BloGiza

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.

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.

Introducing: Blogiza on Tumblr

As promised last week, we here at the BloGiza labs have been toiling on a new, fun feature. Over the past year, we have been running a feature called "The List", which collects interesting articles on the high-tech/VC world and presents them in a hand list format.

Having recently discovered Tumblr (which inhabits the space between blogging and Twittering), I've decided to spin off The List as a standalone property.

The new The List can be found at: http://blogiza.tumblr.com

It will be updated on a regular, ongoing basis instead of once a week like the old The List. You can also choose to get the new List by RSS using this feed.

Check it out and let me know what y'all think

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.