Internet site for teens, with stock exchange simulation games

Quite a few start-up entrepreneurs were successful, and then decided to set up house in the land of exits. Yadin Kaufman, a familiar venture capitalist in our part of the world, did something entirely different in the local entrepreneur scene. For a while, he left his managerial post at the Veritas fund, in which he is a senior partner, and went to the US to set up a truly Internet content start-up, of the sort we don’t have in Israel, with a slim chance of greatly succeeding. After setting the foundations in Silicon Valley, he has now returned to Israel to screen business plans and again write out checks for other entrepreneurs.

Kaufman, 40, started out in the venture capital arena in 1987. He joined up with Dan Tolkowsky, Fred Adler and Gideon Tolkowsky in Athena, the first venture capital fund focusing on investments in Israel. Together with them, Kaufman built a portfolio of anonymous but promising companies such as Scitex, Fibronics, Elscint, Elron and Optrotech.

Three years later, in 1990, equity management company Veritas was set up. It later incorporated two funds: the AAV fund with $50 million mainly raised from South African investors, including the world’s largest mining company, the De Beers diamond concern, Anglo-American Corporation and communications and electronics holding company Eltron. Partners in the fund are Yadin Kaufman, Gideon Tolkowsky, Rann Marom and Gil Tsafrir, who recently came to Veritas after serving as Israel Air Force R&D chief.

Second fund Millennium Capital was set up two years ago, “from a large Far Eastern concern,” says Kaufman. Veritas is not divulging the fund’s scope, but we learned that the fund was set up after raising capital from Mitsubishi, and has $10 million. Next year, Veritas plans to raise another $50-100 million for these funds.

Veritas gathered in its funds’ portfolios several names, which were later included in the great list of Israeli Wall Street issues: Mercury, Harmonic LightWaves, Gilat, Efi, ESC and M-Systems. Also included were companies such as Ubique, which was sold to American Online (which sold it to IBM in a chain deal) and Class Data, which was acquired by Cisco.

Further names in the Veritas list include: Carmel BioSensors (real-time measurement of physiological parameters, such as the level of glucose in the bloodstream), UltraGuide (navigation system for surgeons), Floernce Medical Systems (products in the cardiology field), WebGlide (multi-media interface for e-commerce), and Trivnet (Internet micro-payments), and MainXchange, which we refer to shortly.

Kaufman is a contented investing professional, however bad the definition sounds. He has a combination of self-confidence, calm, experience, and smartness. “We have been in the business for many years, which translates into great experience, with successes and failures behind us, glorious and less-than-glorious periods both in the local market and Wall Street,” he says.

Veritas loves to take start-ups while they are still young, and invest $3-3.5 million on average in the early stages, from both funds. Investment is almost always at the set-up stage. The exception is two companies, which were already selling when Veritas invested.

In MainXchange’s case, Kaufman says that Veritas went to the extreme. He packed his family off to the US in 1996 to establish the fund’s activity there. American-born Kaufman holds a bachelor’s degree in humanities from Princeton University. Just before settling in Israel to train with Judge Aharon Barak, he earned a law degree from Harvard.

Kaufman arrived just when the Internet became the buzz-word in everyone with a mouse’s vocabulary. He added two and two together: teens will become the most important consumer group on the Internet. They spend a tremendous amount of money and are obsessed with brands. Moreover, the demographic reality in the US, where most parents of teenagers work, this age group makes many decisions unrelated to brand names. In the constant absence at home of their parents, they are also sometimes responsible for filling the family’s supermarket shopping cart.

The generation of 12-24 year olds that MainXchange caters for is known in the US as Generation Y. They are Generation X's younger brothers and sisters. Surprisingly, this group has no special brand loyalties.

On the one hand, Kaufman reasoned, we have an age group spending a great deal of money, and on the other, companies fighting fiercely for its pocket. In other words, an Internet site for teens could attract many advertisers.

Kaufman also saw the dizzying Wall Street carousel, and up came an idea of creating a stock exchange game for teens as the site’s main focus of attention, and broadcast an educational image. MainXchange adopted the ancient capitalistic axiom “Teach your children how to make money from nothing.” The company set up a children’s site focusing on an educational stock exchange game, hence the name. Kaufman started to manage the new start-up “as Veritas representative, but also as entrepreneur,” he says.

MainXchange was set up as a regular Israeli company, in Herzliya Bet. Kaufman approached entrepreneur Bezalel Arkush, who managed a multi-media company. Arkush was impressed and decided to join. The entrepreneurs saved themselves the time it takes to find funding, and used the next few months to develop the game.

Each player receives 100,000 BUX, the currency of MainXchange country. He can invest in any stock exchange listed company, and get ongoing updates about the companies he chooses.

MainXchange instituted several changes, which serve as the model for the site’s revenues. The stock exchange companies were classified according to areas of interest to teens, such as sports, fashion, and technology, while the companies sponsoring the site get more exposure.

The company aimed to incorporate the stock exchange game into the school educational system. To this end, a well-connected educator was recruited who is in charge of lobbying for the site. The company also prepared an instructor to train teachers how to use the site in the classroom.

Kaufman admits that selling the site to teachers was not easy. It was therefore decided to set up an auxiliary site for the educational market, with all the content teachers and schools would need.

The company plans to open local sites shortly in various countries, including Israel, Europe and the Far East, despite the fact that the site currently has users from over 100 countries.

Besides sponsors, the site has several sources of revenues, one of them e-commerce. The site will shortly offer online purchases, both direct, at a commission, and by connecting to sites offering e-commerce. Advertising is expected to become a revenue channel for the site.

Another channel of revenues in MainXchange’s list is “bounty” (transmission of information from users of other channels), which is expected to yield, at least according to the plan, more than $10 million in revenues in 2001.

To date, MainXchange has raised $10 million: $3 million on setting up the company and another $7 million in the round completed in mid 1999, led by Jerusalem Global.

He may be an entrepreneur, but as a true venture capitalist Kaufman is already looking for the exit. As befits a venture capitalist, he does not rule out any possibility. “We’re working on either a Wall Street issue or a sale,” he admits.

Published by Israel's Business Arena on November 22, 1999