Israel's Internet Scene Comes of Age

It’s been an interesting month here for Israeli Internet startups, at least when it comes to exits. After years of very few exits in the space, we’ve seen three in the past four weeks. 
In mid-September, Google made its second acquisition here in the Holy Land, snapping up Quiksee for a reported $10M. 

At the end of September, AOL announced it was buying 5min Media for a reported $50-65M.  And just last week we woke up to the news that Yahoo had bought Dapper for an undisclosed price (assumed to be in the several tens of millions). 

On the face of it, the acquisitions don’t have too much in common. Quiksee, a veteran company by local Internet standards, developed technology to create 3D video tours of places. This technology will be used to bolster Google’s Street View application, which might finally make its way here to Israel although I’m not necessarily counting on it.

5min has an extensive library of how-to videos and technology to match these videos to textual content on a website, thus increasing the amount of content available. The value here is both in the library of videos and the distribution network that 5min was able to put in place.

Dapper, meanwhile, has developed technology that can dynamically change display banners based on context and user targeting. Yahoo will use this technology to expand its advertising offerings. It appears that Yahoo wants to try and become a strong player again in the advertising game after having stepped back since it conceded all its search advertising to Microsoft last year. 

But I think what all these acquisitions have in common is that they show a certain maturing of the Israeli Internet scene. When I joined Giza a little over five years ago, Internet startups were still suffering from the aftereffects of the 2000 bubble. Most local VCs did not have anyone dedicated to Internet, and a lot of the partners I talked to at the time were utterly dismissive of the space in general.

Slowly, things started to change. Around the middle of 2006 we started seeing a crop of new Internet companies which flowered up into a full-fledged startup scene a year later. Dapper and 5min were both early entrants in this second wave of Israeli Internet startups. Of course, both started off with completely different concepts than what they ended up with. Dapper was originally a Yahoo Pipes-like technology to allow people to easily create mashups of different Web services; 5min originally wanted to create a destination site and produce their own how-to videos. They later changed their concepts around into what they are today.

So, what are the takeaways here? I can think of a couple:

• The local Internet scene is definitely maturing – One of the key signs that this has become a stable industry is these mid-size exits. Up till now the exits tended to be on the smaller end of the scale. The fact that they might be creeping upwards indicates that there is enough “meat” for larger companies in the world to take an interest.

• Technology rules the day, except when it doesn’t – One of the mantras that a lot of VCs here still subscribe to is that companies in the Internet space only have potential if they are tackling the more technological aspects of the industry. Otherwise, the feeling goes, companies in the Valley have a major advantage over the ones here. While there may be some truth to this idea, the recent round of exits doesn’t provide any clear results. 
  
  Dapper was certainly bought for its technology, but also the fact that it was a growing business. Quiksee was a technology exit, but a relatively small one. On the other hand, 5min was a classic business development exit, bought for the strength of its content agreements and distribution networks.

• Consumer plays are still a question mark. The big question mark as far as the Internet scene is concerned here remains B2C. We haven’t seen a major consumer-focused Internet company exit in the last four or five years. And there is a growing feeling that companies based in Israel cannot compete with their counterparts who are plugged into the Internet ecosystem in the Valley or the East Coast. The jury is still very much out on this question. I’d like to see this assumption proved wrong, although my feeling is that it will be difficult to do so.

And so, congratulations to the guys at Quiksee, Dapper, and 5min. Good work!

 

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