the years to come as Israeli start-ups become great success stories themselves.

Sunday, January 18, 2009

Lets Hope its Just A Little Gas

Maybe I am getting ahead of myself here, but I have always felt that Israel was fortunate to have never discovered serious quantities of oil or gas. This morning, a group of companies made an official announcement regarding conclusive results of tests indicating considerable natural gas deposits in the eastern Mediterranean. While excited at the prospect of energy independence and some extra change for the government to dole out, I am actually quite anxious.

Energy independence is the dream of any modern nation, but too much “independence” is a recipe for economic disaster. Specifically, I refer to the deleterious affects caused by the “rents” that flow to government coffers when natural resources are sufficient for export. Admittedly, Israel is too advanced and diversified an economy to suffer from the “Dutch Disease” of other Middle East economies, which distorts development and in a way that impedes the growth of non-energy industries. However, with populist tendencies now evident in all major political parties in Israel, I genuinely fear the financial mismanagement and irresponsible policy making that will likely result from too much energy independence. I anticipate a situation in which demands for reform, privatization and good government, will give way to demands for populist hand-outs across the political spectrum(now even second and third cousins of the Israel Electric Corporation’s employees will get free electricity for life).

There are few energy rich economies that responsible nations would like to emulate, although there may always be a tinge of envy. Only several months ago, it would have been considered blasphemous to speak of such ruin with the price of a barrel of oil reaching $140. But now that it has plummeted to $35, government budgets are imploding, inflation souring, and currencies swooning. Moreover, unrest is likely to ensue when these populist authoritarian governments are unable to meet the rising expectations of their citizens. I am of course thinking of Russia, Saudi Arabia and Venezuela, among others. While counter examples exist, I am not sure future Israeli governments will be able to take advantage of energy riches and follow in the footsteps of Norway and Canada. I know that this might be different because there is no government owned company calling the shots, but I am still anxious.

Gazprom's new headquarters building will be two times the size of the Eiffel Tower.

Lets just hope that the gas discovery off the coast of Israel is enough to meet Israel’s energy needs, and not much more(not enough to build the tallest building in the Middle East). And lets hope that the next great discovery in Israel is the software that facilitates the discovery of oil/gas in other regions of the world, or even better new solar cell technology that allow Israel to harness the sun to be completely independent (could we then be a light among the nations?).

Sunday, January 4, 2009

Just the Minimum

I constantly find myself trying to convince entrepreneurs of pre-revenue software and Internet start-ups to scale back their development plans and accelerate the introduction of their product. This has only intensified in the current economic environment, where hundreds of start-ups, caught fundraising during the R&D phase, look pretty unattractive to venture capitalists right now. My advice is met with an emotional reluctance, because invariably this means curtailing ambitious development and product goals, which were the basis of the original business plan. And in pushing companies to develop only the minimum necessary to engage a customer with a real product, a second piece of advice emerges with regard to narrowing the market focus. I encourage companies to tighten their market focus through cuts in development, but to do so in way that does not completely forsake the larger billion dollar market dream.

We in Israel have been spoiled and even misled by multiple, high profile technology acquisitions over the past two years. These companies were purchased by large US companies at prices that had no relationship to revenues. Contrast this with the most successful US start-ups over the past few years, where technology took a backseat to superior business, sales and customer acquisition models. I have long felt that Israeli entrepreneurs rest too heavily on technology superiority as the core of the business plan. Such emphasis on technology creates protracted development plans, and delays the critical stage of ascending the “sales learning curve.” My colleague, David Cowan, has written better blog posts on this “sales learning curve,” but my angle on this is to implore Israeli start-ups to move as fast as possible to this stage. This stage of selling and learning from customers is actually a lengthier process for most Israeli companies due to distance and culture.

Needless to say, a company enters a new stage of its life when it brings a product to market. On the sales side, the start-up is able to better understand the sales cycle, the viability of the go-to-market strategy, the priorities facing the key decisions in the customer’s organization, and strength of the marketing message. On the product side, the company gains insight into the competition and pricing, and receives valuable feedback to refine the product roadmap and feature set. On the technology side, the start-up also learns valuable lessons regarding integration and implementation, interoperability with the other products in the customer’s environment, and support requirements. All of the above also serves my interest as an investor; as we become more educated about the opportunity, a company’s sales assumptions and cash needs. But ultimately, this is about making a plan more attractive for outside investment, which should be in everyone’s interest.

By doing only the minimum, a start-up actually lessens its reliance on technology, and is forced to hone its customer acquisition and support skills, which is a very healthy test of viability. In the current environment especially, I believe we all need to tone down the technology goals in pre-revenue companies precisely in order to focus on building a business much earlier than we have seen in the past.