Two fellows with a bright idea and a ponytail. That is what the local venture capital market calls the type of companies that in the past year have been flooding the local market. The profile is one of youthful entrepreneurs, not necessarily graced with any formal technological education, sometimes devoid of any technical background whatsoever, with an idea for an Internet company of limited technological depth and dreams of becoming Mirabilis when they grow up. In another year or two, that is.
The funds, too, contracted Mirabilis fever, and had to adapt to totally new game rules. "Ever since, the funds have been rushing around like crazy", admits a certain venture capital fund source. Israeli high-tech has suddenly become a very prestigious brand-name. And the funds, nourished primarily by money from abroad, suddenly acquired very high-prestige status in the venture capital investment world.
Mirabilis Lookalikes
They had to produce receipts, though. The fame of Mirabilis spread through the nations. If an exit had hitherto averaged four to five years, one’s meteoric Internet exist was henceforth supposed to take place within one and a half to two years, yielding astronomical returns. Suddenly, a genuine understanding of Internet became essential. Suddenly, one had perforce to keep one’s finger on the US market pulse, and recruit an American management team. Suddenly, there was competition over investments among the funds and with the angels. And over foreign strategic investors, by both companies and the funds themselves.
The funds had no choice but to re-deploy. Formerly, many of them never even bothered to specify a field of specialisation. Their portfolios bulged equally with semiconductor companies and communications and medical equipment firms. But from now on, they almost all positioned the Internet as their central selling station. Because if your investors aren’t receiving an Internet-derived yield, you could be seeing some sour faces on your Board of Directors. And you may well lose them next time round.
A smart venture capital fund would therefore be well advised to learn to do a rapid due diligence. And may well have to develop something with the distasteful name of service consciousness, vis-a-vis entrepreneurs it used to kick around wherever possible, just to teach them where the dollars were coming from. Investment decisions must be taken within two to four weeks, instead of four to six months, and fast cheque-writing skills must be developed.
Shlomo Kalish calls this "time to investment". Getting to market quickly is not enough. The fund has to reach the entrepreneur quickly, cheque in hand. This forced him not only to set up the yazam.com Internet site, a sort of Israeli entrepreneurs portal, at the Jerusalem Global investment bank, but also to promise applicants an answer within six weeks at most, from receipt of the business plan. Where good start-ups were once wont to stand long and patiently in line outside this investment bank, founder Kalisch and his merry men must now work harder to reach the good entrepreneurs before anyone else does. "It’s hard", Kalisch admits. "The market is more competitive today. The whole Internet world operates in dog-years. There are no entry barriers, there is no unique technology. Any two guys finishing their national service can set up some sort of eBay."
Kalish is not alone. The whole market, as one man, is giving chase to Internet start-ups, especially the more successful ones. To the point where the best ones, can afford to let the funds court them, even good, solid, sought-after Israeli funds, and sometimes to no avail. Some entrepreneurs, at least at seed stage, prefer to obtain quick money on good terms from "angels", and then obtain strategic money from US funds, which know how to play the Internet game and give the company added strategic value.
Another manifestation that has indelibly scarred the local start-up market mentality is that of the exit as an entrepreneurs selling station. Way back in entrepreneurial pre-history in the land of our fathers, entrepreneurs would come along with a detailed business plan for setting up a landmark, Check Point-compatible company on Wall Street. Today, they reel off, for the benefit of all comers, a hasty, yield-intensive list of exits.
But the meteoric dream exit no longer holds water, as they say. The phenomenon of free client software packages (intended for all terminal users), such as ICQ of Mirabilis still persists in Israel, as indeed in the United States. Today though, there is a tendency to revert to the good old model of companies being required to show a model for generating profits that is not based on a millions-long user list. Because that is what is happening in the United States.
So, tectonically though the game rules in Israel may have altered, things are starting to calm down, to revert to something like normality. Those fly-by-night, never-stood-a-chance idea boys have made way for people with more business experience, and a more mature business concept. "the Internet market is now maturing", says the business development manager of an important investment firm, "It’s no longer a child’s game. You have to show a clear revenue plan".
Benny Dekalo, a partner in the Dekalo-Ben-Yehuda investment bank, which raise investments for Israel's MultiMate, does not believe in companies that have no business model. "It doesn’t work any more, this whole style of ‘let’s put in some users and see what happens’, or ‘slipshod will do, it will all work out’". The Jerusalem Global people say they will not rule out companies that cannot show a profit model, as they did prior to June 1998. Partner Alan Fled of the Vertex fund says they reached the conclusion that specialisation was called for, where Internet companies are concerned. "If I see something in the style of Mirabilis, I say ‘no’ to it. We have reached the conclusion that Internet companies with a client software are not for us. It isn’t easy to get if off the ground from where we are, and we therefore choose to deal with the Internet, but more with applications that appeal to organisations and have greater technological depth. Even so, if we see something that makes us jump out of our skin, we’ll go for it".
JVP fund partner and general manager Erel Margalit says that, historically, Israeli companies that have succeeded in their field have been market leaders, like Amdocs, ECI, Check Point. They gave rise to an entire industry in Israel, leading mainly by virtue of the fact that they came to market at the right time with a good technology. Except that the principal Internet model is a service model, and not one based on technology.
Erel says geographic distance alone blurs the Israeli understanding of the principal market. This applies to Mirabilis, too, he says. "Mirabilis scored a great intrinsic success. It built a gigantic network community. But it did not give all its achievements a brand-name. For that, it had to be sold to America Online", Margalit maintains. Today, in order to build an Internet brand-name, one needs to turn back to some strong traditional brand-name like that of Coca Cola. "If Mirabilis had established its own brand-name, today it would have been a $4 billion company, not a company that sold for $400 and something million".
The whole subject of Internet brands, says Margalit, "hit people out of the blue. They did not realise that selling a brand on the Internet is more like selling advertising in the Superbowl than developing a technology. Companies like Time Warner are adept at going into a vertical field and building it a brand name, and that is what we Israelis are least adept at". In his opinion, it is risky investing in an Israeli Internet company unless it stands a chance of becoming a market leader, and unless people can be introduced to it who understanding about brand names and content.
What has taken place is a sort of "flip-flop". On the one hand, the Internet reshuffled the whole deck of high-tech market cards, and on the other hand, we are back to the old, familiar model of basic consumer brands.
Margalit: "That is exactly what happened. One the one hand, you need a technology, and on the other you need a strong brand. That is why Israeli companies will find it worth their while to go in for the next Internet revolution, the business-to—business one, which more closely resembles models that Israelis have already dealt with".
With all our self-criticism, all our provincial cynicism, let’s not forget that Mirabilis is not just some local-patriotic pipe dream. It is deemed an Internet enterprise success of world order. And its chief architect, Yossi Vardi, is a highly respected personage in the global Internet arena. "After the sale, people though it was largely a matter of luck. But in the course of time it became apparent that Yossi Vardi and his staff really understood the Internet model, and that it takes some excellent business understanding to know how to do a Mirabilis", says Ari Gorlin, vice president for banking at the Jerusalem Global fund.
Was Mirabilis good for the Israeli market? Gorlin: "The Mirabilis syndrome is a two-edged sword. On the one hand, it gives all little Davids the hope of some day becoming a Goliath, since younger and less experienced people have already done it. On the other hand, it gives them the illusion that with just one year of hard work, they can reach the sky, thereby devaluing the long-term hard grind. Mirabilis merely emphasises this aspect of Israeli chutzpa, which both keeps the wheels of Israeli entrepreneurship turning, and plays havoc with its professionalism."
Published by Israel's Business Arena August 3, 1999