Savants in the Levant

10 Possible Signs the Good Times are Back

noreply@blogger.com (Adam R. Fisher) — Mon, 05 Dec 2011 10:55:00 +0000

1. There is enough seed money to buy six-figure, five-letter vanity URLs

2. Entrepreneurs and Hollywood celebrities are invited to the same events

3. ~~VCs invest in Angel rounds~~ Angels invest in VC rounds

4. M&A is a bona fide hiring tool ("acquire-hire" is used in mainstream media)

5. Series B financing is the first of many liquidity events for the founders

6. Corporate VCs are dusting off their incorporation docs from 1999

7. College drop-outs are glorified

8. Bankers court pre-revenue start-ups

9. Everyone knows the difference between incubators, accelerators & micro-VCs (duh!)

10. VCs buy logos on the secondary market to bolster their portfolio

Sliding Into First: Why Israeli Start-Ups Need to Keep Running

noreply@blogger.com (Adam R. Fisher) — Sun, 20 Nov 2011 18:40:00 +0000

(see the H ebrew version in TheMarker.com)

In baseball, players often slide into the base in order to avoid being tagged out, but almost never slide into first base. The reason no one ever slides into first is not because it’s illegal, but because it slows down your momentum if you want the option of running onto the next base. A lot of Israeli high tech companies unwisely “slide into first,” yearning for safety and calm after years of uncertainty and hard work, but inadvertently end up losing the precious momentum necessary for continued growth. With fewer late stage companies generating the kind of momentum and scale that late stage investors look for, it is little surprise that Israel has an underdeveloped growth financing market relative to the US. Maintaining the growth momentum is how big companies are created, and is arguably one of the biggest challenges now facing Israeli high-tech.

Straddling both the US and Israeli venture markets it is clear that later stage Israeli start-ups don’t often share the growth characteristics of their US counterparts. For a variety of reasons, many Israeli start-ups tend to become more risk averse as they grow more successful. Each case is unique, but in general such companies see profitability on the horizon, cringe at the thought of additional dilution and a larger board, and balk at the idea of making bold moves so close to reaching safe ground.

In contrast, US start-ups are more likely to see signs of success and decide to take on additional risk by hiring faster, expanding abroad, making acquisitions and launching multiple new product lines in parallel. Many people claim that US start-ups are simply better at fundraising than Israeli start-ups, but this is mostly because they are also more effective at spending those funds to generate growth.

PSYCHOANALYSIS

There are multiple factors at work that cause Israeli companies to “slide into first.” First of all, maintaining the growth momentum often requires inorganic growth and therefore moving out of our “comfort zone.” This may include hiring non-Israelis into key executivea positions, hiring lots of sales staff in far off geographies, developing partnerships and making acquisitions, each of which can create a sense of losing control. Product acqusitions in particular are difficult for technology savvy Israeli companies to pursue due to intense NIH (not invented here). American companies don’t have the same cross border cultural challenge, have a much larger talent pool with which to grow, and often see their core competence as busienss rather than technology (making technology acquisitions more straightforward).

Secondly, investors in Israeli start-ups are often investing out of smaller fund vehicles, and as a result have a tendency to shy away from growth plans that require financing far in excess of what they can provide going forward. Fundraising apprehension of this sort can be an enormous barrier to growth because momentum requires consistent investment in development, product and sales, well in advance of knowing what will be successful ….and in advance of knowing who will fund it. Trying to raise growth financings after your company’s year over year growth has slowed to 20% is as good a parachute designed to open on the second bounce.

A final reason we tend to slide instead of accelerating is eagerness on the part of founders and VCs to “cash in” their investment rather than “double up” on their investment. It’s not simply that Israeli start-ups sell early, but that we avoid taking more aggressive and accretive steps earlier on, which would made rejecting an acquisition offer all the more obvious.

CHANGE IN THE AIR

The Israeli market is changing before our eyes and this is something to be excited about. This post comes on the heels of several growth stage financings that have rarely been seen in Israel before. Israeli start-ups in clean tech, consumer tech, semiconductors, adtech and consumer Internet have announced financings ranging from $25M-$50M for businesses that are growing fast and don’t want cash constraints to limit their potential. Some of these companies could ostensibly survive without additional equity funding, so these entrepreneurs and board members truly represent a new mode of thinking big.

One example of the new mode of thinking is the growing acceptance of founder liquidity. Many of these larger financings involve the sale of a fraction of the founders’ holdings, and sometimes the holdings of angels and veteran employees. However difficult it is for some to accept this trend, it is exactly the kind of move that enables key decision makers in a company to “double down” in the form of several more years of hard work in order to focus on the long-term growth.

Not everyone realizes it, but growth equity investors are well represented in Israel and BVP intends be a major player locally, just as we are in the US. But while capital availability is necessary, it is far from sufficient to producing Israeli growth opportunities. That depends on entrepreneurs and existing shareholders taking a long-term view to company building that emphasizes calculated risks for growth and not simply patience and perseverance (which can often be just pigheaded if growth is elusive or margins poor). Israeli companies need to keep running fast, focusing on how to reach second and third base well before reaching first. And it’s ok if you over run first base. Just don’t slide into it.

"Tech Crutch": The Challenge of Moving Beyond Technology in Israeli High Tech

noreply@blogger.com (Adam R. Fisher) — Sun, 24 Jul 2011 14:06:00 +0000

This is a post that has been in draft for almost a year based on hundreds of interactions I have had with start-ups and high tech execs in Israel and abroad. The issues are broad and provocative, and because a blog post risks being an oversimplification, I welcome my readers’ comments and critique. (see Hebrew version in TheMarker.com)

If there ever is to be a sequel to the book Start-up Nation, Israeli high tech must become as serious about product design, customer experience, and business models as it currently is about technology and R&D. Over the last decade, Israel has mastered an entrepreneurial/venture model, which involves sourcing entrepreneurs from military technology units, creating cutting edge technology products and ultimately selling a company, its IP and personnel to one of many foreign multinationals that have come to appreciate the Israeli brain trust. While this model of start-up creation has served us reliably, it is vulnerable to macroeconomic headwinds and is increasingly unsustainable in the face of technology commoditization that is rapidly approaching our shores in the form of competition from China, Korea and Taiwan. As it turns out, our over reliance on technology creates an endless demand for more technology talent, which prevents us from nurturing vital competencies in product, design and business. The resulting ‘tech crutch’ is a self-perpetuating cycle that threatens the future of Israeli high tech.

CLIMBING TO THE TOP OF THE HIGH TECH PYRAMID

This challenge of moving beyond technology is more important than ever if Israel is to enjoy its rightful share of the high tech economic pie. The underlying reason for this is that Israel is stuck pursuing a goal of technology creation rather than technology application, and this mindset affects entrepreneurs, venture capitalists and government policy makers alike. As a result, we generally prefer to enable others to build amazing products, rather than to use the technology to build the products ourselves. We hesitate to touch the end customer and resign ourselves to being technology merchants, promiscuous with our technology smarts but timid with our business creativity. This is a problem, because increasingly the fattest margins and steepest barriers to entry belong to those who know how to apply technology to build a better business.

We too often overlook the fact that users of technology often enjoy a disproportionate share of value relative to the technology creators. This is because technology increases efficiency and reduces production and distribution costs, thereby enabling new business models to emerge, thrive and engage directly with their customers (think Netflix, Salesforce.com, Amazon and eBay, none of which were initially based on technological innovation). As the pace of technology commoditization hastens, the value of high tech is shifting even more to those companies that can apply technology to create or upend a huge market opportunity. These companies find a way to be as close as possible to their end customer, to maximize exposure and to extract the maximum economic value. This is a key reason so many venture investors favor companies that can leverage the Internet to reach consumers and businesses alike.

High tech in 2011 is about innovation, but not necessarily technology innovation. Unfortunately, too many Israeli companies seek shelter with their technical differentiation, and assume that distributors, OEMs and acquirers will recognize their unique offering and spare them the daunting task of building a business on their own. Of course, there are a handful of success stories where high tech companies have struck gold licensing their technology, winning the lottery OEM or signing lucrative and scalable revenue sharing deals, but these lucky few cannot be role models for the rest of us. And even though there will continue to be amazing technology companies emerging out of Israel, this is too small a base for an entire industry to rely on.

To reach the top of the pyramid Israel must now embrace product, marketing and business innovation, just like it has technology innovation. Such a shift does not require abandoning its technical roots, but rather using this technology strength to create higher order products, and mustering the talent and courage to bring them as close to the customer as possible. In some cases, the business innovation may even require providing technology products for free. The key is that while Israeli start-ups can still use technology as a differentiator and competitive advantage, long term shareholder value and competitive barriers-to-entry will ultimately be built on brand, loyal customers, and a profitable model. The shift in mindset starts with how we found, fund and grow start-ups. Israeli start-ups must identify a real business pain and solve it with a great product offering, rather than solving a technology pain with technology solutions. Our distance from many of these business pains makes developing deep industry understanding a challenge, but this distance also enables objective observation and analysis, which can itself fuel innovation.

STRENGTHENING OUR WEAKNESSES, NOT ACCEPTING THEM

We all recognize that Israel has both strengths and weaknesses in high tech, but for too long we have allowed ourselves, collectively and individually, to invest solely in our strengths, accepting our weaknesses as destined. High tech is a competitive sport, and just like athletes invest more energy in improving their weaknesses to remain competitive, so Israel must devote more attention to its weaknesses in product, design, marketing and business. The success stories that will come out of Israel over the next decade will be those companies that defy conventional wisdom about what can be done in Israel. Countries with great natural resources like oil need to develop capabilities in refining and distribution to reach their true potential as an energy powerhouse. It is no different with a natural resource like technology talent. Israel must avoid becoming an “oil state” in which only a small percentage of the population can participate, and where there is dependence on selling the natural resource to others who know how to extract value.

To address these challenges, we must stop thinking about our high tech industry strictly in terms of engineers and programmers. By emphasizing only the R&D side of high tech, we have in effect erected walls around the country’s only growth engine, which in turns only exacerbates the technical talent shortage we hear so much about. With the current model Israel may always face a shortage in technical talent, but it will face far more acute shortages in marketing, product and design talent. Therefore, we must encourage our engineers to explore and develop their latent creative and business skills. These multi-talented people are rare, but they certainly exist. We must also find ways to make high tech more inclusive and inviting for the less technically inclined and for those who didn’t have the privilege of serving in an army technology unit. In short, Israel’s natural resource is human talent, not just technical talent.

On a start-up level, my recommendation to entrepreneurs is the following:

1) Incorporate strong marketing, product and design skill sets at inception, including in the founding team. This cannot be an afterthought post development, and it really shouldn’t be outsourced either.

2) Innovate on the business/product side as well as on the technology side. Recognize that you are building a business, not a product and certainly not a technology, and practice pitching this business idea with minimal mention of technology. Technology innovation is great, but it can create tunnel vision for the creator, and confusion for the employees and shareholders.

3) Determine whether you could be going a step further in your product or business plan to ensure that you are getting the maximum value out of your innovation. Can you build a product based on this technology.? Can you build a service based on this product? Can you go directly to the customer using the web?

On a national level I have a few ideas for how to promote this change in thinking:

1) Bring high tech business into Israel’s academic system, not by offering internships for developers, but by exposing students to the non-technical side of high tech, whether it is business in China (Eastern Studies), online marketing (psychology), user interface and experience (industrial design), successful business models (economics), etc. Conversely, Israeli universities need to create more multi-disciplinary tracks that combine computer science and design, or engineering and economics/business.

2) Find ways and incentives to integrate the super creative talent in the Israeli advertising and media industry (which is already an export industry for Israel).

3) Expand the narrow mandate of the Chief Scientist Office (CSO) beyond simply creating R&D jobs, to include strengthening Israel’s non-tech weaknesses. The CSO should provide tax incentives for multinationals, which establish marketing, customer support and other non-technical functions in Israel. Most importantly, the CSO should provide grants to start-ups for the launch of their product or service, not its development.

Israeli high tech is in a transition, not a crisis. The proof is that many start-ups have already made this mental leap and are attempting to reframe Israeli high tech as masters of business and marketing, not only patents and architecture. Israeli high tech will be stronger in years to come as we hone the creative and business talents that so many in this country possess. But, too often, we leave money on the table. Not because we sell companies too early, but because in many instances we don’t take or are unable to take the extra step to seize the larger business opportunity. There is a lot of work to do, but it all starts with recognizing that high tech is not just about tech, and that our technology strength must not become a crutch.

TheMarker Recognizes BVP's Israeli Internet Portfolio

noreply@blogger.com (Adam R. Fisher) — Fri, 08 Apr 2011 11:56:00 +0000

Three of my portfolio companies were included among the 10 most promising, young Internet start-ups in Israel, in an article by Guy Grimland in the TheMarker Magazine. In the photo above, you can see Raphael Ouzan, the CTO and co-founder of BillGuard, Ishay Green, the CTO and co-founder of Soluto, and Shai Wininger, the CTO and co-founder of Fiverr.

I am really proud of each of these investments, and its great to have them recognized so early on. Similar to another one of my portfolio companies, Wix, each of these Internet companies offers a unique and differentiated service directly to consumers. Furthermore, each exhibits the "product network effect" I always look for in my investments. A product network effect occurs when a product's effectiveness and competitiveness continually improves with more users and usage. I will have a lot more to say about these companies as the year progresses, but look out for them and try out their products if you haven't already.

Below is an audio clip(in Hebrew) from Israel public radio, in which Yael Dan interviews Guy(TheMarker.com), Ishay(Soluto) and Raphael(BillGuard) following the publication of the article.

Hulu from Israel

noreply@blogger.com (Adam R. Fisher) — Sun, 30 Jan 2011 08:54:00 +0000

Breaking the Habit

noreply@blogger.com (Adam R. Fisher) — Tue, 25 Jan 2011 12:03:00 +0000

There are two styles of consumer Internet ventures emerging in Israel: product perfectionists and money chasers. Despite our tendency to celebrate and learn from both of them, one of these has a darker side we should be cautious of.

Product perfectionists are founded upon a belief that a unique and differentiated product will create an avid and loyal customer base, which in turn will help build their brand and business. These companies understand that a great customer experience is paramount, and the result of a corporate strategy and culture that focuses on the customer, not merely the result of good product definition or an unbeatable price. I place a high premium on product perfectionist companies that can deliver a compelling customer experience, though it is far from sufficient to ensure success.

In contrast, money chasers are founded upon a belief that an effective monetization and distribution model can essentially define the product offering. These companies excel at driving traffic, accumulating users and raking in cash, but often at the expense of the end consumer (including the customers’ customer). While many entrepreneurs and investors are attracted to the money chasing model, there is a disturbing side to many of these businesses.
Money chasers often prey on naive consumers with aggressive marketing and monetization methods that often have nothing to do with the product they are providing, including changing your default search engine, gleaning your personal details for affiliate sales, or signing you up for a subscription you weren't aware of. To be clear, most of these companies operate legitimate businesses within the law, but push the bounds of acceptable behavior in order to generate profits, or let affiliate marketers do it for them. In the process, they ensure an awful user experience, weaken their brand, and hurt shareholder value.

Like in any attempt at categorizing, there is oversimplification in what I say about product perfectionists and money chasers. Internet entrepreneurs are pioneers, and many of the rules and standards have yet to be written. However, lately I have seen a new generation of money chasing companies, which seem to have learned their craft from the veterans of Israel’s forex, affiliate marketing, toolbar and gaming titans. Product perfectionists have much to learn from these talented individuals, who understand the math and economics of customer conversion like nobody else. But there are some unsavory practices that are also being transferred, and it is a dangerous path to be on.

A Review of the Unsavory

Some companies deliberately mislead the consumer into thinking that he is receiving something more significant than he actually receives, which is the case with several Israel-based sites that provide “services to assist” foreigners to fill out simple, seven question green card lottery forms.

Other times, it is more sinister with marketing tactics that deliberately mislead consumers into signing up for a survey or game and unknowingly committing to monthly subscription of some sort (often on mobile phones). This method, known as cramming, takes advantage of affiliate agreements companies have with cellular operators, which simply add on fees to you monthly phone bill.

(

(small print of this common quiz in Hebrew says 30 shekels/week subscription)

And finally, sometimes the consumer is very much a party to his own exploitation, which is largely the case with forex trading companies which make money only as fast as their customers lose their money(though this is in contrast with gambling sites, which at least allow people to win and have fun in the process). The prior “tricks” should perhaps be obvious to the consumer, and one can argue that such consumers are responsible for being so trusting. But there are additional methods that are much less obvious, but no less sneaky.

Monetization Models Prone to Abuse

When monetization models are divorced from the core product value, there is a greater tendency to exploit consumer ignorance. This occurs in business models where the consumer doesn’t pay for the product or service directly, but rather indirectly through search advertising or affiliates. I don’t have a problem with either of these monetization models per se, unless they are non-transparent to the user, which is too often the case.

Siphoning Search

Downloadable software that installs a browser toolbar that then changes the consumer’s default search engine is simply obnoxious (they generally use an aggressive ‘opt-out’ installation process). These companies operate as affiliate partners of one of the large search engines and are paid a cut of the resulting search engine revenue. Most of these publishers also change the consumer’s home page to a modified version of Google or Bing.

How common is this? Just last week, it was revealed that the third largest advertiser on Facebook is a website site that forces the visitors install "a browser plug-in to present an enhanced experience." Make-my-baby.com is a Microsoft Bing affiliate and gets paid a hefty bounty for each install. This company’s deal is not unique, and it now widely known secret that Bing is paying such bounties in a land grab against Google. Forget the fact this is artificially inflating advertising revenues across the industry. Such bounties bring out the worst in publishers which are suddenly motivated by installs and altered home pages, not active or quality users, and certainly not happy users. This leads publishers to optimize consumer confusion by tricking the consumer into installing the search toolbar even when the consumer thinks he/she has chosen the opposite!

In most cases , there is little doubt that the consumer was not in the market for a new search engine, and probably reached the said software publisher or website just fine via his/her current default search engine. Furthermore, the consumer may never know that the publisher has forever altered his search experience with 10 sponsored ads above the first search results instead of the typical two(and some sites work hard to hide the fact they are even sponsored results). Worst of all, uninstalling the software or the toolbar often leaves the hijacked home page in place until the next toolbar equipped piece of software changes it yet again! The search engines themselves are complicit in this behavior, but presumably hold their noses when signing search affiliate agreements. Recently, Google has been so appalled at how affiliates trick their consumers that they have tried to enforce certain standards around modified Google home pages. But this is like a drug dealer pushing back on his heroin addict for fear he will die and cease to be a regular customer. Some have complied, while others have moved to Bing or to super affiliates of Google like Ask.com.

Which search experience is more transparent?

Abusive Affiliates

In principle, the affiliate model of monetization is less devious, although many websites have begun to push the envelope in what is an appropriate use of customer information. The infamous case of Offerpal signing up consumers for subscription services they weren’t aware of is an extreme example of abuse because it was illegal, but there are numerous other examples of legitimate, yet unfair tactics using the affiliate model. For example, some large Israeli software publishers require the user to input key personal data like a phone number, which is then forwarded to a call center for use to push third party products unrelated to the product the consumer downloaded. There are others, which lure consumers to provide personal data with promises of guaranteed prizes like free iPads. It’s one thing to turn a blind eye to third party sites which are violating your own policy, like Facebook did, but much worse in my opinion to predicate your business on deceiving your own consumers.

Regardless of the source, it should be clear now that growing revenues and usage is not necessarily an indication of customer satisfaction or brand creation. The Internet affords businesses great leeway in how they communicate with consumers and such freedom can be easily. Net Promoter has its method of measuring customer satisfaction, asking the simple question of “How likely is it that you would recommend our company to a friend or colleague?” You may ask whether I am jealous or frustrated that I am not invested in some of the outstanding companies which operate in this way and which today are printing cash. Perhaps, but then I remember how difficult it is to believe in your investment and potential, when you are hesitant to use the product yourself.

If you are an entrepreneur or investor, I suggest asking yourself a slight variation of NetPromoter question: “Would you recommend the site or download to your own mother?” I am deliberately being provocative here, but that is how I think of my own investments. Would I let my mother use their product or service without any caveats?

So, why are money chasers bad for Israel?

Well, first off we are training a generation of Internet product and marketing experts to exploit the consumer, rather than serve the customer. We are becoming masters of deception, which is quite convenient when you are anonymous and can hide behind cute websites, big name search engines or a web of little known affiliates. Secondly, few of these companies will ever have long term strategic value because their monetization methods are will not endure in their current form forever. Affiliate search via toolbars is in decline, with Chrome, Safari and the new Firefox dropping support for toolbars (and Google stepping back). Additionally, privacy hounds, security sleuths and legal experts are looking out for abusive affiliates, and have proven they can shut companies down overnight.

Some money chasers are led by entrepreneurs who have made a tactical decision to generate revenue as a way of sidestepping angel and venture financing, which is fair enough. But when “product innovation” is merely a euphemism for squeezing more profit from unwitting consumers, the monetization model has in effect become a drug. It is difficult to slow down, let alone stop or reverse. Most often, it’s a slippery slope as companies push the limit of what is acceptable until someone exposes them or pulls the rug out from beneath them.

A sustainable business must be built on a great product and satisfied customers. I understand the need to optimize, test and influence consumer decisions, but companies should never allow such clever tactics to become their overall strategy. As a VC, I too need to go where the money is, just like the entrepreneurs I back. But sometimes we also need to step back and question what value our investments bring to the world.

Series B Psychology

noreply@blogger.com (Adam R. Fisher) — Mon, 27 Dec 2010 13:24:00 +0000

Venture investors never like to lose money. But if we must, we prefer to lose it approximately 2-4 years after investing. Why? Losing money after more than 4 years is more painful and expensive because of the opportunity cost of our time and that of everyone else around the table. If a company fails after 4 years, it was either a sudden turn of events or a slow, agonizing death...but in either case, we wish we had recognized it earlier and moved on to the next exciting venture.

However, even worse than this is losing money, or recognizing that you are going to lose your money, within 12 months after making an investment. Yes, losing money in a short period of time frees up time to spend on the next opportunity…but in the venture world, there is little excuse for not anticipating such a reversal of fortune so soon after conducting due diligence and writing a check. When this happens, one feels blindsided, duped and foolish…all emotions we tend to shy away from as money managers.

It is for this reason that venture investors are wary of investing in a company that promises imminent business success in the form of revenues, partnerships or customer wins …but only after receiving additional investment. This awkward situation is most common in the proverbial ‘B round,’ or second institutional round. At this stage the company has a product in hand, but while initial customer traction may be evident, growth and execution is still far from conclusive.

For many years, companies at this intermediate stage could easily raise their Series B round due to an oversupply of capital. This led many VCs to refer to the second institutional financing as a “shiny” Series B (i.e. “it looks fantastic, but we have no idea what it's really worth?”). In recent years, companies have found that finding a new institutional investor to lead such a B round is quite difficult even when you are dressed up pretty.

My first bit of advice is don't over promise, when there is a good chance you may under deliver. When an entrepreneur expresses complete confidence in the company’s imminent success, we as investors first question why the company was unable to properly forecast its cash needs or hit its milestones with its available cash. Then we question why the existing investors don’t share the entrepreneur’s confidence and find it in their interest fund the company to this obvious and accretive milestone just around the corner. We know that confidence cannot pay the rent or salaries, but funding a venture in anticipation of near term results can be hair-raising for a VC. Sure, sometimes we hold our noses and take the plunge. But too often it looks like we are expected to invest on the assumption that the company will hit its milestone, while the company raises cash based on the fear it might not hit that same milestone. We never want to feel that the company is buying an insurance policy to cover the small risk of failure, and we are acting as the insurer.

My second piece of fundraising advice is expressed in the following maxim, which applies to all stages of financing: great entrepreneurs are never fundraising, and great investors never care to ask. Regardless of cash needs, start-ups should consider fundraising on the back of a significant accomplishment and barring that, to set the prospective investor’s sights on achievements at least 12 months out. For this reason, when you raise your Series A round, don’t let investors underfund your business to suit their fund limitations, and give yourself sufficient buffer to demonstrate business momentum, not just initial traction.

A Wize Move for IBM

noreply@blogger.com (Adam R. Fisher) — Tue, 28 Sep 2010 09:31:00 +0000

Last month, we successfully exited our investment in Storwize through its sale to IBM. IBM had been working with Storwize for some time on technical validation and joint marketing initiatives, and gradually became convinced that Storwize was a critical enabling technology that could disrupt the entire storage segment and including their own product lines (why rent when you can own?).

This relatively quick exit scenario for BVP was completely in line with our original investment thesis that data reduction technologies, such as Storwize’s primary storage compression, will ultimately prevail due to the considerable economics at stake(I have another outstanding bet in Sepaton). Primary storage capacity optimization was the latest data reduction trend for the simple reason that it was the most challenging. The stringent performance requirements of primary storage and the mission critical applications that depend on it meant that a optimization solution could not introduce any latency or performance degradation. So when pundits told me during my due diligence process that Storwize’s claims were inconceivable and that several large companies had failed in the past attempts, I decided it was a risk worth taking with a crack Israeli team. Storwize was truly an “amazing” company, as just getting the product to work would be highly accretive to shareholders, due to the complexity of the problem, the elegance of the solution and the enormous end market.

As an investor, one always has mixed feelings about selling a company. After years of investing money, time and energy, your involvement comes to a sudden and unceremonious halt as you promptly resign from the board and resume being a curious spectator. The entire Storwize team did an outstanding job in bringing the company to an inflection point, where shareholders had to decide between accepting an attractive acquisition offer or raising more capital to invest in growth and R&D. Storwize was in the pole position, had some incredible things under development, and had strong leadership across the board.

But it is no secret that building an enterprise storage company into a big business is exceedingly difficult and expensive, especially from Israel with our distance from the customers and overindulgence in technology. If IT departments are naturally conservative, storage departments are among the most unadventurous of the lot, always favoring the large incumbent even if they do overcharge and overpromise. And contrary to what one might think, a deal like this with IBM doesn’t appear out of thin air due to hype or fear, but only after years of hard work to overcome skepticism and even disregard that it really works. Many still don’t and won’t believe, but that is the natural reaction to amazing companies until their product is considered mainstream.

Storage was never an easy market to penetrate, and for Storwize it would not be an exception, all of which led us to conclude that the acquisition offer made sense. I am sure the success of Storwize and IBM’s Israeli recent storage acquisition binge will entice more storage entrepreneurs and investors, and all I can say is that this is not for the faint of heart.

My hat is off to the entire Storwize team including Ed Walsh, Gal Naor, Yoni Amit, Ori Bauer, Mary Henry, Steve Kenniston, and Tzahi Shahak, not to mention many others in sales, marketing, support, product and development. It was truly a team effort across geographies, disciplines and cultures, and I was proud to be an investor and board member. Thanks for the ride, and good luck to you all!

Soap and Oil in Paid Acquisition Strategies

noreply@blogger.com (Adam R. Fisher) — Wed, 22 Sep 2010 10:46:00 +0000

When your business depends on driving quality traffic to your website, embracing a paid acquisition strategy using SEM or display advertising can be both a luxury and a nuisance. It’s a luxury, because you can effectively manage your rate of growth via variable marketing dollars. With great precision, successful Internet companies know what kind of return to expect on every dollar spent and can comfortably raise their spending level month over month.

But as anyone familiar with Internet marketing will tell you, scaling a paid acquisition model is rarely as simple as doubling down on AdWords or opening up to affiliates. This is simply because your ability to effectively scale ad spending depends on maintaining an acceptable customer acquisition cost ratio (CAC ratio) relative to your best estimate of your customer lifetime value (CLTV). You may run a fantastic campaign on a certain combination of key words, or on a certain publisher’s website, only to find that you have quickly exhausted the cheap inventory or that you wound up acquiring customers at a prohibitive marginal cost. And if the economics aren’t consistently attractive, affiliates will never work with you in the first place.

It is often said that successful Internet models are about “lather, rinse and repeat,” and while there is a lot of truth in this most companies have to try and use a variety of soaps, before they can really follow these instructions. Such experimentation means that successful paid acquisition strategies will often be an expensive nuisance to the company before it can truly be a luxury. Not surprisingly, many companies find that mastering the science behind customer acquisition will be more challenging than the science behind the product they are trying to sell. However, when executed properly, the company will have created a well oiled marketing machine that will become a core competitive advantage.

The uninterrupted search and discovery for new sources of cost effective traffic most resemble the search and discovery efforts in oil and gas. It requires lots of drilling and patience, and there is a time lag between an initial investment and assessing your ROI. When a company does finally strike oil, not only is it unclear how much oil is available, buts it’s also unclear how much it will cost to extract each barrel of oil (marginal acquisition cost). And even then, the company’s economic interest in extracting the oil at a given cost depends largely on the prevailing price of oil (similar to your CLTV which can also rise and fall). Luckily, web companies don’t need to spend as much up front or to wait as long for a return, but I think the analogy is apt.

With many Israeli start-ups adopting paid acquisition growth strategies in recent years, I want to draw attention to several types of early stage companies I have encountered. The first type are companies which have demonstrated positive unit economics on very limited ad spending (<$10K/month), and which have concluded that they can easily double their revenues several times over by simply raising their marketing spend (which I am asked to fund). The second type of early stage company has already decided to halt their limited paid acquisition experiment after experiencing unattractive unit economics on limited ad spending over a short period of time.

The reality is that both types of companies would be mistaken to draw too many conclusions on such limited spending. The first type of company should keep testing the limits of their marginal CAC to discover how far they can really go until a ceiling is hit. And the second type of company should exercise more creativity and patience in running campaigns, not completely forgoing a paid acquisition strategy until more advanced revenues set in with a better sales strategy.

There is also third type of early stage company that I encounter which successfully generates traffic and customers using a variety of “free” methods, including SEO, PR, viral and social media. This type of company grows nicely month over month, and therefore can’t fathom the idea of paying for the traffic directly. They even look down on those who spend to buy each of their customers. While some companies' growth rates completely support a strong stance against paid acquisition, I strongly believe that companies should continually experiment with their traffic acquisition methods as the growth potential from paid acquisition may positively surprise even if it is a lot more expensive than “free.” Moreover, the competition may discover and then master this paid acquisition strategy putting the company at a real disadvantage when their free methods start running out of steam. I recently came across this quote from the founder of Wesabe, which was steamrolled by Mint: "Mint aggressively acquired users by paying for search engine marketing (reportedly spending over $1 for each user), while Wesabe spent almost nothing on marketing; yet in the end we grew at about 1/5th the rate they did."

These days, there are several promising Israeli start-ups hitting their groove with scalable paid acquisition models, including my own portfolio company Wix. Surprisingly, there have also been several Israeli exploration companies striking it rich with natural gas discoveries, but we won’t touch those! I don’t think oil companies and Internet start-ups have too much in common, except persistence, patience and rigorous economic analysis day after day. And just remember that companies must dirty their hands as if searching for oil, before they can enjoy the simplicity of lather, rinse and repeat.

Amazing, Smart or Crazy?

noreply@blogger.com (Adam R. Fisher) — Tue, 29 Jun 2010 18:57:00 +0000

My fondness for early stage investments often prompts me to develop a new method with which to filter, evaluate and pursue deals. One of my current methods is to group interesting early stage companies into the following buckets: “amazing,” “smart” and “crazy.” Many companies don’t quite meet the criteria I set to receive these labels, and occasionally, special companies will fall into more than one category. This is an imperfect framework, but nonetheless useful for me as I evaluate the worthiness of a given early stage project.

“Amazing” companies are the mainstay of the Israeli venture scene. The business case of these companies is predicated on having a superior technology solution for a technology problem that in turn has meaningful business implications in a very large market. These are companies whose products are incredibly difficult to develop, and whose product claims are met with incredulity or otherwise elicit a “wow” response. Competitors will scratch their heads and dismiss the claims as preposterous, but “amazing” companies will be vindicated at the end of the day. Finally, these companies are unique in that they are actually able to create shareholder value by merely delivering a working product (which honestly can’t be said of most start-ups). But alas, too many Israeli entrepreneurs and investors think their company is a diamond(amazing), when in fact it is just a shiny stone(interesting). The bar should be very high for these companies at the early stage, especially those that require significant amounts of cash for R&D. "Amazing" companies may ultimately be acquired merely for their IP, product and development team, but these outcomes are few and far between. From my portfolio, past and present, I put Altair, Dune, Soluto and Storwize in this category. Other "amazing" BVP portfolio companies would include Tilera, Miasole, and Vertica.

“Smart” companies seem to be Bessemer favorite. These companies solve challenging business/market problems with well thought out solutions that are largely business in nature, such as a new product concept, pricing model or marketing approach. They are borne of the founders’ epiphany that something valuable can be built around a market inefficiency or anomaly. They may be technology-driven, but rarely rely on technology innovation. As a result, the founders of these companies usually possess a strong understanding of the target market, including the economics, psychology and politics that drive it. The risk around these companies is largely execution, but when done properly these companies can quickly disrupt an existing market or create a new one with a surprisingly simple, yet smart approach. From my portfolio, I feel that both Soluto, and my recent undisclosed investment, fall in this category. Other “smart” BVP companies include LifeLock, Gerson-Lehrman Group, Diapers, Yodle and Open Candy, among others.

“Crazy” companies come with bold or wacky assumptions about consumer/customer behavior that are simply impossible to prove without trying. These are companies whose products are greeted with indifference (who needs it?), scorn (it’s annoying!) and ridicule(they will never build a business). And with a great degree of uncertainty baked into the plan, a lot of improvisation is required in the early years. In contrast with “amazing” companies, “crazy” companies typically have products that are straightforward to develop, but rely on untested methods of distribution, customer engagement, and/or monetization. And in contrast with “smart” companies, “crazy” companies lack a business model and operate in ill-defined market segments. I deliberately use the pejorative term “crazy,” because entrepreneurs and investors alike should recognize the immense risk of their plan so that pride does not keep anyone from pulling the plug when things clearly aren’t working out. Aside from ICQ, Israel has only had only a handful of successful crazy companies, which makes funding them more difficult. BVP has its share of “crazy” companies, which time has made very “smart.” These include Skype, Yelp, and LinkedIn, and more recently Hunch, Sonic Mule and Wix.

Over time, the distinction between each of these three labels may blur, as some “crazy” companies succeed and become “smart”(Twitter, Facebook), and some “amazing” companies succeed and become "smart" (Google). It’s fair to say that being a “smart” company should be the end goal of every start-up, but this is precisely the point. It’s hard to come up with a smart model at the onset and even harder to succeed at execution. But if you think you can, we are certainly interested. I also recognize that many “amazing” and “crazy” companies will be acquired long before they are able to prove they are also “smart”. Finally, it should be noted that falling into one of these three categories does not by itself guarantee success… however doing so can help early stage investors, like myself, feel their early stage risk is money well spent.

Axis Pulls an Ace in First LTE Exit

noreply@blogger.com (Adam R. Fisher) — Fri, 04 Jun 2010 12:01:00 +0000

Last month my portfolio company, UK-based Axis Network Technology, was sold to Korea-based Ace Technologies for $35M. It was a great outcome for all involved as BVP was the only institutional investor (£3M), following several years of bootstrapping by the entrepreneurs, Simon Mellor and Steve Cooper. Unlike most of my investments over the past 2 years, Axis was not an Internet company, but rather an RF subsystem company focused on being a key enabler for 4G wireless base stations.

At the time of the investment in the summer of 2007, this was a very contrarian decision. But something struck me about the entrepreneurs and the proven market for remote radio heads they were addressing(in 3G). The strength of their entrepreneurial spirit was manifest in their decision to bootstrap their venture by first finding customers and then developing products based on this intimate understanding of the customers’ needs. Furthermore, I was excited by the fact that Axis was following two familiar and successful paths in the telecom subsystem segment.

The first was exploiting a shift within telecom OEMs from in-house development to third party merchant suppliers like Axis. This has been played out successfully multiple times by other start-ups over the last decade, including a former portfolio company of mine, Dune Networks (sold to Broadcom), in the switch fabric segment. The second was paving the path for software/IP to replace low margin hardware, or rather exploiting the commoditization of existing hardware rather than developing yet more complex hardware. As a result, no OEM or competitor could match Axis’s price/performance, which made them the de facto standard in the LTE and WiMAX radio market. I love these themes and will continue to invest in them should new ventures come my way.

For my readers, the take away here is that contrarian investment in out-of-favor sectors can still be made wisely and profitably. However, the entrepreneurs and investors need to practice the same capital efficiency and scrappiness that we have come to expect in Internet start-ups. Leverage the innovation of others, engage with customers immediately, focus on the customer’s business pain, start with a minimal viable product (MVP), and pursue a business model that can be profitable even without massive volumes.

Axis is the first LTE focused start-up to be acquired, and likely one of only a handful of WiMAX start-ups to ever deliver venture returns to its investors. Congratulations and thanks to the Axis team!

Israel Deserves a Real High Tech Policy

noreply@blogger.com (Adam R. Fisher) — Thu, 03 Jun 2010 13:38:00 +0000

A new High-Tech Committee headed by Ministry of Finance Director General, Haim Shani, presented several recommendations yesterday to revive and buttress the local high tech industry. Here they are with my commentary and star rating:

1) Safety Net for Institutional Investors (**) – The idea is to encourage local pension funds to invest in Israeli high tech and Israeli VCs by backstopping their losses through a “Safety Net”. While I agree that the lack of a local financial backbone is a problem for Israeli VCs, and even an anomaly compared with our US and European counterparts, I think this recommendation is flawed. You need a safety net when something is indeed very dangerous or when it is at least perceived to be dangerous. So assuming Israeli VCs are only perceived to have bad performance and are actually quite attractive investment vehicles, then the government doesn’t have much to lose and the industry should gain as a whole with anchor Israeli institutional investors. If, however, Israeli VC performance is not that appealing relative to other asset classes, one must ask what perverse incentive this may create, and what business the government has using tax payers’ money to prop up a failing industry? Such a move may bring needed local LP dollars, but would create a certain moral hazard with investment managers and their LPs using this tax payer stop loss mechanism to invest in overly risky ventures. My recommendation is to leave the risk there, but make the potential reward sweeter by offering tax incentives for gains from investments in local high tech. This creates a natural incentive to invest in venture capital in Israel, without the moral hazard or riskless investing.

2) Encouraging the founders of start-ups not to sell “early” (*) – This popular maxim says that Israel would be creating many more IPO candidates were investors and their founders not so eager to sell at the first opportunity. I have heard this many times, but does this really make any sense or is this just a convenient excuse? Does anyone really think that that founders and their shareholders wouldn’t hold on to their shares two or three more years if they though their share value would easily double or treble? If this is what’s going on, VCs are not doing their job, and founders are surprisingly no longer motivated by money or fame. How could it be that we Israelis are quick to forgo future profits when it’s so obvious to everyone else that we are just hopelessly impatient? I know the names of too many now defunct start-ups who had the gall to reject various offers due to shear hubris. But can anyone point out at least three companies that sold too early and what disaster fell upon it and Israel post acquisition? There is no where near enough liquidity in the local start-up scene so someone in the Ministry is out of touch. If this recommendation goes into effect, it will affect the way investors structure their deals, because it will put founders at odds with both management and shareholders.

3) Prioritization of Chief Scientist Office (CSO) funds (****) – The idea is that the CSO should have some focus with its budget favoring sectors such as biotech, cleantech or semiconductor (my suggestion) which have a greater need for financial support due to capital intensiveness and long gestation periods. Finally someone has woken up to the fact that the CSO is a first come, first serve piggy bank for hungry start-ups. But let me add two other problems. The CSO has neither a mandate nor the ability to assess the viability of a given project, and a lot of the CSO grants are simply wasted on doomed R&D projects or companies. There must be a connection between recent private funding(which presumably is indication of the potential economic gain) and receipt of CSO money to help guide it.

Additionally, stop linking all CSO funds to R&D! How myopic and highbrowed can we be? High tech is not only about engineering and certainly not volumes of patents. Most of the most successful start-ups over the past 5 years have very little to do with engineering or patents (Facebook, Salesforce.com, YouTube, Skype, Zappos, would all be ineligible for CSO funds). In fact, I would argue that Israeli companies spend a disproportionately large share of their budgets on R&D compared with their US counterparts. Stop perpetuating this myth that that the success of Israeli high tech is dependent upon more engineering dollars. It’s quite the opposite.

4) Encourage corporate R&D through tax incentives (*****). Wonderful, by all means and have it apply to foreign R&D centers as well.

5) Provide incentives to employers of Arab-Israeli and Ultra-Orthodox engineers(***). This is commendable, and I like it, but believe it won’t solve much. Those minority populations are at a disadvantage in Israel for so many other reasons, such as their ineligibility to serve in the IDF(where critical experience is gained and vital connections are formed), and living too far from the center of high tech activity. The country’s inability to integrate them into the workforce is not unique to high tech, which suggests more is needed to make this truly effective.

I have several of my own recommendations for the High Tech Committee headed by Mr. Shani:

1) Encourage the creation of new micro VCs of no more than $50M along the lines of the original Yozma plan. These VCs would raise capital from private LPs, but would get generous matching dollars from the government. The $50M number ensures a focus on profits from carry (not management fees) and a focus on early stage investing.

2) Encourage angel investing through tax incentives. Angels have become a vital part of the entrepreneurial ecosystem, but much of what they do is ignored by the government. Give them additional incentives to keep investing. It would amount to a subsidy to the wealthy, but their role in germinating start-ups is akin to oxygen for our industry.

3) Create a Marketing & Sales fund to mirror CSO dollars on the R&D side. These dollars would go towards hiring marketing, business development and sales heads in Israel and outside; and include advertising dollars. This may not create as many local jobs, but successful sales and marketing supports our beloved engineers. It’s like teaching a man to fish, rather than just giving him a fish.

4) Invest more in education, English language skills, fundamental scientific research, and don’t cut the CSO budget. Also, bring more foreign companies and skilled foreign workers to Israel.

Soluto Impresses at TechCrunch Disrupt

noreply@blogger.com (Adam R. Fisher) — Thu, 27 May 2010 12:10:00 +0000

Two days after launching the beta version of their first product, Soluto was anointed the winner of the hyper competitive start-up battle at TechCrunch Disrupt yesterday in New York. This is a prestigious accolade and an ideal launch pad especially for a company like Soluto which needs a large user base to perfect its product. To be clear, this was not any start-up competition, or simply the latest crop of Web start-ups, but Web start-ups that have the potential to be disruptive. I know it’s a loaded word that many will contest until they are blue in the face, but simply adding this modifier, made this more interesting and challenging than usual. I applaud TechCrunch for putting on the event, and am thrilled that my own portfolio company would take home the victory cup. So congratulations to Tomer, Ishay, Roee and the rest of the hard working Soluto team!

And for those of you who don’t already know, Soluto is developing anti-frustration software. This download and accompanying service aims to lessen, if not eliminate, the frustration PC users feel when they twiddle their thumbs waiting for their computer to boot, staring at a frozen mouse cursor or rotating hourglass, or screaming in anguish when an application suddenly crashes on them.

I invested in Soluto foremost because of the strong entrepreneurs, who exhibit that rare combination technology depth and aptitude for consumer products. However, beyond the team and market potential, Soluto had a particular resonance with me because of their vision and approach. It fit squarely with my own investment roadmap around companies that leverage technology and their user base to create innovative web-based services for consumers.

My favorite motif within this “technology-enabled, crowd source-enhanced web service” investment roadmap of mine is that of Big Data-based services. Big Data simply refers to incredibly large data sets that are too cumbersome to accumulate let alone work with and make sense of. I am not so much interested in the companies developing infrastructure solutions to manage data, but rather companies that are developing new products services based on their ability to capture big data, synthesize and analyze it, and package it into a simple, yet valuable consumer products and services.

Initially, the appeal lies with the fact that very often the data already exists, but is buried or otherwise inaccessible. Secondly, I am attracted by the idea that the product will strengthen with more use and over time creating a naturally widening lead over any aspiring competition(large or small). I am increasingly of the opinion that to be successful, in particularly out of Israel, web start-ups must either leverage strong technology and/or the power of the crowd to maintain a competitive advantage in the face of so much competition for customers and investment dollars.

All of this is far from trivial, but Soluto aims to do just this. They start with a powerful, yet very intuitive download, which serves a dual purpose of providing a free boot utility to consumers, while capturing important data anonymously, not unlike anti-virus software. This “passive” crowd sourcing is valuable because Soluto has already built the backend of their service which knows how to make sense of the data for the creation of the second order product, which is the anti-frustration service. There is also “active” crowd sourcing through the techie users who can easily contribute their knowledge and solutions to the product.

With a more than a billion PCs in use, most of them frustrated, the business opportunity is enormous. The intense demand explains the relative success of snake oil solutions like registry cleaners or extreme methods like repetitive reimaging. And as anti-virus increasingly becomes a commodity or outright free, anti-frustration software pioneered by Soluto, may be its natural successor.

Even though it is still early days at Soluto, I continue to look for more companies that pursue similar strategies. In fact, I hope to announce my next “technology-enabled, crowd source-enhanced” web service investment soon. In the meantime, download and install Soluto!

The App Developer's Children Have No iPads

noreply@blogger.com (Adam R. Fisher) — Fri, 16 Apr 2010 11:38:00 +0000

Israel is lauded for its impressive high tech achievements, but this is primarily for the development of technology, not its application or deployment. Actually, outside of the defense/security realm, Israel is often a laggard when it comes to the adoption of new technologies(I am excluding the Internet). Instead of the Israeli domestic market serving asa a laboratory for its start-ups and entrepreneurs, it has become a clear hindrance to their success. Nowhere is this situation more poignant than in the telecom and clean tech sectors, where Israeli companies are renowned for their innovation and trailblazing development, but where one must travel thousands of kilometers from Israel to witness their actual application. In fact, I believe there is a widening gap between what pioneering Israeli companies are developing for export today, and the point far in the future when Israel will adopt those home grown technologies.

While it is the role of private corporations and entrepreneurs to adopt and deploy new technologies, I place much of the blame with those government and regulatory bodies tasked with ensuring a competitive and progressive market. It’s not enough to belatedly deregulate and open markets to competition, as Israel has done in telecom. Israel must take the lead and guide its local companies so that they are partners in the development and deployment of technology, and not orphaned to export. This is most critical considering that Israeli technology companies are increasingly competing with companies in Korea, Japan and China, where government support and sponsorship borders on protectionism.

Everyone knows that Orckit sold DSL equipment long before Israeli consumers could enjoy broadband. Or that Israel is the home of the only publicly traded WiMAX company in the world, but has no intention of ever licensing spectrum for WiMAX services. It has been the same situation for Israeli companies pioneering fiber-to-the-home, WiFi, home networking, IPTV, High Definition broadcast(finally!), and mobile TV. And for every successful start-up that overcomes the apathetic or hamstrung local market, there are many more Israeli start-ups that were simply outdone by foreign competitors with inferior products, but who had benefactors in the form of domestic customers. Sweden, Korea, India and China come to mind when I think of countries where domestic start-ups work closely with domestic customers to build the product and start deployment. I am not calling for protectionist policies that favor local companies(although some modest patronage at the early stages wouldn’t hurt), but rather for a local market that can embrace advanced technology early on in tandem with start-ups to ensure that Israel as a country is at the forefront of technology.

I am hopeful that Israel will eventually adopt most of the technology it produces and allow its citizens to enjoys the fruits of its engineering feats, but at the same time I am fearful how foot dragging and bureaucracy can harm our industry. The recent headline about Israeli Ministry of Communications banning iPads is a sign of how myopic and obtuse the government can be. It’s easy to forget that WiFi and Bluetooth were banned outright in Israel until late 2003, despite the fact that Intel Israel was already shipping the Centrino processors or that Israeli start-ups Envara and Butterfly were pioneering these standards three years prior to their legalization.

Clean tech is actually a lot worse, for reasons that have no logical explanation. The country is still wholly dependent upon polluting fossil fuels, all of which are imported. Israel sells solar panel products, and now even solar panel companies, but cannot manage to get around to actually using the technology on a massive scale despite the abundance of sunlight. Despite claims to the contrary, Israel will never be a true clean tech power if it cannot rely on its domestic market for trials and deployment. Better Place may prove the exception, but if they succeed in Israel it will not be solely because of its unique approach or technology, but also because of its political and economic clout.

We often take the strong Israeli high tech sector for granted, but it does not excel in a vacuum. Just like we need a strong education system to produce the next generation of entrepreneurs, we need more competition and more government leadership to make Israel a true laboratory for innovation. In short, I want an Israeli government that is as visionary and ambitious in the usage of technology as the Israeli entrepreneurs that develop it.

Deserving of a Response

noreply@blogger.com (Adam R. Fisher) — Sun, 31 Jan 2010 18:23:00 +0000

Along with a bunch of my fellow Israeli VCs, I was an unknowing subject in an experiment conducted by TheMarker(in Hebrew) over the past week. The idea was to send cold emails to 62 active Israeli venture capitalists and to test their “response times.” They created a fictitious cloud infrastructure start-up called Shadowscale, complete with an Israeli founding team from Checkpoint. The email was made to appeare genuine, and was designed to avoid the typical pitfalls most pitches trip on, such as being too early stage, not having an impressive team, or lacking any customer engagement. In fact, the name of the founder, Yinon Tzuk, seems to have been specially concocted to confuse us with Nir Zuk, an early Checkpoint employee, and now prominent entrepreneur. It was well done, but I would have encouraged TheMarker have created a true web presence including a website on Wix and a LinkedIn profile, which is fairly rudimentary for entrepreneurs.

I am at once both proud and embarrassed to be one of a handful of people who responded within the same day to set up a meeting as a next step. Actually, I happened to have responded within 8 minutes of receiving the email, but they didn’t measure that level of granularity. Although, I wouldn’t be proud of it even if they did, because no professional investor, could be expected to get back to every email within the same day unless an automated email response would be sufficient. I happened to be online at the time, listening in on video conference, so a rapid response was almost a reflex. But I also found it odd that an infrastructure start-up would emerge from stealth to approach VCs for the first time two years after founding. In fact, it was downright extraordinary, and I was convinced I must have been hiding in a cave to have missed a venture in my area of interest created more than 2 years ago.

As clever as it was, TheMarker’s experiment is misleading for entrepreneurs. It creates the wrong expectations for entrepreneurs and sets the wrong bar for measuring a VC’s professionalism. I am not aware of any venture capitalist that would dare promise a same-day response, like Amazon offers next day shipping. In the rare situation, one receives a same day or next day response, one can consider himself lucky(well timed) or at least special(something jumped out). Venture capitalists may pride themselves on being able to listen and provide feedback, but even then, no single VC could ever possibly give attention to every entrepreneur who sends an email out of the blue, let alone on the same day. Most venture capitalists I know travel almost a week a month, have specific areas of interest and are inundated daily with emails from prospective, companies, partners, candidates and service providers. This all might sound shocking to some, but new ventures are not new clients looking to spend their money on our services, quite the contrary! Perhaps if this were the case, we could be tested on our response times, but then again TheMarker didn’t conduct a similar experiment on local accountants or lawyers.

I am not sure who created the impression in the Israeli high tech market that venture capitalists should respond to cold emails, but the TheMarker test now perpetuates this expectation. Everyone knows that the easiest way to get a VC’s attention is to get referred by a mutual acquaintance, be it a fellow entrepreneur or executive, advisor, lawyer, accountant, etc. I am not saying anything new here, and the reasoning is simple. Foremost, it’s a automatic filtering method based on the source and strength of the recommendation. Secondly, if an entrepreneur is to be successful in his venture, he must be extremely resourceful and innovative, and this is the same way he will eventually reach customers, partners and employees (i.e. hopefully not with cold emails). With the large networks each of us has in Israel, the inability for an entrepreneur to find someone in his extended network who has some prior relationship with us is telling. Incidentally, when someone does approach me with an interesting project, but without a third party intro, I generally look them up on LinkedIn to get my bearings and triangulate.

There is however, a more realistic and acceptable expectation which entrepreneurs should have of their venture capitalist, but this is far more difficult to measure with an email ruse. This is the expectation that venture capitalists respond quickly to their own portfolio companies’ requests and needs. In my play book, portfolio always takes precedence over new deals, and this should be reassuring to entrepreneurs considering taking VC money. However, if we are expected to be responsive to our portfolio companies, this will invariably come at the expense of new deals, especially those arriving in the form of a cold email with neither an executive summary nor an email signature with contact details.

We do our job best when we are able to filter quickly and assign a priority to everything, even if it means missing great opportunities (although this is seldom the case with cold emails). I prefer to be judged by those deals I have invested in, and how responsive I am to those entrepreneurs I have truly made a commitment to.

A Farewell to the Walking Dead

noreply@blogger.com (Adam R. Fisher) — Sun, 22 Nov 2009 21:23:00 +0000

If recent headlines are even somewhat accurate concerning the pending sales of multiple Israeli start-ups, Israeli high tech should be feeling a great sense of relief. I know of at least 10 start-ups in advanced stages of concluding M&A transactions, with all but one at a loss or near loss to their investor base after many years of toiling in a challenging market environment.

So why should we feel relieved with such depressed prices?

Many of these companies are at least 7 years old, and fall into a forbidding category of start-ups that I call the “walking dead.” They are very much alive in that they have a fully functioning business, working products, satisfied customers and perhaps even modest year-over-year growth. But they no longer exhibit any of the cutting edge or hyper growth characteristics expected of venture-backed start-ups. Time has not been kind to them, and is no longer on their side. Their successful sale as a going concern is essential to sustaining the Israeli entrepreneurial ecosystem and a much preferred to a slow demise. More specifically, such M&A transactions provide vital liquidity for shareholders, release entrepreneurs to pursue their next dream, and free up the capital and time of venture capitalist to hunt for the next great deal. Furthermore, if done properly, such transactions will bring the company to a multi-national level, generate more jobs, and allow employees to expand their careers and horizons in a larger corporate environment.

Some of Israel’s fastest growing companies are approaching the end of their first decade, so I would not want to imply that all aged start-ups are condemned. However, these are often few and far between. More often, entrepreneurs and VCs unwittingly convince themselves that time will prove them wise, and that there is a light at the end of the tunnel. Unfortunately for most, it is a another tunnel that is at the end of the light and time and money are running out. Recognizing the direction a company is heading and forcing early action will avoid the painful existence of a walking dead company.

For companies past their 7^th birthday, I propose a simple litmus test of two questions to determine if a company is walking dead: 1) Can the company find a buyer today were it to put itself up for sale? 2) Is it clear that the company’s value will appreciate as time goes by? If the answer to both of these questions is ‘no’ or produces a pensive stare, then there is a real risk that the company may already be walking dead. Once trailblazers, these companies are now laggards, passed up by the more aggressive and nimble competition. Once the undisputed leader in a promising market niche, these companies are still the undisputed leader, but in what is arguably now a much less promising market niche. Unfortunately, those asking these questions are also the very people who have invested too much time, energy and dollars, to arrive at impartial conclusion to the above questions.

As a result, many of these companies are in fact dead weight in a VC’s portfolio, consuming precious time, energy and resources. For employees, the board’s persistence can turn a start-up stint into a bottomless pit on a resume. And for the Israeli high tech market as a whole, these companies tend to crowd out new start-ups that might otherwise have been created and funded (sometimes by the very same entrepreneurs and VCs).

Aside from the demonstrating their pitiful grasp of investment return analysis, the Israeli media miss the point with their headlines bemoaning exits at valuations below the sum of the total funds raised to date. They too should see such activity as a healthy catharsis, which will pave the path for new start-ups in the next cycle. Larger and more exciting exits will follow the sale of the walking dead, so the Israeli high tech still has a lot of headlines to look forward to.

Competitive Crowdsourcing

noreply@blogger.com (Adam R. Fisher) — Wed, 12 Aug 2009 13:54:00 +0000

The Netflix Prize reached its final stage last month almost three years after it began. For those unfamiliar with the competition, Netflix posed a challenge to the scientific community to develop an improved collaborative filter algorithm for use in determining Netflix customers’ cinematic tastes. The challenge was to improve on the current Netflix algorithm by at least 10%. Although a small improvement in percentage terms, the target was much harder than originally thought and has attracted 51,000 researchers since 2006. Ultimately there were two winners here. First is the research group that claimed the $1m prize. And then there is Netflix itself. The competition was a clever idea, and proved much more capital efficient then hiring scores of engineers, outsourcing or buying a collaborative filtering start-up. With minimal upfront costs Netflix now has a much improved product that is worth considerably more than the $1m payout.

Aside from learning about the fascinating world of collaborative filtering and algorithms, the exercise revealed the competitive nature of scientists, mathematicians and engineers. Of course, the prize money was an important catalyst and attention grabber, but it was the prestige associated with the battle of intellectual minds that lit a spark and kept these math geniuses going although way to the final stage.

Pride has always been a strong driver of innovation in the scientific and academic community, but is distinct from the pride of an entrepreneur, who is foremost driven by economic considerations. In science, there are grants and there are prizes. The former funds specified projects in the hope they succeed (e.g. NIH, DARPA). The latter are awarded in a fairly subjective manner for past achievements (e.g. Nobel, UNESCO, etc.). What we clearly don’t see enough of, are competitions, where prizes that are awarded for meeting a defined and measurable goal.

It is perhaps less scientific and more commercial, but such competitions can galvanize both entrepreneurs and scientists to pursue a worthy goal…and I am wondering why we don’t see more of them. After all, competitions not too dissimilar to this once spawned the world’s first marine chronometer and parking meter. Such competitions are a form of “crowd sourcing,” except that there is a fairly specific goal and a payout to the winner.

It reminds me of the X-Prize Foundation, which promotes scientific and entrepreneurial achievements that benefit humanity through $10m awards to entrepreneurs and scientists who are the first to achieve an objective goal. The most famous of these awards was the Ansari X-Prize, which awarded the prize to the first group “to launch a spacecraft capable of carrying three people to 100 kilometers above the earth's surface, twice within two weeks.” In retrospect, the monetary reward has little to do with spurring teams to win Ansari X-Priz, as the prize money is almost certainly not the incentive given the vast sums of money often invested in the projects.

Often forgotten is the fact that the Ansari X-Prize was modeled after similar prizes given away in the early twentieth century to spur the creation of the aviation industry. Most notably, Charles Lindbergh won the Orteig Prize for flying across the Atlantic in fixed wing aircraft. Here the cost was most certainly more than the $25k prize, as 6 lives were lost in 3 different crashes.

The recent success of the Ansari prize in turn prompted Richard Branson and Al Gore set up the Virgin Earth Challenge, which promises $25m to promote technologies that removal of greenhouse gases. Cisco too has the I-Prize. However, the Virgin and Cisco competitions are more akin to awards for past achievements, as they are not well defined, objective competition.

The more nagging question I have is why more companies and government institutions don’t use a similar strategy for solving complex problems. Perhaps they are simply afraid to reveal their technology holes or give away ideas to entrepreneurs. Nevertheless, for corporations brave enough, companies such as Innocentive, BrightIdea and Big Carrot offer a hosted platform, or exchange, for creating competitions and sourcing ideas/solutions from the masses. I look forward to seeing companies, large and small, use competitive crowd sourcing in the future, as it may prove a core part of corporate R&D, just like M&A and outsourcing are today.

And what a case of serendipity that as I write, I discover that Netflix is preparing a Netflix Prize 2!

Stanley and the Giant Shekel

noreply@blogger.com (Adam R. Fisher) — Mon, 10 Aug 2009 11:27:00 +0000

For those of you not living the Shekel-Dollar drama of the past year, I wanted to give a quick update. Twice over the past year, the Israeli export economy (including all high tech), has been jolted by the rapid strengthening of the Israeli currency. Versus the Dollar, the Shekel gained almost 25%, then lost it, and was most recently showing worrying signs of strengthening yet again. This might be great for those Israelis traveling abroad during the August vacation, or Israeli peddlers of Ahava Dead Sea products in suburban American shopping malls, but it’s downright awful for the industrial and high tech sector! In the current economic environment it’s probably the worst possible thing that could happen, especially given our natural dependence on exports.

The drama with our central bank started back in March of 2008 when the Shekel reached a low of 3.2 to the Dollar (after sitting around 4.2 for an extended period). Chairman of the Bank of Israel(our Federal Reserve), Prof. Stanley Fischer, announced he would start purchasing $25m a day to take advantage the strong shekel and increase Israel’s foreign currency reserve which then stood at $29bn. It worked for a while, until the Shekel began to steadily rise again. Most recently, Fischer started spending $100m a day; taking Israel’s reserves to an all-time high of $51 billion (India only has 5x that amount). Today he aggravated many and committed himself to a different form of intervention spending anywhere between zero to several hundred million dollars a day.

Most countries have the opposite problem of too weak a currency, which creates a real burden for individuals and the state when purchasing vital imports and natural resources. Our problem is that because Israeli exporters sell their products in Dollars and Euros, the rising cost base of Israeli companies (labor) actually threatening the country’s long-term competitiveness. Our shiny new car is cheaper, but the owner of our R&D center is already drawing up plans to move the facility to China.

There are many potential causes for the rise in the Shekel, including the weakening of the dollar versus most other currencies. We can speculate about speculators, about Israel’s pending entry into the OECD and pending upgrade to “developed country” in the MSCI composite. However, the real problem is that our economy and currency markets are simply too small, and easily moved by large transactions such as a block sale of stock. It’s notoriously difficult to assess the true value of a currency, but as a consumer and venture investor, I know the shekel is too strong. Unfortunately, the Big Mac index doesn’t really support my view, but it doesn’t matter (it doesn’t negate it either). Take it from me when I say Israel needs to be at a discount to the US market, and when the cost of high tech labor approaches that of the US, we venture capitalists start pondering our 6-day work weeks and trans-Atlantic jetlag.

For start-ups that take their investment in dollars and spend in Shekels, the fluctuations can be hazardess. As a board member, I advise my start-ups to use a conservative exchange rate for budget planning and then to lock-in at least 9 months expenses at a fixed rate.

Bank to Stanley.

At first analysts and columnists predicted that the Bank of Israel would fail to tame the free market, but they were forgetting that the Bank has infinite resources at its disposal…the ability to print all the shekels the world wants. As long as there are buyers, Stanley is happy to keep the mint working overtime. As a reminder, this is not a repeat of the fabled battle of George Soros against the Bank of England, but the opposite!

Like me, Fischer is an import from Washington, and former citizen of an African apartheid state (Northern Rhodesia). He likely doesn't remember, but I met him in his Georgetown home in the early '90s when he was at the IMF, and discussed our mutual interest in Israel and Zionism. The point I am trying to make is that one should never underestimate the resolve of such an accomplished immigrant. Fischer may halt his dollar buying binge for other reasons, but I am rooting for him day and night…and so should you if you want Israeli high tech to succeed.

Wanted: Small, No-Name Customers

noreply@blogger.com (Adam R. Fisher) — Mon, 20 Jul 2009 20:12:00 +0000

Readers of my blog should be familiar with my deepening preference for software companies, especially those that exhibit a low cost structure and high margin sales (not all software companies do). However, increasingly I prefer to characterize my investment focus less by sector, and more by the sales and go-to-market strategy. Specifically, I find myself favoring companies that use the Internet to sell directly to small businesses and consumers, and skeptical of start-ups that build their strategy around selling to large, strategic customers. For a variety of reasons, it has simply become more expensive and less rewarding to sell to large customers, regardless of whether this is a Fortune 500 company, telecom operator or hardware OEM. At the same, new marketing and delivery methods have made focusing on small, no- name customers more capital efficient and scalable.

In the first decade of Israeli venture capital, entrepreneurs and venture capitalists had a natural bias towards start-ups that focused on large, marquee customers. Wins with such customers meant large deal sizes, the attention of strategic partners/acquirers, and a rush by other customers to emulate the early adopters and thought leaders. Always preferring a technical sale, Israeli start-ups preferred large customers with a strong understanding of technology. Conversely, we venture capitalists eschewed start-ups that focused on small businesses or consumers, mostly because there was no cost effective way to reach them from Israel. Even if you could reach them, it was widely felt that these small customers do not appreciate cutting edge technology and are partial only to established brand names. Furthermore, while the strength of Israeli high tech was generally built around product sophistication, performance and intellectual property, selling to small, no-name customers required a product that emphasized design, usability, simplicity and price.

Large Can Be Longer, High Touch, Expensive, Non-repeatable & Unrewarding

A lot has changed since then. First of all, post 2000 these large customers have grown wary of working with and relying on start-ups, hundreds of which have disappeared, changed direction or simply never reached scale. The result is that the sales and testing processes of large customers is longer and more arduous for start-ups than ever before. Additionally, the procurement process of these large customers is more stringent, built on the premise that they are always better off buying from a select group of large, established vendors(even with an inferior product). Even where they have no alternative, their reluctance to buy from start-ups persists with attempts to indentify a middle man, place the start-up’s IP in escrow(in the event of shut down), or extract a hard commitment to fulfill the product roadmap(rarely accompanied by any NRE dollars). And once an order is finally placed, the long coveted joint press release is blocked by the legal department.

Secondly, the established competition has become more proficient at thwarting start-ups’ efforts to penetrate their strategic customer base. The competition knows to take advantage of the customer’s preference for buying a full portfolio of products and related services by bundling products and offering their variant of your product for free or at cost. The weak start-up market bolsters the larger competitors’ attempts to sow doubt about start-ups’ long term viability. Even Oracle’s sudden shut down of Virtual Iron only a month after acquiring them can be seen as a message to enterprise customers that even M&A provides little assurance for product continuity. This systematic obstruction was always present, but has intensified with industry consolidation in networking, semiconductors and enterprise software.

Lastly, penetrating a couple large customers no longer provides the same currency it once did. Not so long ago, regardless of sales growth and profitability, a few big customers wins made you “acquisition material.” Such customer wins meant the company was turning a corner, and generally made the start-up “financeable” by fellow VCs. Investment bank research analysts would warn larger competitors of the upstart’s superior technology and growing traction, and the young start-up’s credibility would rise remarkably. Today, this connection has been severely weakened if not completely dislocated. This is partly due to the challenge of a repeatable sales process among more skeptical customers, but also due to the indifference of potential acquirers.

Small Can Be Quick, Low Touch, Repeatable & Inexpensive

With large customers no longer worth the effort, start-ups should consider focusing on smaller customers and/or consumers. Luckily, several trends play in favor of such a “no-name” customer strategy. Performance marketing including targeted online advertising and affiliate networks allows start-ups to reach a wide audience cost effectively and with minimum up-front investment ( see “When Marketing and Sales Becomes Scientific”). Similarly, advancements in delivery methods, including downloads, virtual appliances and software-as-as-service lower the cost of sales, deployment and maintenance. Of course, strategies focused on small customers and consumers do not preclude sales to large customers as mentioned in my previous blog post “A Preferable Route to Market.” The challenge for Israeli companies is to build a product that emphasizes usability and simplicity as much as technology and performance. I have little doubt that such skill sets exist in Israel, but the key is to make this a priority.

The start-up and venture world has undergone a flip over the past 10 years. Large customers, once thought to provide a short cut to success, are now seen as more demanding and less loyal than before. Fortunately, smaller customers scattered across the globe are now accessible and serviceable via the web. Telecom once has its version of “small” customers called CLECs, while the semiconductor companies focused on Original Design Manufacturers(ODMs). In both cases, the smaller customers proved to be short lived or unreliable. I believe software delivered over the Internet could be both long-term and successful, but in the very least it’s an inexpensive model to experiment with.

High Tech Won't Solve Israeli Driving

noreply@blogger.com (Adam R. Fisher) — Sat, 04 Jul 2009 12:45:00 +0000

Israel is known for many great things, but its chivalrous driving is not one of them. Israel does have more roads per kilometer of road than any other country…but I would bet also fewer traffic cops per capita than most. Blame it on the hot weather, the tense political environment, old or young drivers, one of several minorities, the religious, the high tech employees with leased cars or wealthy elitists, either way Israeli drivers rival Italians in their aggressiveness, and South American’s in their disregard for laws.

Israeli high tech has produced start-ups like MobileEye, GreenRoad, Sensomatix and Traffilog to improve driver safety and behavior, but it will require a cultural change to turn Israel into a genuinely friendly place for drivers. As a frustrated driver myself, I have assembled a list of observations and camera phone pics for those unfamiliar with the experience of driving in Israel. All pictures are courtesy of my faithful Blackberry Bold.

1. Tailgating at speeds of 120kmh is a true sport in this impatient land. The logic goes something like this: “The closer I get to the car in front, the clearer I will become in his rearview mirror…and the more likely he is to move out of the way in haste.”

2. Shoulders on the side of the road are for those people in a real hurry and who didn’t know there would be traffic.

3. While frightening, it’s completely routine to see cars enter a highway and then slowly reverse after changing their minds.

4. Crosswalks merely indicate where a pedestrian might be run over if one is so bold as to cross the street. Conversely, drivers only have to stop at a crosswalk if a pedestrian has fully stepped off the pavement.

5. Mopeds, ATVs and small motorcycles can morph into pedestrians at will and use the crosswalks to get around a red light at an intersection. Consider this the next time you marvel at the speed of your pizza delivery.

6. Disabled parking spots tend to be occupied by luxury sedans and SUVs. In fact, I generally associated illegal parking in the cities with luxury vehicles whose drivers are above the law.
(graffiti on wall reads: "Disabled Parking is for the Disabled Momo!")

7. Don’t be alarmed to see seemingly senile pensioners taking their motorized wheelchair on main roads during rush hour. It’s part of the fearless, laissez faire culture we cherish so much.

8. If you want to meditate while driving, you can always read the religious graffiti on the road signs. Na, Nach, Nachma, Nachman Meuman is a chant of the Brezlov Hasidic sect. Why they feel compelled to use spraypoint is beyond me.

9. Israeli road signs are conveniently translated into English and Arabic. However, don’t be surprised if the English name of your destination appears to change its spelling as you drive along. Netanya may become Natanya. Zichron Yaakov may become Zikron Yaakov or Zikhron Yaakov. Petah Tiqwa, Petah Tikva or Petach Tikva…and so on. This should change soon with a harmonization in tranliteration, but in the meantime it must really confuse tourists.

10. Traffic cops exist, but you have to look carefully. And when you do, you will see that justice eventually comes to all repeat offenders regardless of their status.

Google Article in Wired Magazine

noreply@blogger.com (Adam R. Fisher) — Wed, 10 Jun 2009 21:04:00 +0000

Just read a nice article by Steven Levy at Wired about Google’s economic model. None of it is particularly new, but it does a good job of highlighting innovations beyond search.

Key Take-Aways

The first major innovation was in auctioning off a slate of ad slots each time a search query was made, and billing advertisers based on clicks on the ad, rather than impressions. Both were major departures for vendors/advertisers, who were familiar with drawn out auctions on eBay, or CPM based ad pricing on Overture.

A major innovation in Google’s auction process was the use of “second-price auctions”, where the winner of each keyword auction pays the price of the next highest bidder. The process reassured bidders they wouldn’t be a paying much more than the next guy, and ironically, provided enough comfort to actually result in higher bids over the long-run. Anyone who buys via AdWords knows how this affects their thinking in placing bids.

Auction winners and price is also determined by a set of algorithms which determines the quality and relevancy of the ad and associated landing page. This “quality score,” is meant to ensure high click rate and satisfaction for the consumer and advertiser. It also allows Google to predict click-through rates and improve its own business.

Google uses a “keyword pricing index”, which similar to the Consumer Price Index in that is measures the relative value of keywords to one another. This is indicative of how much emphasis Google places on data accumulation, trend analysis, and constantly improving its product for advertisers and consumers alike.

The most important I gained from this article is a reminder that Google did not anticipate the intricacies of its business model, let alone the auction model in advance. This is not to say they had no clue how to make money. Early on, they know the value of search provides users, that search implies "intent" and that intent is perfect for monetization. Ultimately, their success came from emphasizing consumer experience, customer experience (advertisers), and harnessing the results to further improve and refine the model and product. Google long ago ceased to be merely search company, and is now an economy unto itself.

BVP's David Cowan Gives the IVA Keynote

noreply@blogger.com (Adam R. Fisher) — Wed, 10 Jun 2009 07:44:00 +0000

For those of you who missed it, my partner, David Cowan, gave the keynote address at this year's Israel Venture Association annual conference. I provide this link to his own blog, where you can review his presentation and read most of his thought provoking notes from the speech.

His message was a sober one about the current state of venture market, and how to turn the venture business into asset class that once again yields meaningful returns for our investors. He pointed out the little known fact that only a handful of VCs actually have the attractive returns that warrant continued risk taking on the part of LPs. A recent Kaufman report even claims the venture capital industry must shrink by half for it to survive, and cites stark statisctics from Cambridge Associates that the "venture industry lags the small-cap Russell 2000 Index by 10 percent on a 10-year timeframe, despite the fact that those 10 years include the dot-com period, which materially inflates venture industry performance."

The reality is that while the venture market already experienced an earthquake back in 2000, we are only now coming to grips with the effects post-bubble economics are having on our underlying business. At this point, optimistic scenarios for the return of '90s style venture investing should have been eliminated with the latest financing crisis(which has now undermined the VC's capital base).

In Israel, such optimism over the past decade paved the path for funds to continue backing underperforming companies with the hope that good times were just around the corner. The result is that when looking at the portfolios of Israeli funds, few investments have been written off, and the vast majority are still private many years after the initial investment. David made a compelling argument that most funds would be better off having never invested most of the portfolio, even if it meant accepting a larger write-off(because right now, there aren't enough write-offs to speak of).

We Israelis have an uncanny ability to adhere to the "perseverence of mission," which is one of core principles in the Israel Defense Forces' code of ethics. By this I refer to the ability of both entrepreneurs and their VCs to keep at it as long as it takes to prove even a modicum of success. While this can be an admirable quality in some cases, it can also become a burden that prevents both entrepreneur and VC from stepping back to reassess the rationale of continued investment. As a result, "walking through the dessert" with a portfolio company during a rough patch is not an isolated event reserved for elite crop of companies, but rather the typical route for Israeli VCs and their portfolio companies.

Surprinsingly, there seems to be a difference of opinion on this matter in talking to entrepreneurs and LPs over the past few years. Entrepreneurs in Israel are convinced that Israeli VCs pull the plug too early and don't provide support during tough times. This became clear once again in comments made during the recent Globes survey of venture capital funds. In speaking to LPs from the US, however, they make it very clear that Israeli funds support their portfolio companies in excess, and don't do nearly a good enough job in cleaning their portfolio of underperformers. I for one believe that the LPs are in the better position to point out that Israel is an anomaly in this regard.

From the many compliments David received on this speech, it is clear that many in our industry are also exhausted from the omnipresent cheerleaders, who glorify the Israeli high-tech story ad nauseum. The strength of Israeli high tech is globally renowned for good reason, and its prominance will endure for decades to come. The threat the local industry faces is one of simply being an unattractive place for venture investment due to out-of-date company building models and out-of-date investment models. Despite the somber assessment of our collective performance over the past few years, David made it clear that that there are new and exciting trends, sectors and business models that are clearly attractive for venture investing.

Going forward, David offered advice(given in this blog too) including smaller investment amounts in more capital efficient companies, and not being afraid to fail, admit error and move on to the next opportunity. On the last point, the earlier and faster we do this, the more likely we all have a chance of finding or creating the next success story.

In classic style, he ended the presentation on a literal high note, playing Al-Kol-Eleh (a traditional Jewish song), using his iPhone and an application called Leaf Trombone by Smule (a BVP portfolio company). Thanks for sharing your insight David.

A Better Historical Parallel for Clouds

noreply@blogger.com (Adam R. Fisher) — Sun, 17 May 2009 07:22:00 +0000

Cloud computing is often associated with “commodity” pricing and efficiencies of scale, which is why the transition to a world with cloud resources harks back to the emergence of public utilities and mass manufacturing. Cloud networks may provide a utility of sorts, but there was never an industry-wide transition from in-house electricity generation to public utility, which is what is likely to happen with cloud computing. Furthermore, while standardization and interoperability has created a layer of abstraction between applications and their underlying data center infrastructure, clouds are far from offering any service as fungible as commodities, like water and electricity. History should provide some insight into what to expect from the emergence of cloud computing, but this industry parallel from 100 years ago is not ideal.

In reading and speaking to people in the industry, I have come to the conclusion the transition to cloud computing will most resemble the transition in the semiconductor industry, as it went from fully owned fabrication facilities(fabs) to third party foundries. At first glance, this might seem silly, but let me explain.

When foundries first emerged in the 1980’s, it was in response to both the
rising cost of fabs, and the emergence of many small, independent silicon design companies that had difficult financing their own manufacturing facilities. At the time, integrated device manufacturers(IDM), like TI and Intel, developed all of their own process technologies and manufactured at their own fabs. But as the global market for semiconductors grew and process technology advanced, many of the smaller IDMs were unable to keep up with the innovation necessary to remain competitive. Each new geometric process node raised the cost of fabs from $100m in 1985 to $1bn in 1994 (when the Fabless Industry Association was created) to an estimated $10bn today, making it prohibitive for only the very largest companies. Over time, even those that could afford to build a new fab found that the ebb and flow of semiconductor demand, combined with the difficult of capacity forecasting, rendered these operations highly inefficient over the long run, and a real distraction from their core business in the short run.

The emergence of foundries like TSMC offered an alternative for large silicon vendors who had difficulty managing their growth and costs. For small vendors, the impact was just as great, as the foundry model became essential for the emergence of the fabless industry, and companies like Nvidia, Qualcomm, Xilinx and Broadcom. As with any outsourcing transition, the resistance was led by arguments about IP leakage, and the strategic importance of owning and controlling their manufacturing as a competitive advantage. But such myopic views became a costly gamble with some chip companies ultimately buckling under the weight of their fab operations, and others simply ceding market leadership to their more nimble, fabless competitors.

The foundries that succeeded did so by building massive and highly efficient facilities, working closely with the process companies and leading customers. Today, the industry has only five or six leading foundries, with a handful of niche players using specialization to eke out an existence. While quality and the maturity of the technology process is critical, price is still the key determinant in choosing one foundry over another.

In thinking about the analogy I first want to point out the every growing investment required to launch a large-enterprise data center, which has risen to $500 million, from $150 million, over the past five years[1]. Additionally, the cost of running these facilities is rising by as much as 20 percent a year, partly due to the price of electricity, but also due to general opex. Secondly, due to the lead time required to design and build large data centers (2 years), capacity is added well in advance of actual business needs, forcing enterprises face a difficult task in forecasting data center requirements. For some of enterprises, data center spending is rapidly getting out of control as new data intensive applications for internal and external purposes consume valuable resources with an uncertain economic return.

While foundries and clouds provide very different services both solve a similar build vs outsource decision for their customer base. Both provide their customers with access to cutting edge technology, with minimum up front commitment, and the ability to scale infinitely at variable cost. In the case of the foundry business, there are relatively low switching costs and most large chip vendors give their business to multiple foundries to reduce risk and improve pricing. Thus far, there appears to be a similar dynamic with cloud services and their customers, but its still early days.

So what can we learn from the history of the fabless/foundry industry? The first is that due to the economies of scale required to stay competitive in terms of quality, technology and price, there are likely to be only a few big winners(aside from niche and local players). This is an issue, as most large hosting and managed service providers will make an attempt to morph into cloud service providers, with consolidation the likely result. Secondly, it will become harder and harder to justify continued spending on internal data centers as costs spiral out of control with an unclear ROI.

Finally, if there are only a few large players ten years from now, making a business selling hardware and software to these players may be harder than we think. I am reminded of the fact that despite the enormous annual capex of Google, few companies can claim to have built their success around selling to Google. On the contrary, Google has been building its own servers, and is now rumored to be building its own switches, in both cases buying off-the-shelf chips. Whether this will continue is a big question, and I am still undecided. After all, in the foundry business there is a clear distinction between companies like TSMC and Applied Materials, but this could be where the analogy fails.

In any case, one clear opportunity is to be the "fabless start-up" of the cloud era, taking advantage of cutting edge, third party data center technology and infrastructure to build a new businesses with a superior cost structure.

[1] McKinsey Quarterly November 2008 “Data Centers: How to cut carbon emission and costs”, William Forrest, James M. Kaplan, and Noah Kindler

Clouds with Silver Linings

noreply@blogger.com (Adam R. Fisher) — Fri, 15 May 2009 08:57:00 +0000

It is no secret that the costs of launching an Internet or software company have come down dramatically in the past decade, due to new programming languages, open source software, and ever declining server and bandwidth costs. At Bessemer, we actually calculated that cost of launching a web site application declines 50% every 18 months… one key reason we favor companies that leverage the web.

Much like the broadband build-out race of the last decade, today we see a host of companies prepared to spend billions to build out data centers(aka “clouds”) which they aim to resell as a monthly service. While some technology companies may profit from selling into these cloud networks with core infrastructure, such as management software and virtual appliances... many more will find their fortunes by properly leveraging this massive investment by others(even if some cloud companies ultimately go the way of some quixotic broadband companies).

On the face of it, cloud computing and storage services like Amazon Web Services, Joyent, Nirvanix and Mosso, are yet another example of the ever declining cost curve for web start-ups. However, cloud services are riding their own steep cost curve as these massively scalable data centers reach economies of scale and deploy cutting edge technologies becoming far more efficient, responsive, and flexible than anything known in the hosting business. The upshot is that start-ups will be able to craft their own virtual data center and pay a monthly fee only for what they use. Many of the initial customers of these services are in fact Web start-ups, but most are simply using clouds to cut costs or offload peak demand. In the coming 18 months, I expect to see many more business plans that rely heavily on this incredible resource, previously available to only the most well financed in the industry.

Lower start-up infrastructure costs will enable entrepreneurs to test more innovative product concepts, many of which were previously prohibitive from a cost standpoint. Many of these new product concepts will also involve experimenting with daring business models that can upend the established order. On this latter point, I anticipate we will see start-ups using the cheap data center infrastructure to give away more products and services that might otherwise have been paid for. Not unlike web start-ups today, these companies would then recoup their infrastructure costs and profit through premium versions and/or through lead generation revenue models. I will admit there is a fine line and overlap between your typical Web or SaaS company and start-ups that I consider to leverage the cloud. Lets just assume that in the latter case, the start-ups' product concept or marketing/distribution strategy rests even more heavily on rapidly declining computing and storage costs. Panda Security’s recent release of a free anti-virus solution might be one such example, as are the free desktop in the cloud service of G.ho.st.

In many instances, successful cloud applications will be those that are able to put a premium face on a commodity infrastructure in order to benefit from an ever widening price differential. In other words, these companies will use their own technology innovation to deliver proprietary service or application, while enjoying the ever declining costs of the cloud infrastructure. I don't refer to the myriad online storage and file sharing vendors, but new services that marry their own intellectual property to a commoditized cloud infrastructure. There aren’t too many examples just yet, but IT Structures , HD Cloud and Ctera are several companies that come to mind, and are worth watching closely.

This is the first of several posts I intend to write on cloud trends, as it the intersection of some of the dominant growth trends in today's technology market, including SaaS, Web applications and data center consolidation/virtualization.

No Surprise: Israel Leads with 75% Contraction in Q1 Venture Investments

noreply@blogger.com (Adam R. Fisher) — Mon, 11 May 2009 11:58:00 +0000