BloGiza

A few harsh words about the local Internet

Let’s talk about our local, homegrown Internet scene.

For those of you who might not know, Israel has over the last decade and a half developed its own Hebrew-speaking Internet industry complete with Hebrew-language portals, news sites, social networks, blogs, e-commerce, and marketplaces.

By and large, everyone in Israeli high tech (the main, overseas-facing high tech industry anyway) ignores the local Israeli Internet. The world of .il seems uninteresting and irrelevant. I have often attempted to buck the trend and gone off spelunking into the Hebrew Internet looking for undiscovered gems. Just as often, I have come back disappointed and I think I am now about to give up altogether.

The latest impetus came a few weeks ago at the Comvention. As with every year, it was a two-day event. The first day featured talks held in English with numerous guests from overseas. The second was conducted in Hebrew and focused on the local Israel-centered industry.

Very few of my colleagues showed up on the second day. In fact, very few people I knew showed up on the second day, even though the convention center was packed. I would estimate that the overlap in the crows between the two days was less than 10 percent. And this is but one indication of the problem at hand. Simply put, the local Israel-facing Internet is small, provincial, disconnected from the outside world, and two or three years behind everybody else.

One of the panels on the second day of the Comvention was entitled “The Israeli Internet – Sleeping Beauty?” To which Gadi Shimshon, a prominent local Internet pioneer, snorted, “Sleeping Beauty? More like a fuggo in a coma.”

He’s right I think. There are a number of dispiriting issues at play in .il:

• Attack of the Blinky Ads –The average American web site has 14 ads on it. In Israel, the average is closer to 100 (I’m not making this up). Click on any major Israeli Internet site. Now shield your eyes. You are immediately assailed by a wide variety of intrusive Flash ads, popups, video clips that start playing automatically, and every other manner of annoyance you can imagine.
  
  While annoying in and of themselves, blinky ads represent a deeper problem: the immaturity of online advertising in Israel. At the Comvention, Kfir Pravda gave an interesting talk about new trends in online video monetization. He talked about viral campaigns and interesting product placement technologies, among other things.
  
  The crowd – which was comprised mainly of ad agency employees – lapped it up. At the end of the presentation, however, a number of people stood up and said that while they would love to introduce more clever and effective advertising online, their clients the advertisers won’t hear of it. Local advertisers don’t want something new and subtle. They want the same old annoying hard-sell with the same old easily measured parameters.

• Firefox? Not here – I challenge my readers to come up with one major Hebrew-language website that renders properly in Firefox. YNet is about the only one that comes close and even then gets tripped up with embedded video. Hebrew sites don’t do Firefox. And I won’t even mention Safari or Opera, heaven forbid.
  
  To some degree, this represents very successful missionary work on the part of Microsoft which for years has actively nurtured generations of local .Net programmers. But it also indicates a real disconnect with the outside world. The main non-IE browsers now account for nearly 25% market share. But you’d never know that here. Local developers ignore alternative browsers because they never encounter anyone who uses them. It’s a closed loop.
  
  The same goes for all them fancy new Web 2.0 services such as Twitter or Digg or De.licio.us. If there isn’t a homegrown version, then nobody knows what you’re talking about nor sees the need.
• Lack of Internet culture - In general, Israel does not have a civilized Internet culture. On the one hand you have the often-hateful “talkback” environment wherein portals and content sites are shot through with ugly user-generated slander. On the other hand, you have Knesset members constantly coming up with new laws whose main purpose is to censor the Internet. Either that or demonstrate that the people in charge of the Internet in this country don’t understand how it actually works.

In short, situation not so good. Somehow, the same country that can produce Internet successes like Yedda and FoxyTunes craps out when it comes to producing homegrown fare.

So, why do I care? I focus on companies which are by definition outward-facing. So, why waste 1000 words on the irrelevancy of the local scene? Because as long as Israel cannot produce local Internet sites that are connected to the world at large, we limit the pool of talented local developers and entrepreneurs who could build the next great outward-facing Internet property.

Does anyone have any ideas what can be done?

Duck and Cover

The other day, I was talking to a friend of mine in New York who works in the financial services industry. I asked him how things were going there. His (sarcastic) answer, “Everything’s great! The dollar is strong, oil is cheap, Wall Street is looking sound, we’ve got a morally upstanding governor, and I just bought a large position in Bear Stearns. What could be better?”

Indeed, these are scary-type times for those of us in the finance world. This last month has been turbulent. The US economy is teetering at the moment, as the subprime mess starts seeping into many areas of the financial world not directly related to mortgages. At the same time, the dollar is weaker than it has been since the mid-$80s.

This last fact is especially striking when you compare the dollar to the state of the shekel. Sometime over the last couple of years, the humble shekel has transformed itself into an international monetary powerhouse. Since the beginning of the year, the dollar has lost more than 10% of its value relative to the shekel.

So, what does this mean for those of us who ply our wares in the local venture capital trade? Mostly bad news, but there may be a thin silver lining hiding in there somewhere.

The bad stuff: With the financial markets currently in a state of chaos and the US economy slipping (if not already slipped) into a recession. From our perspective, this has three main ramifications:

1. It will be very hard to exit portfolio companies in the States this year. A lot of big players will likely hold off on M&A activity while everything settles. At the same time Wall Street will also take a while to get over its jitters, meaning a rougher environment for IPOs.
   
2. Portfolio companies, especially those in the IT/Software space who sell to financial institutions are liable to miss their revenue forecasts as these institutions implement cost-cutting measures.
   Funds who have recently started fundraising may encounter problems with LPs getting cold feet.
   
3. The dollar-shekel situation presents a host of different problems for portfolio companies in Israel. This from the simple fact that they raise money in dollars but a lot of their expenses are in shekels. Which makes these currency fluctuations a big deal. Just to give an example, one of the portfolio companies I am involved with “lost” nearly NIS 750,000 shekels from the time the investment process started based on the amount they raised and the difference in the exchange rates over the last few months.

All this means that we need to help portfolio companies operate as lean as possible for the foreseeable future.

So, is there a ray of hope anywhere in here? Presumably, the new situation presents an opportunity for companies who can provide real cost savings to customers and present a compelling ROI in a relatively short time frame. As in all times of crisis, these companies can prosper.

From the VC front, all we can do is content ourselves with a bit of schadenfreude. For the past few years, as the markets soared, we VC types watched in envy as private equity and buyout funds posted huge returns. Now, as things swing the other way, we can smile to ourselves.

Explaining VC Part 5 – A few Final Thoughts

Explaining VC part 5 – Closing words

After a longer break than I expected, we come to the end of our series. We have looked at how the VC process works and I have tried to give some idea of what goes through the heads of those guys sitting across the conference table from you when you make your pitch. I’d like to close with a couple of tips and comments:

• Patience please - One of the biggest complaints we VC types hear from entrepreneurs concerns the pace at which things move in our world, especially compared to processes with angels. Yes, it does sometimes seem that we lumber along at the pace of asthmatic dinosaurs. But as I’ve attempted to show, the pace is often dictated by the process and the need to assure our investors that we’re not just plunking down their money at the racetrack. You have our apologies for this, but we do ask for a little patience.
  
• Perseverance – A well known joke says that the hardest answer to get from a VC is “yes”; the second hardest answer is “no”. Oh, how we are infamous for never giving straight-up “no”s. Instead, it’s usually a “not now”. Not now because we don’t think the concept is fully enough developed, or we want to see what kind of uptake it will have, or because the team doesn’t seem strong enough.
  
  While this is understandably frustrating to entrepreneurs, you should also look at the other side of the equation: We understand that things change very quickly in this business. Subsequently, we try to maintain ongoing contact with companies that we have passed on in the past as their situation changes.
  
  Just to give one example, we had a company come in early last year with a concept for an internet site. The idea didn’t seem fully baked, so we gave them a bit of constructive criticism and parted ways. Two months later they contacted us again. They had changed their model and suddenly they seemed a lot more interesting. We ended up giving them a seed investment.
  
  Moral of the story: even if we tell you “no”, don’t walk away mad. Update us when you have significant developments – you launch your product, you start getting users, you add people to your team. You’d be surprised how often that makes the difference.
  
• The ideal entrepreneur – Lots of startup-ists wonder what we look for in an entrepreneur. Personally, I am most impressed by people who know their stuff: they have a strong handle on the technology and the market, and can stand up to a barrage of difficult questions while maintaining a cool head. That plus real passion and devotion to the idea is the mark of a winner, IMHO.
  
• Help keep us honest – As I’ve mentioned more than once in this series, entrepreneurs have a lot of complaints regarding us money types. Some of these complaints are justified, others less so. You can find numerous forums and sites on the Web to compare notes on VCs. The most prominent (and infamous) of these is probably The Funded, where entrepreneurs gather to bitch about VCs and VCs gather to wring their hands about their image.
  
  I invite everyone to visit the site and contribute, as it helps keep us honest and improve our service. I do have one request: be fair. The fact that we didn’t get back to you with an answer (a really bad and common VC trait) is legitimate cause for complaining. The fact that we didn’t like your idea, however, doesn’t necessarily mean that we’re idiots.
  
• So, why VC? – At the end of the day, a lot of entrepreneurs will be tempted to ask, “Why should we bother with you guys?” In other words, why put themselves through a long and unpleasant investment process with a VC fund instead of just going to angels. If you are a software or semiconductor company, the answer is obvious: we’ve got deeper pockets than most angels.
  
  But I’ll put the banal answer aside for a second in order to make this point: In many cases, we are learning how to act like angels. Giza’s seed-stage “Ofek” program is a good case in point. We have learned how to make relatively small, initial investments, and to do so relatively quickly. Often we invest with groups of angels.
  
  This kind of model can be found in almost all the funds here and is often used for companies in the Internet space. For the entrepreneur it gives the best of both worlds.

And so it goes. I hope this series has helped open up a bit of dialog with entrepreneurs and I encourage everyone to contact me with their ideas and complaints.

Explaining VC Part 4 – So, what are we looking for?

Thus far, we’ve looked at how the VC model works and what the investment process is. Now, we have to tackle the question that most entrepreneurs have of us, namely, “Just what is it you people are actually looking for?”

Unfortunately, I have no simple answer to this question. There are so many different factors that come into play when deciding to make a VC investment that it is impossible to generalize a rule. However, I can offer up a well-known framework for thinking: the combination of technology, market, and team.

As investors who look to put money into high-tech money with a time horizon of 5-7 years, our ideal company would have the following combination of traits:

• Technology /product– Obviously innovative, something that can lead the next generation, technology that has significant advantages over the competition, has the potential to be disruptive, and has strong IP protection.
• Market – I’ve mentioned this before, but we are looking for a product with significant market potential (theoretically in the billions), in a growing market, with proven success stories and exits.
• Team – A dedicated group of founders with passion, drive, and vision; people who have a deep understanding of the market they are operating in and have experience in similar ventures; a group of individuals who balance and complement each other.

In the real world, of course, you will find very few companies that fit the description above 100%. So, Generally speaking, you start looking for combinations. As a general rule of thumb it’s enough that a company has two out of the three components (technology, market, team) for it to start looking interesting.

Which two components are the most significant often depends on the fund you are talking to, and quite often the specific investment professional looking at your company.

As a general rule, Israeli VCs tend to emphasize team and technology. This comes as a result of Israel’s position in the world. As a small country with few national resources and a tiny local market, Israel’s biggest asset is its people and especially the Israeli talent for finding clever technical solutions to tough problems.

The fact that Israeli companies have traditionally excelled technologically more than anything else leads to a certain bias in that direction. However, over the last year I have seen more willingness by local VCs to fund companies whose strengths are less technological and more in their innovative business model and/or their target market. Giza’s investment in Koolanoo Group, which develops a Chinese social network, is one example but there have been numerous others. Internet companies have a tendency to fall into this category.

I said before that what counts is a combination of three factors. In reality, the team counts for more than the other two combined. A great team is always critical no matter if you are a technology or market play.

A great team, the thinking goes, will be able to adapt its technology or business model as market conditions change, so it doesn’t actually matter what the initial product is. And if the entrepreneur is good enough, a lot of funds have Entrepreneur-in-Residence (EIR) programs where they work together with the entrepreneur to build a company from scratch.

What makes a great team? Another difficult question. Ideally you should have one person who is very strong technologically, another who is strong on the business side and one person who can manage the operation. The team should also be able to work well together, both during the good times as well as the crisis points.

Next time: Tips for dealing with VCs

We're in The Marker

The Marker approached me a little while back and asked to republish the series on Explaining VCs for The Marker online in Hebrew.

The first installment is up and can be found here:

http://hitech.themarker.com/tmc/article.jhtml?ElementId=skita20080901_51984

The others will follow soon, as will the next installment of the series here.

The online year that was

As today is the last day of 2007, it’s a little hard to resist looking back at the past year and trying to sum it up. So, I won’t resist. Unlike last year, 2007 is hard to summarize with one handy tag such as “the year of online video” or “the year of social networks”. There was a lot of activity in a number of different areas, the rise of a major player in the social networking space, and the rise of a new form of communication.

So, herewith a few highlights IMHO of the online industry in 2007

Story of the year: The consolidation of the advertising industry
Y’all thought I was going to say Facebook, right? Now, while the rise of Facebook is certainly the most hyped story of the year, my vote for the most significant development  (not to mention the biggest source of M&A activity) is the rapid consolidation of the online advertising space.

During the last 12 months, Google bought out Doubleclick for $3B. Shortly thereafter, Microsoft acquired aQuantive for a staggering $6B. AOL bought out targeted ad firm Tacoda, as well as Quigo which. Yahoo acquired Blue Lithium, as well as a majority stake in Right Media. WPP bought 24/7 Real Media. And the list actually goes on.

The M&A hyperactivity in this sector is an indication of the fact that online advertising has reached a certain stage of maturity. Beyond that, the consolidation is likely to have long-term ramifications, especially in regards to the rise of Google as the behemoth of the information age as well as the development of new business models online. And that’s what makes this, at least for me, the biggest development of the year.

Phenomenon of the year: Facebook
Obviously, I couldn’t not mention Facebook which gained momentum extremely rapidly this year and became the go-to social network for those of us who aren’t musicians, 14-year-olds, or skeevy perverts. Facebook only opened itself up to the world outside the university sphere towards the end of 2006. I joined up early this year. Before long, almost every high tech-ist I knew (and many I didn’t) was on it. Lately, the sphere has expanded further and everyone, their parents, and their parents’ friends are connected. Clearly we’re on to something.

Of course, it will be interesting to see whether Facebook will be an ongoing concern for most people or just a passing fad. I like it for business purposes, as a tool for microblogging, and as the communications platform of choice for a number of my friends. On the other hand, I have a hard time answering those who complain that there’s nothing to do there. We shall see.

New technology: Microblogging
The rise of Twitter and its clones provided us with probably the only real new media form we’ve had in a few years, viz. microblogging. At first, the concept seemed a bit stupid. After all, why would I want to blog in tiny, one- or two-sentence bursts? But then you start getting into it and discover that Twittering (or updating your Facebook status, which I tend to do more) is a nice complement to blogging for those times when you have something small and/or clever to say but which doesn’t warrant an entire post. Plus, it’s the first Internet app that makes perfect sense for the mobile. It’ll be interesting to see who snaps up Twitter and for how much.

Interesting development in local tech: The renaissance of the Israeli internet scene
Three or four years ago, it seemed that the Internet industry in Israel was close to dead. During the days of the ’99-’00 bubble, the high tech scene was awash in Internet startups looking to be the next ICQ. Then the bubble burst and most of the companies went under. Worse, the VC industry was burned on the subject and it subsequently became almost impossible to get a new Internet startup funded.

As recently as two years ago I regularly had colleagues in the VC world lecturing me that Israel was incapable of producing Internet companies and, besides, these types of investments weren’t suited for VC anyway. What a difference a few years and a YouTube (and a Facebook) later make.

Once again, we are seeing dozens of new Internet companies each month. What’s more, there is a real feeling of an Internet scene here, helped along in no small part by Facebook, the work of groups like the Co.ils and the Geek Garage, and of course Jeff Pulver’s social activities. Let’s hope this continues to develop and mature.

Case of possible overhype: Online video
I’ll catch some crap from friends about this, but the online video space has become somewhat overhyped in the last year. Actually, that’s kind of unfair. What has happened is that in the post-YouTube age, online video has become ubiquitous. This has led to a lot of noise and a sense of, “Ok, what do we do now?”

Towards the end of last year, it looked like the field of mid-tail, independently produced video content (e.g. Ask a Ninja, Rocketboom, Ze Frank) would be the next big thing. As of now, that has failed to happen. There haven’t been any real breakthroughs this year. Even projects as big and as hyped as Joost have yet to take off as a mass-market application.

I still have big hopes for this sector, but it may have to wait until sometime in mid-2008.

Predictions for 2008
You’ve got to be kidding me. Only fools make predictions in this online age where what you write will forever haunt you. Still, I’ll make some safe and predictable ones for the upcoming 12 months:

• There will be a number of huge-size Internet exits that will have people scratching their heads
• The whole notion of privacy will continue to erode as Google finds out more and more about you
• Mobile internet will remain where it has for the last three or four years, i.e. tantalizingly around the corner as the Next Big Thing
• Some technology or company that you’re not thinking about will be the big story of 2008

So, for all my celebrating friends and colleagues out there, I want to extend best wishes for the new year and hope that 2008 brings health, happiness and success to us all.

The return of Gary Snoman

He's baaaaack!!!

As they've been doing the last couple of years, the guys at Blueprint Ventures have sent out an animated clip for the holiday season featuring Gary Snoman, everybody's favorite ice-based VC. This year, Gary takes a trip to all the major international high-tech hot spots, including... Israel!

"Forget Silicon Valley, this is Technion search technology. You guys can't compete, I mean, you don't even have compulsory military service." Hee.

Explaining VCs part 3 - The Investment Process

Last time we looked at the investment parameters that VCs look at in general. Now let’s look at the actual process of how an investment gets made.

You can envision the VC investment process as multi-leveled pyramid. At the bottom of the pyramid are all the companies which pass through the fund each year, be it at the level of sending a business plan, pitching to a VC at a conference, or being contacted by us. At the top of the pyramid are the small handful of companies that receive investment in any given year. At every one of the levels in between, the fund will decide to pass on the majority of the companies coming in.

The numbers can be pretty daunting. To give you a rough idea, in any given year, something like 1,200-1,500 companies enter the process with a fund like Giza. We will actually meet with maybe half these companies. And the number of new investments that the fund will actually make is something like 6.

Roughly speaking, the process can be broken down into the following stages:

1. Locating potential investments – it all begins with what we call deal flow: finding the companies that are looking for funding. This comes from a wide variety of sources.

   Giza has a full-time investment manager (Aaron Rothenberg, who many of you already know) whose job it is to find companies and contact them. Other new companies come in via our personal networks. Still others contact us, occasionally submitting their business plans to the Giza website.
   
   In addition to identifying new companies, we also spend a lot of time re-evaluating companies that we have seen in the past and who have made progress with their technology and/or their business development.
   
   We drop a certain percentage of companies at this stage which are clearly not suitable for us (sectors that we don’t invest in, not high-tech, etc). Those that pass go to the next level.

2. Screening and reevaluation – Each week, the fund holds a screening meeting where the investment professionals discuss new opportunities. We look at 20-30 companies, discussing the main points of their business plan or presentation. At this meeting, team members request to meet with those companies that seem interesting.
   
   About a third of the companies make it through the screening committee and actually meet with the investment team.
3. Initial meetings – Following screening, Giza team members (often in teams of two or three) will hold an initial meeting with the company. This is usually a 90-minute meeting where the entrepreneurs present themselves, their idea, and their vision. At the end of the meeting, the VC team will discuss whether the company is worth moving forward with.
   
   About a quarter of the companies that make it to initial meetings willpass this stage.
   
   
4. Due diligence - This is the longest and most involved part of the investment process. Depending on the type of company and the complexity of its   technology, the due diligence process can take anywhere between a month   (in the case of companies going through Giza’s fast-track “Ofek” program)   to four or five in the case of companies with more involved technology.
    
     During this stage the company will be called in for more meetings at the   fund to delve further into its technology and market. Often, the VC will   call in outside experts to help the fund evaluate a company’s technology.   The company will also make a presentation to all the investment   professionals in the fund to allow them to decide whether or not to   invest. At the end of this stage, if the investment still looks good, the   VC issues a term sheet.
    
     About 5 percent of the companies which enter the due diligence process   emerge with a term sheet in hand.
    
    
5. Closing   process and investment – The final stage of the investment process   involves negotiations about the terms of the investment. The VC will   perform additional legal and financial due diligence on the company. Some companies will still drop out of the process (usually due to the company   deciding to reject the term sheet) but the rest emerge as the winners of   the VC sweepstakes.

It’s a long process, and it can be an arduous one. As one startup-ist once said, the odds of becoming a pilot for the Israeli Air Force are better than these. However, we would like to think that the results are worthwhile.

Explaining VCs part 2 - The VC Model

Last time around I gave a general introduction to what venture capital is. This let’s look at how VCs make money, which in turn influences which companies we choose to invest in.

I’m talking about the infamous “VC Model” which (if you’ve been reading the blogosphere in recent months) a lot of people claim is broken.

Marc Andreessen explains the model very succinctly:

The whole structure of how the technology industry gets funded -- by venture capitalists, angel investors, and Wall Street -- is predicated on the baseball model.
Out of ten swings at the bat, you get maybe seven strikeouts, two base hits, and if you are lucky, one home run.
The base hits and the home runs pay for all the strikeouts.

Say we raise a fund of $150-200M from our investors. With that money we will make, something like 20 investments averaging $8-10M over the lifetime of the company. In order to make the returns that our investors expect we assume that of the 20 investments:

•    Two will be huge successes and return 10X on the money
•    4-5 will return 2-3X their investment
•    The rest will either just return their investment or else get written off entirely

The successes, as mentioned above, need to be big enough to cover the inevitable losses from those companies that fail.

So how does this influence our investment decisions? For one thing it means that we need to focus on those companies which we believe at least have the potential to be home runs and return 10 times their investment.

One of the most common reasons we have for passing on companies – including a lot of companies where we think the team is great and the idea is solid – is that we feel that the opportunity is too small.

(How small is too small, you may ask. We don’t have any fixed rules, but if your total addressable market – in other words the total revenues that you could theoretically get if you cornered your target market – is less than at least half a billion dollars if not a billion, it’s probably too small for VC).

While the investment multiple is important, it’s not the only consideration. The actual amount of money which is returned is important as well. Small exits (let’s say under $40M) can be very good for a company’s founders but not so great for the VCs who invested in them. In other words, if a VC makes a seed investment of $2M and the company exits for $20M, this is not considered a big success even though it had a multiple of 10.

Why is this? Even if the VC held 30% of the company at exit (which is on the large side) it only got back $6M. In order for a $150M fund to make the returns is investors expect, it would have to have 30 or 40 exits like this, which is unrealistic. So, again, we look for exits we believe will be have the potential to be in the $100M range or greater.

Obviously we know that most companies will not have $100M+ exits. But since 7 out of 10 companies that we invest in are likely not to succeed as hoped, we need to know that the three who do at least have the potential to succeed big time.

So, why are we hearing that the model is broken?

There is a feeling that the size of exits has shrunk over the course of this decade. Fewer companies are going public, and the ones who do are doing so at a much late stage after much more money has been invested in them. With fewer IPOs, more companies exit by being acquired, which often means smaller exits.

It’s unclear to what extent these assumptions are true, but if they are then the number of exits that return a 10X multiple shrinks, which affects the model greatly. On the other hand, the costs of starting up a company, especially in the Internet world, are a lot smaller. Perhaps a larger number of companies will produce moderate exits, which will cover the ones that don’t.

So we may find that the VC model will have to be adapted. If it’s not broken, it may yet have to bend.

Explaining VCs - Part I

In the world of high-tech in general, and Israeli high tech particularly, venture capital is the main avenue for funding new technology companies. This remains a fact even today when startup costs are lower than they’ve ever been and where angel investors can provide alternatives to a lot of deals. However, despite the prevalence of VCs in the startup world, I find that there are a lot of misconceptions about the field. A lot of entrepreneurs don’t quite understand who the VCs are and how we operate.

Although the subject has been covered before in many places, I think it’s worth reiterating with a multi-entry series about how VC works.

Let’s start with what VCs are and what we aren’t.

Quite often, I hear complaints along the lines of, “You VCs say you like risk, but you’re really only looking for the next Google and other sure things.”

Contrary to popular opinion, we are not wild-eyed gamblers nor do we particularly “like” risk. I think part of the confusion here is local and comes from poor translation. In Hebrew, the term “venture capital” is hon sikun, which literally means “risk capital”. (A more accurate translation into Hebrew would be something like hon yozma.) In other words, we are in it for the venture, not the risk.

Venture capitalists are first and foremost financial investors who specialize in investing in technology companies. All startups carry some degree or another of risk. The earlier you invest in a company, the greater the risk. The risk is just part of the business.

It’s also inaccurate to say that we are looking for “sure bets”. While it would be terribly nice to invest in the next Google, who can tell what the next Google is. (As the old cliché goes, back in 1997 who would have thought that the world needed another search engine?)

Another big misconception: although we are seen as haughty, we are not the masters of our own destinies. To paraphrase an old Bob Dylan song, we have to serve somebody. And that somebody is our investors. The majority of money in VC funds comes from large institutional investors such as pension funds which manage tens and sometimes hundreds of billions of dollars. These investors earmark a certain part of the money to high risk/reward vehicles like venture capital. In return we try to provide a high rate of return.

What does this all mean?

First, this setup dictates our business model and what types of opportunities we tend to invest in. More about this in the next part of this series.

Secondly, it means that every few years VCs have to go hat in hand to our investors and try to raise a new fund. Yes, we do know what it feels like to be the ones asking for money. We also have to sit through endless series of meetings, go through a rigorous due diligence process, and then wait around impatiently for an answer. This probably won’t win us any sympathy points with the entrepreneur community, but it’s worth mentioning anyway.

So, that’s us. Next time: the VC model and how it affects our decision-making.