BloGiza

New Avenues in Seed-stage Fundraising

There is an old saying, many variations of which have appeared at various times, that goes, “One time is happenstance, twice is coincidence, three times is a pattern.” Based on this logic, I hereby declare the hot trend in the Israeli high-tech investment community to be organized very early-stage financing.  

Exhibit number one: a fascinating piece written by Bill Burnham called “The Great Abdication” in which he writes about the current challenge that Internet/Media/mobile apps startups face when trying to raise money these days.

“Anyone who has recently spent anytime fundraising for a consumer internet start-up in Silicon Valley quickly comes to an inescapable conclusion: there is effectively no Venture Capital available to Consumer Internet startups.”

To summarize his main points: There is a mismatch between the ever-shrinking cost of starting up a Web startup and the ever-growing size of VC funds who are looking to deploy larger – rather than smaller – investment sums   Many VCs don’t get the Internet/Media space and see success and failure as almost entirely random. (Not a joke – the number of times I’ve heard older VCs compare Internet investing to investing in movies)

Exhibit number two: IVC’s recent survey of investment activity in Israel (noted, among other places, here)  which shows a sharp drop in first-time investments by Israeli VCs from 2008 to 2009, albeit a slight increase in the number of seed-stage investments.  

The picture therefore is not necessarily a happy one if you are a very early-stage Israeli Internet startup, especially a B2C oriented one. Whether or not this is due to Israelis’ inability to create Internet success stories is a subject for a different blog post.  

So, what are the options for your average very-early stage Internet company? The obvious answer is angel investors, whether solo or as groups. This is your best bet to get enough money to develop your product/technology and get it to the proof of concept stage. The main drawback is that angels tend to make smaller investments, usually sub-$500K and may or may not bring any added value to your venture.  

Which brings us to Exhibit number 3: Robert Scoble has also noticed this trend and also notes the rise of organized groups such as Y Combinator and others which provide both investment, centralized services, and advice to puppy startups in order to get them to a point where they can raise a more substantial financing round.  

As of yet, Israel lags behind our friends in the States, lacking both an established Y Combinator and dedicated early stage funds such as Union Square Ventures or First Round Capital.  

The good news is that we are beginning to see a little bit of movement in this direction. In recent weeks we have heard of three different types of fund, all of which are geared towards helping out very early stage companies:

• Platonix Joint Ventures - Platonix offers business and technological development for entrepreneurs with interesting ideas in the world of software. Platonix works on the “sweat equity” model, offering their services in return for equity rather than directly making investments
• Yatir VC - Set up by Avi Domoshevizki (late of Battery Ventures) and Sani Sanilevich they offer technological and business mentoring as well as early stage financing
• Kima Ventures - Set up by Jeremie Berrebi and others, Kima is a Y Combinator-type micro fund looking to invest small amounts of capital in many early stage startups in Israel and Europe

I should take the opportunity here to mention Giza’s Ofek Program as well. Although we are looking for more developed companies than early-early stage, Giza is looking to invest sums in the $500K range as well as looking to syndicate with other investors for larger rounds in early stage companies.

Other funds have their own takes on early stage investing. We shall see where things develop.

Our Latest Internet Investment: WinBuyer

We were pleased this week to officially announce Giza’s investment in WinBuyer, one of five investments we’ve made this year and the latest addition to Giza’s Internet portfolio.

WinBuyer is one of the most interesting Israeli companies working in the e-commerce space, and a leader in the new and growing field of Onsite Comparative Pricing (OCP). The company’s technology enables online retailers to bring comparison shopping to their own sites.

E-tailers running the WinBuyer solution can then display competitors’ prices for a specific product on that product page. Buyers get the benefit of the comparison shopping experience without having to jump back and forth to Google or to external comparison shopping sites.

“But why,” I can hear you shout already, “would any online merchant possibly want to display competitors’ prices on their own sites?” A legitimate question. The answer, counter-intuitively, is that by doing so they actually increase conversion to sale and average cart size.

OCP helps online retailers by increasing transparency and creating a greater sense of trustworthiness. And this works even if the retailer displays prices cheaper than his own. The WB application allows e-tailers to define how many results to show, and whether to lower prices from competitors as well as higher ones.

Psychologically, many consumers want to know that they are getting a fair deal rather than the absolute cheapest prices.

By increasing price transparency, WinBuyer’s solution can actually help e-tailers step back from an increasingly destructive spiral of price-cutting and help consumers focus on other aspects such as service and reliability.

And because e-tailers receive part of the affiliation fees if their users jump to one of their competitors’ sites from the WinBuyer widget, it also allows e-tailers to monetize part of the traffic they would have lost in any case.

Online retailers increase their revenues, users get a better e-commerce experience. A classic win/win.

To date, WinBuyer has deployed its solution on more than 200 sites. Most recently, Overstock.com, one of the major online retailers in the US, has adopted WinBuyer in many of its product categories including books and electronics.

WinBuyer is led by a terrific team, including Founder and President Miki Balin, CEO Dan Clarke, and Founder/VP R&D Alon Weinberg. We are looking forward to great things with these guys.

Time to Headup

Ladies and gentlemen, allow me to introduce what I believe will this year’s insanely nifty Internet development – Headup.

So, what is Headup? Headup brings a bottom-up Semantic Web approach to discovering and organizing information on the Internet. Translated into English, Headup is a browser add-on (currently for Firefox) which understands the context of information on a Web page and automatically fetches a wide variety of additional relevant information. Better yet, it finds information that is relevant to a specific user based on his/her social graph.

What Headup does is:

1. Finds information that you might not discover yourself
2. Saves time and effort by enriching your surfing and searching
3. Does all this while still protecting your privacy

The technology behind Headup connects data sources on the Web, be they news sites, blogs, photo- and video-sharing sites, and social networking services in a semantic, contextualized way and start making smart connections between them.

For example, the technology recognizes that “Joy Division” when you are looking at Amazon’s music section is the same Joy Division on Wikipedia, YouTube, Last.fm, and your friends’ “Favorite Music” section on their Facebook profile. It then aggregates all this information and presents it to you in a useful interface that doesn’t take you away from the original page you started with.

(Click images for larger view)

 

The service is incredibly useful in a number of ways. It makes connections and finds information that you wouldn’t necessarily come across by yourself. I find that by headupping my Facebook friends, I often find blog postings and information about them that isn’t in their profile, not to mention shared interests that we have and upcoming events.

It also automatically enriches search results. When you google something, the search results automatically come back with a headuppable link. The Headup link saves you many next steps that you would automatically take, by bringing you the relevant search results, blog posts, and pictures.

Throughout it all, Headup is watching out for your privacy. Your personal information is stored locally, on your computer. The Headup servers do not store any personal data.

Headup has been developed by SemantiNet, one of Giza’s promising Internet portfolio companies. Although the application is currently only available as a Firefox add-on, it will soon be available for other browsers and a client-less version of the technology is on its way as well.

The application is in open beta and I strongly recommend everybody try it out. Let us know what you think.

Internet is Fun!

Another one out of the gate!

This week marks the official public launch of a second Giza Ofek Program company. This time around, the company is Viral Gurus who have opened their site to the big wide Internet.

Viral Gurus operates a site called Internet Is Fun. The name is pretty descriptive: Internet is Fun provides you the user with a new way to share all those interesting video clips, slide presentations, jokes, sound files, and other fun stuff that you normally get via email.

Internet is Fun still allows you to email these things to your friends and acquaintances. But it also adds a couple of new and useful functions. For instance the service allows you to:

• Have a discussion with your friends about a specific item - Does that YouTube video you got remind you of Haim in accounting? You probably won't leave a comment to that effect on YouTube, but you can here where it's relevant
• See how an item got to you and how it spread once you forwarded it - Internet is Fun tracks the viral spread of each item. You can see the chain of friends that led the item to your doorstep. More interestingly, you can see how an item spread out once you forwarded it. You send it to 10 friends and two weeks later more than 2000 people have seen it - cool!
• Collect all your fun items in one place - Internet is Fun automatically saves all the items you upload and forward to your own personal, customizable page, your "funblog". (This is like what Tumblr and similar microblogging sites enable you to do).

The site is open to everyone. You can check out my own funblog here. Feel free to friend me and let the fun begin.

Introducing: IMScouting

Attention football fans: IMScouting is here!

Today marks the official public launch of IMScouting, one of Giza’s Ofek portfolio companies, which has developed an information service for the professional football industry (“soccer” to you guys in the US).

In short, IMScouting aims to be the world’s leading information source for professionally traded football players. The company maintains an in-depth database of players from across the globe, and offers a wide range of features including:

•    Full statistical information on players from over 40 countries
•    Exclusive professional performance evaluations
•    Injury reports
•    Comparison graphs
•    Video highlights
•    Contract information
•    Market values and salary estimates

The full IMScouting service is aimed at football professionals: scouts, agents, managers, coaches, and anyone else needing in-depth information about players.

However, the site has plenty to offer even if you are not a professional. IMScouting’s free open area contains all the statistical and performance information, as well as an advanced search engine. You can use it for all your fantasy football needs or just as a useful complement when reading the sports pages.

IMScouting was founded by Ronen Carmona and Zeev Reznik, two entrepreneurs with a real passion for the sport (and in Zeev’s case, an insane amount of knowledge about the football industry). Giza invested in the company at the beginning of 2008 along with a group of angels.

What did we see in this investment? First off, two very passionate founders. Secondly, an interesting relatively untapped vertical: Football is a multi-hundred billion dollar global industry. Thousands of players are traded each year, but despite this football professionals don’t have a good way to search for talent. IMScouting hopes to answer this need.

Third, the company has a key competitive advantage. The founders managed to recruit Pini Zahavi, who is considered to be one of the world’s leading football agents. Pini, who operates here and in the UK, has been involved in many of the highest-profile transfers in European football over the last two decades. He serves as a member of the IMScouting board and is highly active in helping promote the company.

We wish the guys the best of luck and invite everyone to check out the site.

Koolanoo Group raises $25M

I don't write enough about Koolanoo Group, which has emerged as our flagship Internet company. But as they say around here, when there's the occasion for a celebration, go for it.

Our big congratulations go to Koolanoo Group and CEO Oded Kobo for closing the company's latest financing round. Koolanoo raised $25M and brought in a significant new international investor.

Koolanoo Group operates 360Quan which has emerged as one of the most significant players in the growing Chinese social networking space. It is fast becoming the most popular social network for Chinese teens offering them everything from blogs to music to dating. It has also recently launched IQ, a new Chinese Internet browser.

Koolanoo plans to use its latest financing to venture into a number of new media ventures such as mail, mobile, and television.

It's been an interesting ride so far. When we saw them first, nearly two years ago, Koolanoo was a couple of guys with an idea. Today it's an international company with headquarters in Herzliya and a large team in Beijing. We wish them the best of luck.

Sergey @ The Garage May 15

We had the honor of co-sponsoring last Thursday's Garage Geeks event in which Sergey Brin came down to Holon to pay a visit to the Garage. Several hundred people showed up (apologies to everyone who asked me for an invite last week - space was really limited) to bask in the man's Google-y glow.

Sergey actually stayed for quite a while, close to two hours. At first, he seemed a little surprised at the rock-star reception he got. Either that or the poor guy was just trying to eat something while everyone mobbed him. But later in the evening, after some presentations by the Garage crew, he got up on stage to give a little talk and answer questions.

The Q&A session was also surprisingly lengthy. (Ayelet Noff has posted a video of most of it which you can find here). I'd be lying if I said that we heard some earth-shattering revelations from Sergey, but here are a few of the more interesting tidbits:

• When asked where Google is focusing its attention these days, Sergey mentioned both Android and RE>C (Renewable Energy Cheaper than Coal), Google's cleantech initiative. I'm actually kind of thrilled to hear this. Along with the proliferation of the iPhone and similar devices, the rise of Android may finally help launch mobile Internet as a mainstream application. Google is one of the few companies that can leverage its size and prominence to introduce new standards and paradigms for the mobile world, so all the power to them. And although Sergey claimed rather politically that Google and Apple are not competitors here, it will be interesting to see how the dynamic plays out.

• Someone asked Sergey if Google was planning on buying Yahoo, which led him to tell the story of the first time the two companies met. In his telling, it was in late '96 or early '97. He and Larry had put together a small company already and approached David Filo with an offer: Give us a couple of million dollars and we'll develop a good search engine for you. Yahoo passed on the offer. In retrospect, Sergey says he understands what Yahoo was thinking -- a couple of crazy kids with an idea come to you asking for a lot of money and it seems a bit ridiculous. But from such events is history created.

• Charmingly, Sergey brought along his parents. Which led Yossi Vardi, who helped bring Sergey to Israel, to point out that in the eyes of Sergey's mother, despite the fact the guy has gazillions of dollars he still hasn't finished his PhD. Sergey says that he plans to finish the doctorate one day.
  
  Now, being that we are all a bunch of provincials, someone had to ask when Sergey is planning on making aliyah. To which, a number of people in the audience shouted "after he finishes the PhD."

• Google's "70/20/10 rule" -- 70 percent of focus on the core business, 20 percent on ancillary businesses, and 10 percent anything-goes projects -- seems to actually track in real life.

• Sergey's favorite application -- Panoramio, an application over Google Earth which shows you pictures from any given place. Which is kind of like Flickr's geotagging feature that no one seems to use.

In short, an interesting evening and a chance to catch a bit of the magic. More on the event can be found here.

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.

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

On the Changing Web Investment Landscape

A recent blog post by Y Combinator’s Paul Graham has caused a fair deal of buzz around the VC end of the blogosphere. In his essay, Graham points to a number of trends that he sees in the software/internet startup world and makes a number of predictions as to where the industry is headed.

In Graham’s view, we can expect to see a lot more startups founded by younger entrepreneurs needing a lot less funding; a standardized process on the part of investors to streamline the investment process; a more sophisticated attitude towards acquisition by major players; as well as a decrease in the importance of a college degree compared to technical skills and experience.

On the heels of the piece, we’ve seen numerous blog posts analyzing Graham’s points, focusing on the changing landscape (when it comes to Internet companies), and openly suggesting that the traditional VC model is broken and that we need to adapt ourselves to the new world order.

Graham, I believe, is spot-on with a lot of his analysis even though I don’t fully accept his conclusions. Here at Giza we’ve seen the local Internet scene develop greatly over the last couple of years. Our deal flow is filled with the types of companies Graham describes: young guys (and gals) with great ideas who don’t need a lot of funding to get started.

Our Ofek seed-stage program is designed for this environment: provide the relatively small initial sums for a company to reach pre-defined milestones and then decide whether to continue on to a major Round A. So far, we have made four investments this year under the auspices of the program, with Koolanoo Group having already graduated into a full portfolio company.

Like I said, I have a couple of caveats about Graham’s piece and the Y Combinator approach in general. A big part of it is the model and the potential scale. Y Combinator’s business model (also shared by investors such as First Round Capital) is predicated on making small investments in each particular company, then enjoying potentially good returns even on small-scale exits.

In theory, this should work fine. In practice, it runs up against issues of scale. Again in theory if you fund enough startups like this, one or two of them might be classic VC-grade home runs (say $100M plus exits). The question is how many you have to fund.

Graham talks about what happens when Y Combinator has to deal with 10,000 companies. Obviously, they’ll never be able to deal with 10,000 companies, let alone 1,000. Unless you’re planning on being a source of capital c’est tout, you need to provide some management attention to each of your portfolio companies. This is feasible for 20 or 30 companies at a time, depending on your staff size and the amount of streamlining you are able to do. It becomes increasingly hairy after that.

So you have to then wonder what types of returns – not multiples, but actual objective money – you can get from a strategy based on a few dozen companies with relatively small exit avenues.

And then there is the matter of follow-on funding: few are the companies that grow into significant Web properties without some degree of marketing. Which means that you go from investing a few hundreds of thousands of dollars to investing two or three million.

In short, big questions indeed. As a rule, I think that seed-stage investment approaches like Ofek are the right way to go for many of the Internet companies that we see. (And even then, I should point out that since the model is relatively new we have little data on the actual outcomes). Whether it will completely take over the VC biz, count me skeptical.