BloGiza

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.

Congratulations to Yedda

A little bit late, I tip my hat to the good guys over at Yedda who recently sold the company to AOL for an undisclosed sum.

The Yedda exit is another indication that Israel's Internet scene is developing nicely, and begins to answer those who contend that Israelis are incapable of creating consumer-facing applications that appeal to an English-speaking audience.

In Yedda's case, founders Avichay Nissenbaum and Yaniv Golan and their team did an excellent job both with the UI of the site as well as with the clever and far-ranging business development. They leveraged the use of widgets and embeds to get Yedda out on as many sites as possible.

So, congratulations Avichay and Yaniv on a job well done.

The art of picking winners

Guy Grimland wrote a piece (Hebrew link) in The Marker the other day about highly promising Israeli startups not backed by Israeli VCs. The piece came after reports that targeted ad serving company Quigo has been bought by AOL for around $300M. (Quigo founder Yaron Galai, it should be mentioned, strongly emphasizes that this is still a rumor).

Alongside Quigo, the piece looks at a couple of other high-flying Israeli startups like Oberon Media, Mobileye Vision Technologies, and SuperDerivatives. These have variously raised extremely large financing rounds and/or have significant revenues. And, like Quigo, each managed to make something of itself initially without VC financing.

The question is whether there we can learn a lesson about the structure of the Israeli high-tech market -- and specifically about the way VCs work within this market -- from the success of these companies. I'm not entirely sure.

First off, I think Ori Kirshner (my boss) gave the best answer in the article by pointing out that while Israeli VCs did miss the ball on Quigo,  there have been quite a few other success stories recently that were VC backed.

Beyond that, to say that VCs dropped the ball on Quigo, Oberon, et al. is oversimplifying the case. VCs look at many hundreds of companies a year. Each rejection is its own story. Sometimes, the companies themselves reject VCs, because they find they get what they need from angels or they have chosen to bootstrap it.

If there is a lesson to be learned here it might be one of broadening our horizons. Each of the companies mentioned above operates outside the "traditional" realms like communications technology or enterprise software that Israeli VCs historically invested in. Quigo and Oberon are Internet/gaming plays; Mobileye does technology for the auto industry; and SuperDerivatives provides a software solution for the financial world. The fact that most of them were set up in the post-bubble period (during which a lot of VCs became more conservative in their decision-making process, especially with regards to Internet companies) probably contributed as well.

At any rate, I hope the rumors surrounding Quigo are true. Not only because I wish the founders well (which I do), but also because it will help further establish new sectors in Israeli high tech as "interesting" from the financial perspective.

Early exits

A little while back, Aner Ravon wrote a heartfelt post about the state of Israeli high tech, specifically the fact that Israeli startups tend to exit too early (generally via acquisition) instead of developing into large, mature companies.

The Israeli high tech scene fails to produce sustainable, ongoingly growing, companies. The problem is not the Israeli landscape, the problem is probably with having a wrong dream.

When it’s all about the Exit, focus shifts from succeeding as a company to succeeding as investors, speculators. From creating to trading. Operational record is overlooked for dream weaving. This is why Boaz Eitan walks out with $100M for having successfully sold a multi billion dollar balloon to investors despite having no operational evidence at any point.

The question why this is so often comes up for discussion by people inside the country’s high-tech industry. (Daniel Cohen addressed it in a piece about “The Quest to Create an Israeli Nokia”). While Israel has shown itself capable of creating international category leaders – Teva, Check Point, and Amdocs spring to mind – the actual number of these is small, and none have really sprung up for nearly 15 years.

Aner lays most of the blame with the money guys:

Most Israeli startups are funded by VCs, Israeli and American, who in turn get most of their funding from out of Israel investors. This is good and bad. The VC model is based on selling their share for the highest amount in the shortest time. The fundamental focus of a “business” is to create a profit. Unfortunately, these two foci’s correlate less often then they do. An IPO may mean such correlation, as the VC can sell it’s share and the company can grow. However, very few companies fit the IPO model, and most companies are forced to think about their “business” in different terms. Terms such as “comparables”, “size of the (exit) opportunity”, “exit strategy” and “fitting the investment portfolio” take precedence and management attention away from real business decisions. Innovation becomes more important than operations because ideas can be sold earlier in the lifecycle. This means the company must be sold to a company who believes it can turn innovation to operations. Sold to, not become one.

I don’t want to argue that he is wrong, because a lot of these points have merit. The venture capital model does present certain problems (mainly the time horizon) when it comes to growing a big company. There have certainly been cases where investors have pressured companies to exit when they had the potential to become much larger. And yet, at the risk of being an apologist for the VC industry, the situation is a lot more complicated.

Other factors contributing to the relative paucity in the development of large-scale tech companies in Israel include:

• The entrepreneurs themselves – In some cases, as mentioned, investors will push entrepreneurs into exiting too early. But in many other cases it can be argued that VCs try to keep entrepreneurs from going for exits in the mid- ten million range that might be good for the entrepreneurs but lousy for the investors.
  
  To put another way, it is the rare entrepreneur (especially in Israel) who won’t give in to the temptations of a $200M exit. Very, very few people have the cojones of a Mark Zuckerberg.

• The lack of a local market – The fact that Israel has managed to grow a tech industry at all is impressive given its basic situation. We are a tiny little country, whose inhabitants speak a native tongue that nobody else does, cut off geographically from all of its potential markets. All this means that Israeli companies need by definition to be oriented towards overseas markets. As a result, a lot of non-technological functions end up being shipped off overseas instead of staying in Israel. This leads to…

• Management issues – Israel has traditionally had problems growing management capable of making the jump from a $100 million-level company to a $1 billion level company. The situation has improved in recent years, ironically as more Israeli executives have served time in international companies. But there are still way too few international-grade managers to go around.

• The financial environment – You should also remember not to discount the general financial environment. The wild IPO environment in the late ‘90s and beginning of this decade has been dampened for years. And while the TASE is growing continuously, it is still considered a backwater financial market. Meanwhile, investment banking and other financial services are still relatively primitive. All this has led to greater M&A (well, A) activity rather than IPOs.

It should also be pointed out that Israel doesn’t necessarily want a Nokia, in the sense that Nokia completely dominates Finland’s technology industry.

The question is whether this is all leading in one direction – as Aner suggests – that direction being downwards. But that is a question for another day.

Google Eats Feedburner

It's funny to think now, but just a few short months ago we labored under the conventional wisdom that "Google doesn't do major purchases." Which was correct up to a point. If you look at Goob's M&A activity over the last five years you see a string of (by VC standards) nickel and dime acquisitions: lots of startups doing nice features (maps, spreadsheets, etc) plus a few deals where Google wanted to buy a company for the R&D team.

In fact, even the YouTube deal seemed like an outlier. But no more.

Google just announced that it was buying Feedburner for about $100M. This of course comes on the heels of the Doubleclick acquisition that was announced last month. So now Google's acquisition activity is becoming a bit clearer.

What seems obvious is that Goobe has gone from making small tactical purchases (in order to boost products that it wanted to develop) to making much larger strategic purchases in its drive to become the undisputed Master of Your Online Life. The Feedburner acquisition means that Google will now have access to millions of RSS feeds, the new life blood of the Web. It's all in service of finding out more about you the user and serving up better and more targeted advertising.

I has seen the future and it is looking increasingly multi-colored.