VCinJerusalem

Closing The [Venture] Gap: From Silicon Wadi to Silicon Valley

Over a cup of coffee this morning discussed with a super smart visiting entrepreneur (and professional angel investor) from Silicon Valley the remaining differences between the Wadi and the Valley--or in other words, start-ups here in Israel and those found (and backed by investors) in the Bay Area.

Bottom line, I believe a gap does still exist, but it's closing, and there are many of us working to close the gap completely.

But a word to the wise for Israeli entrepreneurs, investors in Israeli startups, as they say in the London Tube:

MIND THE GAP!

Where are the main remaining differences (well, beyond the better weather here in the Middle East, better food, and the Power That Is being a local call...)?

Over time I will revisit this, but let me just highlight a few areas worth further exploration:

1. We started later. Well, we started way before, like, say, three thousand years ago...but then took a break (for about two thousand years). Silicon Valley got going in the 1960s, hit its stride in the 1970s, and has never looked back. And that was on the base of a country that has enjoyed a somewhat stable government for 200 years. We are operating in a political reality formalized 60 years ago (that has never enjoyed more than a week or two of stability). Our start-up culture really only got kick started  about 20  years ago, in the late 1980s. Really picked up only in the 1990s. 

2. We Speak Hebrew. We really do. My mother still can't believe it (really, she asks, "what do the kids speak in school to each other?" I say, "Hebrew." She says, "and they understand each other?").  You see, we literally had to recreate a society  after two thousands years of exile  --  part of that was breathing new life into an old language. Maybe you haven't realized it -- but not too many people speak Hebrew...which means at first we were a bit cut off from the global culture. Now many of us speak English as well...but we still think in Hebrew.

3. We are far away.  OK,  so no matter how much my friends in Tel Aviv  or Long Island pretend, Israel is in the Middle East. We are not in Europe, we are very far from the US, or any other market for our companies. Sure, its a lot easier to connect today, but air travel costs are going up again, and people still want to see people when they do business together.

4. We know what's best. Maybe as a result of that whole "chosen people" thing, or being on edge for 60+ years, Israelis have a "we know what's best" attitude, that sometimes makes dealing with us...a little rough. But we are learning, at least in our public behavior, to become more "American" (as my partner Lior says). At meetings we now say things like "how interesting" when really we mean....

These are just some highlights -- and we are quickly closing the gap. I will write more on how and why that is happening. But until it's completely closed, take someone's hand to make it across.

Fail, Fail, and Fail Again. But Always Believe You Can Succeed

Living as an early stage VC in Jerusalem, it's easy to get burnt out on so many different levels.  All of our companies need to raise more money (the difficult part),  close  business deals (the easy part),  and keep their teams incentivized, excited, and with a feeling of positive momentum. Not easy.  And all of this while living in Israel where the very existence and future of the state is questioned on a daily basis.

I saw the following video on Brad Feld's blog, reminded me how true visionaries are the ones who know how to deal with failure (but not "give up"):

Facebook Fallout: Nobody Wins, Especially VCs and Start-Ups

You have heard me go on before about why I thought the valuation Microsoft gave Facebook for its "strategic investment" was way out of line (nice way of saying absolutely ridiculous). Below please find analysis by Daniel Primack (of PEHub fame), which I think is spot on, so simply reposting in...bottom line, Dan thinks that "Microsoft’s initial investment may be one of the worst venture capital deals of all time."

Not only do I agree, but want to add that in addition to being terrible deal for MSFT, also sent shock waves through the entrepreneurial ecosystem, even here in Israel, which made entrepreneurs (and some VCs and Angels) silly for several months. All of a sudden every idea for a new social network was deemed to be worth $5 million pre-money...which is one of the reasons Jerusalem Capital did make any new investments since September 2007.

We already see that people have come back to reality, a bit. Anyway, here's Dan:

                                                                

	Dan Primack | 1191 articles posted | contributor since 11/2006         read my column ...
Facebook’s Valuation Problem
Topics: VC Deals,  PE-Backed M&A,  PE Exits		This entry was posted on 05-09-2008

 

The WSJ recently reported that Microsoft is sniffing around Facebook, less than seven months after investing $240 million in the social network at a $15 billion valuation. It was largely discounted as the hopeful fumblings of Steve Ballmer, in his search for a rebound acquisition after being dumped by Yahoo. But it got me to thinking: Microsoft’s initial investment may be one of the worst venture capital deals of all time.

Longtime readers know that the current title-holder is Hummer Winblad, for its Napster investment in the midst of that company’s legal morass. And it will remain that way, as Microsoft’s Facebook deal presents neither the legal difficulties nor the likelihood of a total write-down. In fact, it’s probably been a good strategic deal for Microsoft, which doesn’t need to sweat the small stuff (i.e., cash). The only caveat to that last part is that Microsoft is now expected to overpay for all its other acquisitions, which has led to a trickle-down throughout the Web 2.0 market. For example, macro valuation inflation helped scuttle the Internet roll-up envisioned by Ross Levensohn and Jon Miller — as their targets upped their respective asking prices.

Anyway, back to my thesis. The reason this might be one of the worst VC deals is that all of its negatives fall on its supposed beneficiary: Facebook.

This isn’t a dilution argument, but rather one of public perception. Social networks partially work because of functionality, and partially because of bandwagon popularity. You don’t necessarily join and use Facebook because it works well, but perhaps because your friends have joined and use it. And, as has been proven with MySpace-Facebook-Beebo, that usage can be fickle and prone to migration.

Public perception is very important, and I think the Microsoft investment has set Facebook up for a giant egg pie in the face. For example, imagine the endgame is to go public. If so, there is no way a company with such low revenue could possibly get near a $15 billion valuation (this isn’t 1999, and Facebook isn’t Google circa 2004).

So let’s generously imagine it could get $5 billion. Know what the headline will be? How about: “Facebook Files for IPO.” Looks good, but check the subhead: “Social networking company worth just one-third of 2007 valuation.”

Ditto for an acquisition, as no company in its right mind would pay close to $15 billion for Facebook. Yes, that includes Microsoft.

What this means is that Facebook is going to lose heat upon liquidity, and a loss of heat can lead to a loss of cachet. Remember all the buzz when Facebook got the $15 billion? Now imagine it again, but with a negative spin (particularly outside the TechMeme bubble, where most of Facebook’s users actually live).

All of this is exacerbated by the fact that Facebook never really needed to take the Microsoft money (could have gotten it elsewhere), and certainly didn’t need to confirm the valuation in a press release.

The only out I see for Facebook is to take another big strategic investment at the $15 billion figure. It could provide liquidity for Facebook’s early VCs like Accel (whose LPs would really like some payoff) and other employees looking to turn their paper green. And, yes, that probably means Microsoft again. If not, that original investment will hurt Facebook far more than it will help it.

Note: Much of the above argument was first made (to my ears) by venture capitalist Stewart Alsop, at this year’s VC in the Rockies conference. It took my a while to come around, but I’m now there. Hope he doesn’t mind the pilfering.

If a "Tweet" Falls in the Forest....Does a VC hear?

If you have not yet heard of Twitter you are part of the blessed 99% of the population of the Western world that are not "early adapters." For professional reasons and general curiosity of the 1% (I consider myself to be a bemused observer of the early adapters) I signed up for Twitter back in January, although Twitter has been around as a public service since October 2006 (see here for more on history).

OK, so what is Twitter? Its is a messaging service limited to 140 characters...wait, all of you semi-Geeks ask, isn't that the same as SMS? Well, yes. And aren't there dozens of companies that allow you to message blast from/to mobile phones, PCs, etc.? Yes. So what is new about Twitter? Well, nothing and everything. Nothing technically new, that's for sure.

So what is/was new about Twitter? Well, they picked a funky name, that's always important (think Yahoo!, Google, Ebay...). And they specifically marketed their service to US semi-geeks (think self-important VCs and well-known bloggers). And timing was right, when [finally] the 1% crowd in the US felt comfortable messaging from their mobile devices. And of course after the first blogging wave, which already prepared us to be interested in complete nonsense(;-)).

One of the "features" that Twitter added (this feature exists in many blogging platforms) is to sign up to receive the tweets of a certain Twitter. Basically, to get their micro-blog feed. The 1% crowd loves this, all zapping messages to one other all day long.

As I said, I signed up, literally to just see what the sign-up process was like, see how it worked. Sent a few twits to test web/sms interfaces. haven't twitted in quite some time. But slowly slowly people have found me on Twitter and have signed up to "follow" me. So far only 18, but half of those people I don't even recognize their names! And there is nothing to follow.

To understand better how Twitter is being used by the 1% crowd, I popped over to Brad Feld's Twitter home page, and see that he has 1,383 people "followers" and that he is "following" 132 people. Very believable, and reasonable, given that Brad is one of the best living VCs, and prolific blogger. Persusing through his "tweets," I recommend he stick to blogging, and stop tweeting, but whatever makes you happy.

And then I looked at super-uber-blogger Robert Scoble's Twitter page, and see that he is sending tweets every few minutes (while awake, and sometimes while sleeping). He claims to be following 21,209, and to have 22,545 followers. Meaning every time he sends a tweet, goes out to 22,545 people. That's a lot of virtual ink. Does this make sense? Could he really be keeping up with 21,209 people? Doubt it, but maybe he has outsourced himself...

Bottom line: with all this tweeting, does Twitter make any money (you knew I was going to ask)????

Answer: a few weeks ago, on their Japanese version, started running some ads. Other than that, nada. no revenues.

The aptly named Peter Kafka wrote the other day on Twitter's current fundraising round, see here (asking the age old question, but this time for Twitter, How Much Is Twitter Worth?):

The bigger question: How do you put a value on Twitter, anyway? The company has only just started seeing a trickle of revenue, via advertising on its Japan version. But beyond that there's no money coming in, and it's not clear what the model will be.

While Twitter itself has great buzz, we hear the majority of the site's traffic comes from outside the site, via other apps like Twhirl, mobile access, etc. So traditional online advertising--a difficult prospect to begin with for a communications service (see the struggles of various IM, email platforms) may be even harder.

That said, based on Twitter's growth and brand dominance, $75 million post-money seems plausible. There must be a pony in there somewhere.

I am sorry, Mr. Kafka. A company that has no real technology, a usage base of uber-geeks, and no significant revenue should not be valued at $75 million. It's bad for the business of creating businesses.

VC as Motiviating Coach: GO FOR IT! Vyond a Finalist for Start-Up of the Year

One of the most important characteristics of a successful start-up CEO is the ability to inspire his team, much like the team captain in many sports. But who motivates the motivator? The coach. A successful coach can empower the CEO, inspiring her to be a better captain. A good coach  does not try to replace the team captain, but helps keep her spirits up, pushing her to reach deep down and lead the team as best she can--and sometimes to go beyond what she thinks possible, "winning against the odds."

In my short career as VC, I have found that  my best moments are when I inspire (OK, sometimes more like nudge....) my CEOs to be the best they can be, and more.

To jump into start-up life is not easy--and to be the CEO of an early stage start-up is probably the most stressful position in business life.  VCs, I believe, need to provide  a good  support system,  that sometimes reminds the CEO how much  she should believe in herself -- to  Go For It!

I experience this almost every day, but one pleasant example: TheMarker, Israel's leading business publication, together with Microsoft, are running the annual Most Promising Internet Start-Up (in Israel)competition. With the deadline approaching, I coached/nudged Adi Ashkenazy, CEO of our portfolio company Vyond to enter the competition. Adi, like all start-up CEOs, is juggling many things, under all kinds of pressure...and did not at all think Vyond would win...I coached him through it, reminded him just how cool our product is, and he got the application in. I am proud to say Vyond is one of the three finalists (chosen from hundreds of start-ups), with the overall winner to be chosen/announced at TheMarker annual conference on Sunday. I will be there, very proud of Vyond whether we come in first or not.

Are VCs To Blame For "Free?" And Is Free Model One Size Fits All?

Excellent posting by Hank Williams today on Silicon Alley Insider, which is one of my favorite sources. See full text of his original post below, and definitely check out the discussion that erupted within minutes on SAI...back and forth brings out the angst that many of us have been dealing with over the past few years.

With the success of Google, who weave billions of dollars of profit from millions of "keywords", convincing the world that a "click" has inherent value, there has been a run on the bank. Literally. Everything is now supposed to be supported by "advertising." But remember, as I have often said, in the end someone needs to buy something. That's how advertising works. Otherwise its a massive ponzi scheme.

Traditional media companies have always had (and will have) advertising as a dominant (and sometimes sole) source of revenues. But advertising was never 100% of the revenues, think of movies, video games, even most daily newspapers. There is a price. It is not free.

And now think of services that are not media companies -- there is no historical justification for free. Salesforce.com, a pioneer of using Web X.0, charges. And many gladly pay. Is Gmail free? For now. I doubt it will last, and if it does will mean a re-shuffling, but not complete revolution.

Advertising has its place, but I for one am tired of very smart entrepreneurs acting like deer in the headlights, who have been brainwashed by VCs with too much money that usage/users  are all that's important. We will be facing a capital crunch in the days, months, and years ahead -- those who have developed real revenue generating businesses will survive.

I agree with Hank, that VCs are killing many businesses, but there will be a revival of the dead. Make sure you are prepared!

Free" is Killing Us--Blame The VCs

             

Hank Williams             April 4, 2008 9:20 AM        
                          I believe it should be possible to start a small business and to have a small number of profitable customers, and to earn a living. From there, it should be possible to work hard, and to grow your business into something substantial. Until recently, this was the American way, and it applied to technology as much as to any other business. But no more.

In today’s “free” world, in most online business categories, it is inherently impossible to start a small self-sustaining business and to grow it. This is because in the digital world, advertising, the only real revenue stream, cannot support a small digital business. If businesses were based on the idea that people paid for services then small companies could succeed at a small scale and grow. But it is very hard to charge when your competition is free.

The economic problem with advertising businesses is that advertising businesses do not work without really significant scale. In the past, a good product or service could address a niche and succeed without being a home run. Today, a home run is required because if you do not reach a massive scale, advertisers are uninterested. And even if advertisers could be attracted, CPMs are so low that the revenue would be inconsequential. Small Internet businesses don’t work.

So how did we get here? In a word, VC.

Venture capital has totally distorted the market. VCs are investing billions of dollars in companies with instructions to get big fast and to worry about advertising revenue later. As a result the competition is for users and not for paying customers.

Unfortunately, to fix this, many more companies need to die.

With less “free” floating around, a more regular supply and demand dynamic can take hold, customers will have to pay for the things that are important to them and non-quantized growth dynamics can return. In the meantime, why should consumers pay for products and services that VCs and their pension fund investors are willing to give away for free?

The good news is at some point VCs will indeed realize how dumb all of this is and stop giving away everything of value on the Internet. This will all stop when the average VC can’t get any of his/her companies to scale because there is just too much VC sponsored free stuff out there. Then and only then will this crazy eyeballs business model redux finally be put to bed.

I cant wait.

SAI Contributor Hank Williams is a New York-based entrepreneur. He recently launched a new blog: Why Does Everything Suck? Exploring the tech marketplace from 10,000 feet.

    

   

Defining a "User"...Skype Says They Have 276 Million of Them: Questioning Where We Are in VoIP

Just reviewed a recent presentation by Skype GM Jonathan Christensen at Ecomm2008 entitled "A Brief History of VoIP." The full presentation can be viewed here or below. Besides a nice ego boost, in that Jonathan cites Delta Three, which I co-founded and helped lead, as a "pioneer," I came away with a few highlights, and questions.

Number one highlight, is that Skype (and others) went from talking in 2003 about downloads (500K in 2003) to "users." Jonathan says that today there are 276 million users of Skype. Believable? I think not, but depends on how expansive your definition of user is...When I tried to use Skype tonight (more on that below) there were 12.4 million "on-line." Not using, obviously, just running Skype in the background. No usage statistics are ever given....would be fascinating to hear what those 276 million actually are doing.

Number two, is that Jonathan does not relate to quality issues, which in my mind are still A BIG DEAL. VoIP has had a bad reputation since the beginning as a low quality phone quality, when in reality we geeks know that true VoIP should be better quality than the PSTN. Why is it [still] not? Because unless you control the network[s] you run on, you have no quality of service. Tried to talk to one of our CEOs tonight on Skype (he in hotel room in LA, me in my house in Jerusalem where I have 5 MB line), and after few minutes of CB radio like static has to IM him asking for hotel room number, and I called him using my POTS phone.

Number Three, while Jonathan claims profitability for Skype, as far as I know the only revenue they have is from Skype Out, which is nothing more than a cheap calling card for the PSTN -- in other words, they generate no revenue from  actual pure IP communications. Could they at least put ads on the Skype app? Sure. But I guess being part of Ebay, there is no rush to bring in new revenue channels...

Finally, Jonathan talks about "mash ups of web based communications," but as far as I know, Skype "users" are restricted to calling, on net, other Skype "users." Not much of a mash up there. In fact, sounds very much like a closed garden, even worse than regular phone network. Where are the inter-op agreements for Skype users to talk to MSN/ICQ/AIM/GoogleTalk users?

I have a lot of respect for Skype team past and present, but think VoIP community is still taking baby steps from the "pioneering" days of Delta Three, ITXC, VocalTec, and others. It is time for new pioneers to really move us forward in leveraging the power of IP communications.

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Where Google Goes, the Dollar is Not Far Behind

Google has represented the decade we are now winding down, and tracked the resurgence of the American economy after the blows of NASDAQ implosion in 2000 and then of course 9/11. With the succesful growth of Google, its IPO took off, and while I thought it was a short at 80, stock price continued to climb.

While the dollar did not follow the same meteoric rise over the past 6-7 years as the Google stock price, Google is many ways was keeping the dollar propped up, overshadowing the many serious problems in the American economy and government (not the least the American invasion and occupation of Iraq, costing the American taxpayer, which includes me, more money than it would take to feed all the hungry people in the world).

Clicks. Click throughs. PPC. Adwords. Adsense. These are the ingredients of Google's billions of dollars of profits (and still insane valuation). What it boils down to is the ultimate American value point: marketing. The Google guys convinced the world that clicks=$$, and until the emperors cloths start to fade noone knows he is standing there naked (or nude, if you prefer). But how well tested is the core Google theory? What are conversion rates really like? None of "know," tremendous amount of guesswork involved. Look back to my post on Jaxtr for a taste of emptiness of usage--10 million users and no revenue to speak of, in my eyes that is not a business.

Now, let me stress that while I know little about the public markets, I know far less about the global currency market. When my children ask me about the dollar falling in value against the Shekel, I blabber for a bit about "shakiness in the American economy," but actually have no idea what I am saying. I do know, however, that much like Google, America marketed itself well, even in the face of some astonishingly stupid moves in the world. In 1990 we defended one dictatorship from another (to this day not clear why). In 2001, in response to 19 Saudi men bombing New York and Washington the US went to war in Afghanistan and Iraq. Go explain that one to your kids.

Now people are losing confidence in Google, and in the Greenback. As long as you cashed out and your life is all in dollars, nothing to  worry about.

For those of us who live in the world, and I mean in the world...multi-currency,  multi-lingual,  multi-national,  the  rapid deterioration of the  Google stock price and  the dollar  remind  us  that we cannot rest  all our hopes on one player. Going global means being global, and even living in Jerusalem (in the center of the world) I am feeling left behind. Time to move savings in multiple currencies. Time to figure where the next waves are coming from -- because Google Greenbacks are so....what do we call this decade?

JAXTR HAS 10 MILLION "USERS": Now what? Oh yeah, MAKE MONEY

Back in April 2007 I posted short notice about a cool new thingie (that's a highly technical term, sorry) from a start-up called Jaxtr. At the time I had no idea what their business model might be, and as I was not considering investing in them was only mildly curious.

Now I come across this press release from Jaxtr, with this headline and summary:

Jaxtr Goes Out of Beta; Launches World's First Talk Network In Less Than a Year, Jaxtr User Base Already Tops 10 Million

Jaxtr (www.jaxtr.com), the social communications company that links your phone to the Web, successfully completed eleven months of beta testing today and released version 1.0 of its service. The centerpiece of the new release is café jaxtr, a place where users socialize around the question: "What do you want to talk about?" With this 1.0 release, the company is also implementing its revenue model via the integration of text and display advertising within café jaxtr.

Now, I added the emphasis on the last line there, but find it so interesting. Over a year into the company's existence, with "10 million users," they are only now "implementing [their] revenue model." And, that model is...drum roll please....advertising. Wow. What a radical new concept.

Also, take a step back at Jaxtr's claim of "free international calls." What they really mean is to a limited subset of countries, with you calling into a local number (anyone say calling card?) they will complete the call. Not exactly free.

But anyway, in their press release they give no statistics of actual usage, just "users." I remember in the late 90s at VON conferences Jeff Pulver used to challenge all the speakers coming from VoIP companies to say how many minutes were actually going over their networks, and what minutes were really origanting on the net.  As one the frequent speakers at VON I loved that moment when we all would have to "open the kimono."

A year ago I liked the Jaxtr widget, for its creativity, but that was about it. I did not understand the company they were trying to build. Still don't. But glad to see they remember that the point of a business is to make money. I hope they do.

                                                           

                                                                                   

Going Beyond the HEADLINES, Skype Silliness

In many disciplines, going beyond the headline is important, but in the tech space, especially with start-ups (I include in that anyone yet to prove they can make serious money) facts are really important, because many of us tend to slip into la la land when talking about our products/service.

Take a look at this posting from FierceVOIP blog:

Skype scores 12M concurrent customers

      

February 21, 2008

         

       

Tags       Skype   VoIP Phones      

      

   
       

   

Skype watchers noted the big VoIP provider this week enjoyed 12 million concurrent users for a short period. The peak occurred around 19:00 GMT and coincided to a period when both European and U.S. users were using Skype. According to the Skype Journal, the strong rise in usage reflects a recent lift in the take-up of Skype by U.S. customers. Over 80 percent of Skype's user base is offshore from the U.S. and Skype has long yearned for a bigger U.S. audience. The peaks are driven by its European base.

At the same time, Skype claimed to have clocked 100 billion minutes of audio and video usage. What that means is hard to get your head around, other than to note there are now 276 million users with registered Skype accounts. If only someone could work out how to make money from free telephony!

Now, did Skype actually have 12 million concurrent users? NO! They had 12 million on-line at the same time. Impressive, but not the same as 12 million people actually all making a phone call at the same time. Also need to remember that many Skype  "users,"  including me,  mainly use Skype as  another IM  tool, and rarely for actual  phone calls.  I do  have some Euro  loaded into my account, for  those desperate times when I have wifi and need to call off the IP network (using SkypeOut).

The most important line of the post above was the last line, which is that Skype still has not figured out how to makes gobs of money from its "12 million concurrent users," much to Ebay's sadness (for those of you who already forgot that deal, Ebay bought Skype for billions of dollars, many of us are still trying to figure out why they would have paid anything...).

Call me old-fashioned, but while I love whiz-bang technology as much as the next person, a start-up is [at some point] supposed to actually become a business, which means turning a profit.

Oh, even in business you can be a loss leader at times (see here what my friend Rami Levi is doing to chicken prices in Israeli supermarkets) but that is quite simply a marketing ploy.

Writing a headline is an art, but those only get you so far. After the headline comes reality, and even if Skype really had 12 million people talking at the same time (imagine listening in), if it's gross profit margin is no better than Rami Levi, well, then they better start selling chicken--at least then people will get something to eat after all that talking (as a Vegan, only using chicken to make the point, would prefer tofu!).