BloGiza

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!

 

The Government Rides to the Rescue (?)

The last couple of years have not been particularly kind to the local high-tech industry. Although Israel was spared the worst effects of the global crisis, the local economy and especially the local tech-based economy has had to deal with knock-on effects of the general meltdown.

Specifically, we have seen a dramatic reduction in capital available for both VC funds and startups. Since the beginning of 2009, only one VC in the local market has managed to raise a new fund, and this was Sequoia Israel who could leverage Sequoia’s international positioning.  Many of the local VCs who had managed to raise new capital prior to the crisis are working with smaller-than-planned funds.

Unsurprisingly, this has affected that amount of new money flowing into startups here, which is at one of its lowest points in a decade.

Over the past few weeks, the Government has unveiled a number of new initiatives which Prime Minister Netanyahu and Finance Minister Yuval Steinitz hope will help save Israel’s high-tech economy. Steinitz, working with his Director-General, Avi Shani, and a Knesset subcommittee dedicated to the issue have come up with a number of ideas designed to address the problems of Israel’s high-tech sector at all levels.

The measures that have been announced are: 

1. Encouraging local institutionals to invest in VC funds instead by providing a financial safety net
2. Provide tax benefits and breaks for investors in seed-stage companies (the so-called “Angel Law”)
3. Attempt to establish Israel as a leading center for the development of technology geared towards the global financial sector, in the same way that Israeli high-tech companies became leading players in the Communications space over the last 15 years
4. As part of this repositioning, encouraging multinational financial institutions to establish R&D centers for financial technology within the framework of the CSO
5. Encourage Israeli companies to grow instead of selling themselves out early. The idea is to provide tax incentives for medium- and large-size local tech companies to acquire smaller tech companies and in this way to establish themselves as large growing concerns.
6. Create additional exit opportunities by encouraging companies to go public on the Tel Aviv Stock Exchange
7. Focus government R&D spending towards specific areas of interest
8. Improve the quality of science and technology teaching at the high-school levels by creating programs to train teachers in these subjects, re-training ex-high tech employees as teachers, and encouraging current high-tech employees to teach on a part-time basis in the schools
9. Encourage additional sectors of society (e.g. the ultra-orthodox and Israeli Arabs) to participate in the high-tech economy by subsidizing part of their salaries in high-tech companies
10. Encourage academics who have left Israel to return by providing tax breaks from future earnings based on technology that they develop

It’s an ambitious plan and one that addresses a lot – if not all – of the main problems facing Israel’s high tech sector. Whether or not it will work is another question.

My gut feeling is that the plan will be only partially successful at best. Without going into a point-by-point critique, some thoughts:
 
Regarding incentives for local institutional investors to invest in Israeli VC, this is one of these “yes, but…” things. On the one hand, Israeli institutionals are indeed an untapped source of LP potential. This is increasingly important, since institutionals in the US and Europe are both more hesitant to invest money in the asset class and more inclined to put their money in funds targeting other emerging markets such as India and China.

However, the local pension and insurance funds are not currently geared for significant investments in VC and it would take significant incentivization on the part of the Government to get them there. Even then, the amount of money that they could theoretically put into the asset class is limited. This by itself won’t solve the funding crisis for local VCs looking to raise new funds.

Regarding the re-focusing of Israel’s R&D efforts towards financial technology, again “yes, but…”. Other emerging countries, for example Taiwan, have had success in steering their high-tech industries towards government-defined areas of interest such as semiconductors and biotech. I have two issues here, one philosophical and one practical.

On the philosophical side, one of Israel’s great strengths as a high-tech superpower has been in the creativity of our entrepreneurs and technologists. If a large portion of government and specifically OCS funding is directed towards financial technology, might that not stifle a lot of this creativity that might lead to other large opportunities?

On the practical side, encouraging the establishment of R&D centers, as well as the other components of the plan based on providing tax breaks and benefits are all great in theory. However, they all have a good chance of falling apart in the execution phase especially if the tax authorities are not re-tooled to handle these changes.

After all, the government already provides tax incentives for high-tech today but it makes companies and investors go through 12 levels of bureaucratic hell in order to enjoy them. If this continues to be the case, will multinational financial institutions feel that it is worth the hassle of setting up R&D centers here?
 
The relative lack of large-scale local tech companies has been a key concern for the better part of a decade. We have talked endlessly about whether Israel needs or can establish more “Israeli Nokias” to stand alongside Amdocs and Teva, and the complexities involved. I’m not sure the current plan offers strong enough incentives to do so.

The idea that you can encourage medium size Israeli tech companies to grow into large size tech companies, and large companies into global leaders all by helping them acquire smaller companies is at the very least out-of-the-box thinking. However, it still doesn’t address the main reasons that lead medium-large companies to and M&A exit before they can become large.

Companies usually sell out because they have funding concerns. Either they start to run into cash-flow problems or else are need a relatively large amount of financing in order to ramp up into major-size IPO-able international leaders.

The current government plan as formulated does not provide real solutions to this issue. Encouraging more IPOs on the TASE is nice. However, the TASE is a relatively small exchange with some liquidity issues. The plan might help companies that would ordinarily be sold for the low tens of millions IPO for mid-ten to millions. But in order to IPO in a manner that can establish a large sustainable company, you need to go public on NASDAQ.

Which brings us right back to the funding issue. As Giza’s Managing Partner Ori Kirshner noted in this piece on The Marker TV, one of the real problems facing Israeli VCs and startups is the lack of available late-stage funding. Israeli funds are relatively small in global terms, and those funds who have the capital to invest will look just as actively at investments in India and China.

The issues of reversing the brain drain and improving the quality of technical education in the schools are both good ones, but they will struggle if not handled in the broader context of problems facing Israel’s education system as a whole. (Which is a whole other blog post, if not a series of blog posts). Short version: in order to provide a more educated and effective high-tech workforce, it’s not enough to concentrate on high-school science training. Israeli students need much better training in math, science, and English from the elementary school level onwards.

I’m not saying the government plan is a wash. It addresses a number of key social concerns (especially the low participation of large sections of the work force) in a logical manner. And, if the plan doesn’t get mired in a bureaucratic morass, stands to introduce a bit more flexibility into the local high-tech market and perhaps even end up as a net gain for the Israeli economy.

But without a significant increase in the amount of capital flowing in from overseas – both from LPs and global venture funds – the local high tech industry will continue to face serious challenges, despite the best intentions of the government.

The State of Israel vs. the iPad

In the event that you missed the biggest local tech controversy last week, it appears that the iPad is currently illegal in Israel. Customs officials at Ben Gurion Airport have confiscated a dozen or so of the magic machines from Israelis returning from abroad. The iPads were confiscated on orders from the Ministry of Communications (MoC) and the devices will be held until further notice.

According to the Ministry of Communications, the iPads operate under a different WiFi standard than the European one which has been licensed for wireless devices working in Israel. An MoC spokesman went so far as to express concerns that the American-standard iPad would “overwhelm” local WiFi networks with its allegedly stronger signal.

The iPad ban quickly found its way to the foreign tech press, fostering a number of articles none of which made us look very good.

Although there has been lots of theorizing about shadowy business concerns standing behind the iPad ban, it strikes me more as a case of Israeli bureaucracy having its head stuck firmly up its backside.

Although Israel has a bleeding-edge 21st century high-tech industry, it is regulated by government ministries whose mindset has not advanced much since the 1980s. Bureaucrats, like IT technicians and IDF quartermasters, tend to operate on the policy of “first say, ‘No’”. In this case they threw out what appears to be some half-understood mumbo jumbo about WiFi standards to bolster their case and will stand by it despite the fact that it’s all a bunch of rubbish.

Whatever the cause, the iPad for the moment remains certified un-kosher.

Adam Fisher at Bessemer points out that this is another example of “the shoemaker going barefoot” when it comes to Israeli tech. The Israeli tech industry is very good at inventing innovative technologies. And yet, the Israeli economy as a whole tends to lag behind when it comes to adopting and implementing new technologies on a large scale.

This is both doubly true and doubly puzzling when it comes to a lot of aspects of consumer technologies. Israelis are enthusiastic adopters when it comes to new gadgets. Israel had one of the fastest and most significant penetration rates for both Mobile phones and broadband. Similarly, the iPhone has taken off like crazy despite its super-premium price point.

And yet, it took more than two years for the iPhone to go on sale here officially, and nearly a year after it was being sold in Europe and other countries in the region. The same story goes for commercial WiFi, which only became available in 2004 after having been held up for several years due to IDF stonewalling, and is now extremely widespread

The tech lacunae here doubtlessly hamper the local hi-tech industry when it comes to developing compelling consumer applications. Besides the relative unavailability of iPhones over the last few years (one of the reasons, I’d argue, that we haven’t seen a lot of great app developers coming out of Israel), you could list issues as seemingly trivial as the fact that the Google Maps API renders Israel as one large undefined gray patch. This makes location-based services such as Foursquare virtually meaningless here.

I think this also helps answer a question I’ve had lately about one of the more compelling up-and-coming spaces in tech: augmented reality. On paper, at least, Israel should be leading the way with AR apps. The combination of location awareness and clever signal processing are both part of the Israeli skill set thanks to IDF technologies. And yet, I have seen almost no local startups in the space.

One of the drawbacks, it would seem, is lack of devices to work with. The iPad (assuming Jobs and his magical elves ever make the 3G model widely available to the world) should be one of the most logical platforms on which to run AR apps. But instead of pioneering the development, a lot of Israeli developers will first have to face the choice of sitting for months waiting for the iPad to work its way through bureaucratic hell or risk having their devices seized at the airport.

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?

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.

Geekcon 2007

I had the pleasure of attending the second day of Geekcon 2007 this weekend at the Wingate Institute.  As it was last year, Geekcon brought together several dozen extremely talented people who came up with a variety of weird and interesting projects to put together.

Among the ones I really liked were an attempt to do IP over semaphone, a very cool recreation of the Enigma encryption device put together using mechanical and electrical components only, and -- for sheer esoteric silliness -- Oren Tirosh and Kobi Sambrano's daytrading program which took its buy/sell cues from the movement of a lava lamp.

Geekcon -- like the Geek Garage which it spawned -- has an incredible and unique atmosphere about it. There's something about getting some of Israel's smartest and most creative technology people to work on amusing projects just for the hell of it that brings a flutter to my little heart.

I'm glad that Giza (which co-sponsors both the Garage and Geekcon along with Carmel) helps enable this unique forum.

I wasn't able to put together a project this year, but I've already started working on one for next year. In the meantime, I've posted some more photos on Flickr for your enjoyment.

The Great Vertical Social Network Shootout

I don't know about the rest of youse guys, but I'm beginning to feel slightly awash in a sea of social networks. Don't get me wrong, I'm all for vertical social networking and I see it as one of the logical developments of the MySpace revolution.

Lately, us Israeli Internet aficionados have found ourselves spoiled for choice when it comes to choosing a social network of our very own.
First into the fray was The Marker Cafe, an online spot where tech-savvy Israeli business types could get together. A couple of months after that, the iDrink guys rolled out their site, which serves as an online complement to the real-world Internet drinking club.

Now, our friends from The Coils have brought out the.co.ils Zone, which also provides an online space for Israeli Internet entrepreneurs (as well as us investor types) to meet, talk, do business, put up photos, share links, and all that other fun social networking stuff.

Hovering above this all, of course, is Facebook which has seen an incredibly quick uptake of Israeli Internet scenesters, and which already contains an iDrink group, a co.ils group, and numerous other groups related to the Israeli Internet.

So, the question now becomes what to do with all this activity. And frankly, I'm kind of stumped. iDrink is nice, but is limited in its functionality. The Marker Cafe has plenty of functionality. It is, however, in Hebrew only which cuts it off from the rest of the world.

The co.ils Zone looks like it has a lot of potential (assuming that Ning, the platform on which the Zone is built, gets their act together and deals with its recent outages). But it will be a challenge for them to get a critical mass of people actually using the site, what with all the competition from the other sites.

What do you think?