Monday, December 27, 2010

Series B Psychology

Venture investors never like to lose money. But if we must, we prefer to lose it approximately 2-4 years after investing. Why? Losing money after more than 4 years is more painful and expensive because of the opportunity cost of our time and that of everyone else around the table. If a company fails after 4 years, it was either a sudden turn of events or a slow, agonizing death...but in either case, we wish we had recognized it earlier and moved on to the next exciting venture.

Tuesday, September 28, 2010

A Wize Move for IBM

Last month, we successfully exited our investment in Storwize through its sale to IBM. IBM had been working with Storwize for some time on technical validation and joint marketing initiatives, and gradually became convinced that Storwize was a critical enabling technology that could disrupt the entire storage segment and including their own product lines (why rent when you can own?).

Wednesday, September 22, 2010

Soap and Oil in Paid Acquisition Strategies

When your business depends on driving quality traffic to your website, embracing a paid acquisition strategy using SEM or display advertising can be both a luxury and a nuisance. It’s a luxury, because you can effectively manage your rate of growth via variable marketing dollars. With great precision, successful Internet companies know what kind of return to expect on every dollar spent and can comfortably raise their spending level month over month.

Tuesday, June 29, 2010

Amazing, Smart or Crazy?

My fondness for early stage investments often prompts me to develop a new method with which to filter, evaluate and pursue deals. One of my current methods is to group interesting early stage companies into the following buckets: “amazing,” “smart” and “crazy.” Many companies don’t quite meet the criteria I set to receive these labels, and occasionally, special companies will fall into more than one category. This is an imperfect framework, but nonetheless useful for me as I evaluate the worthiness of a given early stage project.

Amazing” companies are the mainstay of the Israeli venture scene. The business case of these companies is predicated on having a superior technology solution for a technology problem that in turn has meaningful business implications in a very large market. These are companies whose products are incredibly difficult to develop, and whose product claims are met with incredulity or otherwise elicit a “wow” response. Competitors will scratch their heads and dismiss the claims as preposterous, but “amazing” companies will be vindicated at the end of the day. Finally, these companies are unique in that they are actually able to create shareholder value by merely delivering a working product (which honestly can’t be said of most start-ups). But alas, too many Israeli entrepreneurs and investors think their company is a diamond(amazing), when in fact it is just a shiny stone(interesting). The bar should be very high for these companies at the early stage, especially those that require significant amounts of cash for R&D. "Amazing" companies may ultimately be acquired merely for their IP, product and development team, but these outcomes are few and far between. From my portfolio, past and present, I put Altair, Dune, Soluto and Storwize in this category. Other "amazing" BVP portfolio companies would include Tilera, Miasole, and Vertica.

Smart” companies seem to be Bessemer favorite. These companies solve challenging business/market problems with well thought out solutions that are largely business in nature, such as a new product concept, pricing model or marketing approach. They are borne of the founders’ epiphany that something valuable can be built around a market inefficiency or anomaly. They may be technology-driven, but rarely rely on technology innovation. As a result, the founders of these companies usually possess a strong understanding of the target market, including the economics, psychology and politics that drive it. The risk around these companies is largely execution, but when done properly these companies can quickly disrupt an existing market or create a new one with a surprisingly simple, yet smart approach. From my portfolio, I feel that both Soluto, and my recent undisclosed investment, fall in this category. Other “smart” BVP companies include LifeLock, Gerson-Lehrman Group, Diapers, Yodle and Open Candy, among others. 

Crazy” companies come with bold or wacky assumptions about consumer/customer behavior that are simply impossible to prove without trying. These are companies whose products are greeted with indifference (who needs it?), scorn (it’s annoying!) and ridicule(they will never build a business). And with a great degree of uncertainty baked into the plan, a lot of improvisation is required in the early years. In contrast with “amazing” companies, “crazy” companies typically have products that are straightforward to develop, but rely on untested methods of distribution, customer engagement, and/or monetization. And in contrast with “smart” companies, “crazy” companies lack a business model and operate in ill-defined market segments. I deliberately use the pejorative term “crazy,” because entrepreneurs and investors alike should recognize the immense risk of their plan so that pride does not keep anyone from pulling the plug when things clearly aren’t working out. Aside from ICQ, Israel has only had only a handful of successful crazy companies, which makes funding them more difficult. BVP has its share of “crazy” companies, which time has made very “smart.” These include Skype, Yelp, and LinkedIn, and more recently Hunch, Sonic Mule and Wix

Over time, the distinction between each of these three labels may blur, as some “crazy” companies succeed and become “smart”(Twitter, Facebook), and some “amazing” companies succeed and become "smart" (Google). It’s fair to say that being a “smart” company should be the end goal of every start-up, but this is precisely the point. It’s hard to come up with a smart model at the onset and even harder to succeed at execution. But if you think you can, we are certainly interested. I also recognize that many “amazing” and “crazy” companies will be acquired long before they are able to prove they are also “smart”. Finally, it should be noted that falling into one of these three categories does not by itself guarantee success… however doing so can help early stage investors, like myself, feel their early stage risk is money well spent.

Friday, June 4, 2010

Axis Pulls an Ace in First LTE Exit

Last month my portfolio company, UK-based Axis Network Technology, was sold to Korea-based Ace Technologies for $35M. It was a great outcome for all involved as BVP was the only institutional investor (£3M), following several years of bootstrapping by the entrepreneurs, Simon Mellor and Steve Cooper. Unlike most of my investments over the past 2 years, Axis was not an Internet company, but rather an RF subsystem company focused on being a key enabler for 4G wireless base stations.

At the time of the investment in the summer of 2007, this was a very contrarian decision. But something struck me about the entrepreneurs and the proven market for remote radio heads they were addressing(in 3G).  The strength of their entrepreneurial spirit was manifest in their decision to bootstrap their venture by first finding customers and then developing products based on this intimate understanding of the customers’ needs. Furthermore, I was excited by the fact that Axis was following two familiar and successful paths in the telecom subsystem segment.

The first was exploiting a shift within telecom OEMs from in-house development to third party merchant suppliers like Axis. This has been played out successfully multiple times by other start-ups over the last decade, including a former portfolio company of mine, Dune Networks (sold to Broadcom), in the switch fabric segment. The second was paving the path for software/IP to replace low margin hardware, or rather exploiting the commoditization of existing hardware rather than developing yet more complex hardware. As a result, no OEM or competitor could match Axis’s price/performance, which made them the de facto standard in the LTE and WiMAX radio market. I love these themes and will continue to invest in them should new ventures come my way.

For my readers, the take away here is that contrarian investment in out-of-favor sectors can still be made wisely and profitably. However, the entrepreneurs and investors need to practice the same capital efficiency and scrappiness that we have come to expect in Internet start-ups. Leverage the innovation of others, engage with customers immediately, focus on the customer’s business pain, start with a minimal viable product (MVP), and pursue a business model that can be profitable even without massive volumes. 

Axis is the first LTE focused start-up to be acquired, and likely one of only a handful of WiMAX start-ups to ever deliver venture returns to its investors. Congratulations and thanks to the Axis team! 

Thursday, June 3, 2010

Israel Deserves a Real High Tech Policy

A new High-Tech Committee headed by Ministry of Finance Director General, Haim Shani, presented several recommendations yesterday to revive and buttress the local high tech industry. Here they are with my commentary and star rating:

1) Safety Net for Institutional Investors (**) – The idea is to encourage local pension funds to invest in Israeli high tech and Israeli VCs by backstopping their losses through a “Safety Net”. While I agree that the lack of a local financial backbone is a problem for Israeli VCs, and even an anomaly compared with our US and European counterparts, I think this recommendation is flawed. You need a safety net when something is indeed very dangerous or when it is at least perceived to be dangerous. So assuming Israeli VCs are only perceived to have bad performance and are actually quite attractive investment vehicles, then the government doesn’t have much to lose and the industry should gain as a whole with anchor Israeli institutional investors. If, however, Israeli VC performance is not that appealing relative to other asset classes, one must ask what perverse incentive this may create, and what business the government has using tax payers’ money to prop up a failing industry? Such a move may bring needed local LP dollars, but would create a certain moral hazard with investment managers and their LPs using this tax payer stop loss mechanism to invest in overly risky ventures. My recommendation is to leave the risk there, but make the potential reward sweeter by offering tax incentives for gains from investments in local high tech. This creates a natural incentive to invest in venture capital in Israel, without the moral hazard or riskless investing.

2) Encouraging the founders of start-ups not to sell “early” (*) – This popular maxim says that Israel would be creating many more IPO candidates were investors and their founders not so eager to sell at the first opportunity. I have heard this many times, but does this really make any sense or is this just a convenient excuse? Does anyone really think that that founders and their shareholders wouldn’t hold on to their shares two or three more years if they though their share value would easily double or treble? If this is what’s going on, VCs are not doing their job, and founders are surprisingly no longer motivated by money or fame. How could it be that we Israelis are quick to forgo future profits when it’s so obvious to everyone else that we are just hopelessly impatient? I know the names of too many now defunct start-ups who had the gall to reject various offers due to shear hubris. But can anyone point out at least three companies that sold too early and what disaster fell upon it and Israel post acquisition? There is no where near enough liquidity in the local start-up scene so someone in the Ministry is out of touch. If this recommendation goes into effect, it will affect the way investors structure their deals, because it will put founders at odds with both management and shareholders.

3) Prioritization of Chief Scientist Office (CSO) funds (****) – The idea is that the CSO should have some focus with its budget favoring sectors such as biotech, cleantech or semiconductor (my suggestion) which have a greater need for financial support due to capital intensiveness and long gestation periods. Finally someone has woken up to the fact that the CSO is a first come, first serve piggy bank for hungry start-ups. But let me add two other problems. The CSO has neither a mandate nor the ability to assess the viability of a given project, and a lot of the CSO grants are simply wasted on doomed R&D projects or companies. There must be a connection between recent private funding(which presumably is indication of the potential economic gain) and receipt of CSO money to help guide it.

Additionally, stop linking all CSO funds to R&D! How myopic and highbrowed can we be? High tech is not only about engineering and certainly not volumes of patents. Most of the most successful start-ups over the past 5 years have very little to do with engineering or patents (Facebook,, YouTube, Skype, Zappos, would all be ineligible for CSO funds). In fact, I would argue that Israeli companies spend a disproportionately large share of their budgets on R&D compared with their US counterparts. Stop perpetuating this myth that that the success of Israeli high tech is dependent upon more engineering dollars. It’s quite the opposite.

4) Encourage corporate R&D through tax incentives (*****). Wonderful, by all means and have it apply to foreign R&D centers as well.

5) Provide incentives to employers of Arab-Israeli and Ultra-Orthodox engineers(***). This is commendable, and I like it, but believe it won’t solve much. Those minority populations are at a disadvantage in Israel for so many other reasons, such as their ineligibility to serve in the IDF(where critical experience is gained and vital connections are formed), and living too far from the center of high tech activity. The country’s inability to integrate them into the workforce is not unique to high tech, which suggests more is needed to make this truly effective.

I have several of my own recommendations for the High Tech Committee headed by Mr. Shani:

1) Encourage the creation of new micro VCs of no more than $50M along the lines of the original Yozma plan. These VCs would raise capital from private LPs, but would get generous matching dollars from the government. The $50M number ensures a focus on profits from carry (not management fees) and a focus on early stage investing.

2) Encourage angel investing through tax incentives. Angels have become a vital part of the entrepreneurial ecosystem, but much of what they do is ignored by the government. Give them additional incentives to keep investing. It would amount to a subsidy to the wealthy, but their role in germinating start-ups is akin to oxygen for our industry.

3) Create a Marketing & Sales fund to mirror CSO dollars on the R&D side. These dollars would go towards hiring marketing, business development and sales heads in Israel and outside; and include advertising dollars. This may not create as many local jobs, but successful sales and marketing supports our beloved engineers. It’s like teaching a man to fish, rather than just giving him a fish.

4) Invest more in education, English language skills, fundamental scientific research, and don’t cut the CSO budget. Also, bring more foreign companies and skilled foreign workers to Israel.

Thursday, May 27, 2010

Soluto Impresses at TechCrunch Disrupt

Two days after launching the beta version of their first product, Soluto was anointed the winner of the hyper competitive start-up battle at TechCrunch Disrupt yesterday in New York. This is a prestigious accolade and an ideal launch pad especially for a company like Soluto which needs a large user base to perfect its product. To be clear, this was not any start-up competition, or simply the latest crop of Web start-ups, but Web start-ups that have the potential to be disruptive. I know it’s a loaded word that many will contest until they are blue in the face, but simply adding this modifier, made this more interesting and challenging than usual. I applaud TechCrunch for putting on the event, and am thrilled that my own portfolio company would take home the victory cup. So congratulations to Tomer, Ishay, Roee and the rest of the hard working Soluto team!

And for those of you who don’t already know, Soluto is developing anti-frustration software. This download and accompanying service aims to lessen, if not eliminate, the frustration PC users feel when they twiddle their thumbs waiting for their computer to boot, staring at a frozen mouse cursor or rotating hourglass, or screaming in anguish when an application suddenly crashes on them.

I invested in Soluto foremost because of the strong entrepreneurs, who exhibit that rare combination technology depth and aptitude for consumer products. However, beyond the team and market potential, Soluto had a particular resonance with me because of their vision and approach. It fit squarely with my own investment roadmap around companies that leverage technology and their user base to create innovative web-based services for consumers.

My favorite motif within this “technology-enabled, crowd source-enhanced web service” investment roadmap of mine is that of Big Data-based services. Big Data simply refers to incredibly large data sets that are too cumbersome to accumulate let alone work with and make sense of. I am not so much interested in the companies developing infrastructure solutions to manage data, but rather companies that are developing new products services based on their ability to capture big data, synthesize and analyze it, and package it into a simple, yet valuable consumer products and services.

Initially, the appeal lies with the fact that very often the data already exists, but is buried or otherwise inaccessible. Secondly, I am attracted by the idea that the product will strengthen with more use and over time creating a naturally widening lead over any aspiring competition(large or small). I am increasingly of the opinion that to be successful, in particularly out of Israel, web start-ups must either leverage strong technology and/or the power of the crowd to maintain a competitive advantage in the face of so much competition for customers and investment dollars.

All of this is far from trivial, but Soluto aims to do just this. They start with a powerful, yet very intuitive download, which serves a dual purpose of providing a free boot utility to consumers, while capturing important data anonymously, not unlike anti-virus software. This “passive” crowd sourcing is valuable because Soluto has already built the backend of their service which knows how to make sense of the data for the creation of the second order product, which is the anti-frustration service. There is also “active” crowd sourcing through the techie users who can easily contribute their knowledge and solutions to the product.

With a more than a billion PCs in use, most of them frustrated, the business opportunity is enormous. The intense demand explains the relative success of snake oil solutions like registry cleaners or extreme methods like repetitive reimaging. And as anti-virus increasingly becomes a commodity or outright free, anti-frustration software pioneered by Soluto, may be its natural successor.

Even though it is still early days at Soluto, I continue to look for more companies that pursue similar strategies. In fact, I hope to announce my next “technology-enabled, crowd source-enhanced” web service investment soon. In the meantime, download and install Soluto!

Friday, April 16, 2010

The App Developer's Children Have No iPads

Israel is lauded for its impressive high tech achievements, but this is primarily for the development of technology, not its application or deployment. Actually, outside of the defense/security realm, Israel is often a laggard when it comes to the adoption of new technologies(I am excluding the Internet). Instead of the Israeli domestic market serving asa a laboratory for its start-ups and entrepreneurs, it has become a clear hindrance to their success. Nowhere is this situation more poignant than in the telecom and clean tech sectors, where Israeli companies are renowned for their innovation and trailblazing development, but where one must travel thousands of kilometers from Israel to witness their actual application. In fact, I believe there is a widening gap between what pioneering Israeli companies are developing for export today, and the point far in the future when Israel will adopt those home grown technologies.

While it is the role of private corporations and entrepreneurs to adopt and deploy new technologies, I place much of the blame with those government and regulatory bodies tasked with ensuring a competitive and progressive market. It’s not enough to belatedly deregulate and open markets to competition, as Israel has done in telecom. Israel must take the lead and guide its local companies so that they are partners in the development and deployment of technology, and not orphaned to export. This is most critical considering that Israeli technology companies are increasingly competing with companies in Korea, Japan and China, where government support and sponsorship borders on protectionism.

Everyone knows that Orckit sold DSL equipment long before Israeli consumers could enjoy broadband. Or that Israel is the home of the only publicly traded WiMAX company in the world, but has no intention of ever licensing spectrum for WiMAX services. It has been the same situation for Israeli companies pioneering fiber-to-the-home, WiFi, home networking, IPTV, High Definition broadcast(finally!), and mobile TV. And for every successful start-up that overcomes the apathetic or hamstrung local market, there are many more Israeli start-ups that were simply outdone by foreign competitors with inferior products, but who had benefactors in the form of domestic customers. Sweden, Korea, India and China come to mind when I think of countries where domestic start-ups work closely with domestic customers to build the product and start deployment. I am not calling for protectionist policies that favor local companies(although some modest patronage at the early stages wouldn’t hurt), but rather for a local market that can embrace advanced technology early on in tandem with start-ups to ensure that Israel as a country is at the forefront of technology.

I am hopeful that Israel will eventually adopt most of the technology it produces and allow its citizens to enjoys the fruits of its engineering feats, but at the same time I am fearful how foot dragging and bureaucracy can harm our industry. The recent headline about Israeli Ministry of Communications banning iPads is a sign of how myopic and obtuse the government can be. It’s easy to forget that WiFi and Bluetooth were banned outright in Israel until late 2003, despite the fact that Intel Israel was already shipping the Centrino processors or that Israeli start-ups Envara and Butterfly were pioneering these standards three years prior to their legalization.

Clean tech is actually a lot worse, for reasons that have no logical explanation. The country is still wholly dependent upon polluting fossil fuels, all of which are imported. Israel sells solar panel products, and now even solar panel companies, but cannot manage to get around to actually using the technology on a massive scale despite the abundance of sunlight. Despite claims to the contrary, Israel will never be a true clean tech power if it cannot rely on its domestic market for trials and deployment. Better Place may prove the exception, but if they succeed in Israel it will not be solely because of its unique approach or technology, but also because of its political and economic clout.

We often take the strong Israeli high tech sector for granted, but it does not excel in a vacuum. Just like we need a strong education system to produce the next generation of entrepreneurs, we need more competition and more government leadership to make Israel a true laboratory for innovation. In short, I want an Israeli government that is as visionary and ambitious in the usage of technology as the Israeli entrepreneurs that develop it.

Sunday, January 31, 2010

Deserving of a Response

Along with a bunch of my fellow Israeli VCs, I was an unknowing subject in an experiment conducted by TheMarker(in Hebrew) over the past week. The idea was to send cold emails to 62 active Israeli venture capitalists and to test their “response times.” They created a fictitious cloud infrastructure start-up called Shadowscale, complete with an Israeli founding team from Checkpoint. The email was made to appeare genuine, and was designed to avoid the typical pitfalls most pitches trip on, such as being too early stage, not having an impressive team, or lacking any customer engagement. In fact, the name of the founder, Yinon Tzuk, seems to have been specially concocted to confuse us with Nir Zuk, an early Checkpoint employee, and now prominent entrepreneur. It was well done, but I would have encouraged TheMarker have created a true web presence including a website on Wix and a LinkedIn profile, which is fairly rudimentary for entrepreneurs.

I am at once both proud and embarrassed to be one of a handful of people who responded within the same day to set up a meeting as a next step. Actually, I happened to have responded within 8 minutes of receiving the email, but they didn’t measure that level of granularity. Although, I wouldn’t be proud of it even if they did, because no professional investor, could be expected to get back to every email within the same day unless an automated email response would be sufficient. I happened to be online at the time, listening in on video conference, so a rapid response was almost a reflex. But I also found it odd that an infrastructure start-up would emerge from stealth to approach VCs for the first time two years after founding. In fact, it was downright extraordinary, and I was convinced I must have been hiding in a cave to have missed a venture in my area of interest created more than 2 years ago.

As clever as it was, TheMarker’s experiment is misleading for entrepreneurs. It creates the wrong expectations for entrepreneurs and sets the wrong bar for measuring a VC’s professionalism. I am not aware of any venture capitalist that would dare promise a same-day response, like Amazon offers next day shipping. In the rare situation, one receives a same day or next day response, one can consider himself lucky(well timed) or at least special(something jumped out). Venture capitalists may pride themselves on being able to listen and provide feedback, but even then, no single VC could ever possibly give attention to every entrepreneur who sends an email out of the blue, let alone on the same day. Most venture capitalists I know travel almost a week a month, have specific areas of interest and are inundated daily with emails from prospective, companies, partners, candidates and service providers. This all might sound shocking to some, but new ventures are not new clients looking to spend their money on our services, quite the contrary! Perhaps if this were the case, we could be tested on our response times, but then again TheMarker didn’t conduct a similar experiment on local accountants or lawyers.

I am not sure who created the impression in the Israeli high tech market that venture capitalists should respond to cold emails, but the TheMarker test now perpetuates this expectation. Everyone knows that the easiest way to get a VC’s attention is to get referred by a mutual acquaintance, be it a fellow entrepreneur or executive, advisor, lawyer, accountant, etc. I am not saying anything new here, and the reasoning is simple. Foremost, it’s a automatic filtering method based on the source and strength of the recommendation. Secondly, if an entrepreneur is to be successful in his venture, he must be extremely resourceful and innovative, and this is the same way he will eventually reach customers, partners and employees (i.e. hopefully not with cold emails). With the large networks each of us has in Israel, the inability for an entrepreneur to find someone in his extended network who has some prior relationship with us is telling. Incidentally, when someone does approach me with an interesting project, but without a third party intro, I generally look them up on LinkedIn to get my bearings and triangulate.

There is however, a more realistic and acceptable expectation which entrepreneurs should have of their venture capitalist, but this is far more difficult to measure with an email ruse. This is the expectation that venture capitalists respond quickly to their own portfolio companies’ requests and needs. In my play book, portfolio always takes precedence over new deals, and this should be reassuring to entrepreneurs considering taking VC money. However, if we are expected to be responsive to our portfolio companies, this will invariably come at the expense of new deals, especially those arriving in the form of a cold email with neither an executive summary nor an email signature with contact details.

We do our job best when we are able to filter quickly and assign a priority to everything, even if it means missing great opportunities (although this is seldom the case with cold emails). I prefer to be judged by those deals I have invested in, and how responsive I am to those entrepreneurs I have truly made a commitment to.