Alon Gonen: We want to make Plus500 much bigger

Alon Gonen

The online securities trading company co-founder has unusual ideas about money and tax planning.

On one of the walls in the lobby of Plus500's offices in Haifa is written the sentence, "Love your neighbor as yourself" in large blue printed letters (the same color as in the company's logo). It is impossible to miss, but it is reasonable to assume that few will remember that it comes from the book of Leviticus in the Bible. "It's my idea," Plus500 Ltd. (AIM: PLUS) cofounder and largest shareholder Alon Gonen told us when we asked about it. "It's a very important sentence, and people sometimes forget it."

At first glance, Gonen is not the kind of person to believe in the meaning of this ancient sentence. A 38 year-old high-tech entrepreneur (he looks much younger) and millionaire, he is already one of Israel's wealthiest men, thanks to the huge success of Plus500. At second glance, after a long talk with him, the Biblical saying fits him to a tee.

Gonen, whom the public first read about in "Globes," is the brains of Plus500, one of the most successful Internet companies to spring up in Israel. The company, which developed a platform for online trading in securities, goods, foreign currency, and other items, held its IPO on the UK AIM secondary stock exchange in July 2013, and has since more than quadrupled its market cap, which currently stands at $941 million. At its peak, Plus500 had a $1.3 billion market cap, but anyone who invested in the company's shares shortly after its IPO does not really have anything to complain about. A return of 357% within 16 months comes under the heading of fantastic.

In the case of Gonen himself, the return is much higher. When he was 31, he got the idea for Plus500, and was the only one of its six cofounders who invested his own money in it. Almost seven years later, the $400,000 he invested became capital worth a total of $300 million (NIS 1 billion), through shares he sold, a dividend he received, and the paper value of his remaining shares). His NIS 1 billion (gross before taxes) came from just one business, and he is only 38.

Incidentally, the source of that initial capital invested in the company by Gonen is Interlogic, Gonen's first company, which operates the Play65 backgammon website. He got $10 million from selling it in 2007. "Money is a very significant and important thing," he says in an exclusive "Globes" interview, but stresses that for him, "Money is like a toy. I enjoy playing with it."

"Globes": Do you feel comfortable with the label of millionaire?

Gonen: "I'm not crazy about it."

How much have you learned to enjoy the wealth that has come into your hands?

"Not too much. I like kite flying (he gets up and shows us the kite equipment he keeps in his office, T.T.), but I don't have too many hobbies that cost a lot of money. The sea doesn't attract me, so I don't like yachts. A private airplane might be nice, but I have no plans to buy one. To tell you the truth, I had more than I needed long before Plus500's IPO. I have no interest in showing that I've got money."

How much do you need?

"My income is NIS 500,000 a year."

"I knew it would succeed"

Gonen, married with two children, was born and raised in Haifa. After graduating from the Alliance high school, he served in an elite intelligence unit, and spent four years after being demobilized getting his BS in electrical engineering on the software track from the Technion Israel Institute of Technology. "I really enjoyed it," he says about his academic studies. "I like studying and doing tests. I like the competitiveness in it."

"Globes": Did you get 100 on every exam?

Gonen: (laughs) "No, I wasn't that good."

Gonen met the other five founders of Plus500 in high school, or later in the Technion's corridors. Company CEO Gal Haber and VP marketing Elad Ben-Izhak studied with him at Alliance, and he met chief systems architect Shlomi Weizmann (originally from the Golan Heights), VP R&D for servers Omer Elazari (originally from Tiberias), and Shimon Sofer (originally from Netanya) at the Technion. Sofer, who was VP R&D for user interfaces, left the company at the beginning of the year, while selling all his holdings in it and accumulating $90 million (NIS 340 million gross, before taxes). Gonen is responsible for risk management and strategic development at Plus500.

The idea for Plus500 came to Gonen after he was already 30 years old, but he admits being interested in economics and the capital market from a very young age. "I've been reading the financial press since I was 12. I was always interested in how the capital market forces and economies operate, who's who, and things like that."

How does a 12 year-old kid start getting interested in such heavy things?

"One of my most conspicuous traits is that I like understanding things in depth. I also had a strong drive to make money, and I wanted to understand how it's done."

Was the home you grew up in not very well off?

"No. I lacked nothing at home. My father is an electrical engineer, and my mother is a social worker. I think it came from ambitiousness."

At age 12, did ambitiousness mean a lot of money to you?

"Yes, I told myself that it would be nice to make money. At that time, we moved for a while to Silicon Valley in the US when my father's job moved there, and I started to catch on who's who in the capitalist market."

At what age did you buy your first share?

"12. My father gave me money, I think about NIS 10,000, and explained to me how it works. My parents exposed me to this world, just like they exposed me to sports and technology."

How much did you win or lose on your first investment?

(smiles) "I was OK, plus."

Over 15 years later, Gonen tried to sell the Microsoft share short on the website of IG, Plus500's biggest competitor, and came to the conclusion that it could be done in a much friendlier way. "We realized that there was a business opportunity here to build a company for the long term," he says about the moment when he started getting the idea for Plus500. "After all, almost every business is based on the upgrading of an existing product. There aren't a lot of businesses that invent something new, and Plus500 didn't invent something new, either; it's offering an improvement on an existing product."

The company's first PC version was launched in 2009, and the browser version was launched a year later for Macintosh and Linux users. The iPhone and iPad version was launched a year after that, and the Android version was launched last year. To put it succinctly, regardless of which desktop computer, smartphone, or tablet you have, you can use it to get the Plus500 service.

"Globes": Did the company's success surprise you?

Gonen: "No, because we had forecasts of where it could go, and it eventually outdid them. I knew it would succeed. When you found a company, there are three main risks. The first is whether its founding team will manage to get the product going. The second is whether the product will work in the market it is aimed at. The third is whether the money will run out in the middle of the process. When I calculated the probability of each risk, each statistical variable with its own calculation, I concluded that it would work."

That is a very mathematical way of thinking. Founding a company is not simply mathematics or statistics.

"That's true. I live a statistical life."

What does that mean? Is everything in your life statistically calculated?

(laughs) "Yes, almost everything, and it's really enjoyable. In general, life is statistical. For example, most people are afraid of snakes, not traffic accidents, but the number of people killed by snakebites is negligible, compared with the number killed in traffic accidents."

Are you afraid of anything?

"Of diseases and God."

Do you believe in God?

"Yes, very much so. I come from a traditional family. My grandfather, my mother's father, was a cantor."

"I can be very aggressive"

Plus500 is still managed by five of its six founders, the youngest of whom is Elazari (35), and the oldest of whom are Haber and Ben-Izhak (40). "We're good friends," says Gonen. "Each of us brought the company something in which he's the best, and always, when they ask me what made Plus500 successful, I say that it's not one thing; it's hundreds of small things."

What did you bring with you?

"I'm an expert in the product and the business model."

Does the description as the technological brain behind the company fit you?

"Not exactly. I didn't write the code. Omer and Shlomi have much more expertise in technology than I do.

Do you know how to manage people?

"Yes, but Gal is much better at it than I am."

In the past, we quoted someone who said that you were "a genius at an insane level; there's nothing like it," but at the same time claimed that these traits didn't exactly make it easy to work with you.

"It depends on who I'm working with. Every business partner requires a different approach. An Israeli service provider, who tends to be more aggressive, will get different treatment than an Australian or a Briton."

You don't seem to me like an aggressive type.

(grins) "I can be very aggressive; it depends who I'm with. If someone is aggressive with me, I'll be aggressive with him."

Gonen says that as part of the responsibility for Plus500's product, it is much more important to focus on the customer and his requirements than on what its competitors are offering. "We don't ignore the competition, but at the moment, I think it's more important to focus on what we're doing, not what others are doing."

What is your goal? To make Plus500 a giant company, or to make another exit and continue on to the next company?

"To make Plus500 a much bigger company, and the explanation why is also statistical. Let's assume that I sell Plus500, and start a new company. I'll have to spend 4-5 years, and maybe I'll be able to bring its value up to $20-40 million, and if I own half of its capital, I'll get $10-20 million. On the other hand, if I spend all my time at Plus500 - I still own 17% of it - and within five years I bring it to a value of $1 billion or $2 billion, which is quite realistic, I will earn almost $200 million. I'd have to be stupid not to choose that option."

So you have no desire to start something from scratch again.

"No, on the contrary. I have a desire not to try, because a) the risk is too great, and b) at Plus500, there's much more money in the game."

Some people find it hard to appreciate you. They say that Plus500 is a gambling company that makes its customers lose a lot of money.

"I don't really relate to feedback like this. Our product provides the opportunity to trade using the world's most popular tools. There are thousands of companies offering a solution similar to ours, and trading in financial assets is a significant part of the global economy."

Does it make you angry that people think about the company that way?

"I'm not sure that the people who think like that really understand what they're talking about. It's like saying that Bank Leumi (TASE: LUMI) is a casino, and I myself have an investment portfolio managed by Bank Leumi. It bothers me, but not too much."

At this point, Gonen asserts that a financial education, in his opinion at least, should become an integral part of the educational system. "It's a system that has gone nowhere in 40 years, with the same professions, and in order to change it, you have to put the right person in the right place."

And the right person is not in the right place now?

"The right system isn't there. In Israel, the problem is the system, not the people. Take Russia, for example. The Russians are amazing people. Put them in the US, and you get Google. Put them in Russia, and you get nothing. Conclusion: the problem is in the system, like in Israel, and you can only change the system by appointing other people."

Are you trying to give your children more financial and technological education?

"Yes, obviously."

Plus500 has more than quadrupled its value since its IPO. The company made a secondary offering in February that also included an offer for sale, in the course of which its five founders sold shares for $167 million. The price for the offer for sale, £5, is lower than the current share price.

In retrospect, the company made its offering at a rather large discount. Did you intend that?

"Yes, that's part of our philosophy about how to do business. When you do business with someone, in our case the investors, it has to be profitable for both sides. Had we priced the company at a higher value in the offering, the public would have earned less."

That is a rather exceptional attitude among Israeli entrepreneurs.

"Right, and I think that Plus500's entire attitude is exceptional in the Israeli high-tech industry. The company's brand name is based, among other things, on fairness. Just like we're fair to our customers, we also wanted to be fair to our investors."

The philosophy of Gonen and his partners in founding Plus500 was reflected in the tax policy of the company as a corporation, and of its founders as private individuals. Plus500 is built so that the parent company is Israeli, incorporated in Israel, and has two subsidiaries: a British one with a British license to do business, and an Austrialian one, with a license to do business in Australia. All the profits from both companies go to the parent company, so most of Plus500's tax is paid in Israel.

In the case of its founders, each of the six owns his shares directly as an Israeli citizen, or through a private company owned by him and incorporated as an Israeli company. This means that each of them pays 25% capital gains tax under Israeli law - no trivial matter in a world in which tax planning for both individuals and companies has become routine. "We're Israelis, and all six of us believe that as Israelis, we should pay our tax in Israel. The country gave us an education, security, and so forth, and we should pay it back through our taxes. That's the deal. It's an agreement between us and the country, and we should fulfill our part."

Again, that's an exceptional attitude.

"In general, yes, but it gives peace of mind. I don't have to think all the time how to spend 180 days year outside of Israel…" (grins).

Is there ever a moment in which you regret that you did not engage in tax planning to save some of your tax liability?

"Not too much. What each one of us has accumulated is enough, and very nice."

Does it bother you that entrepreneurs in your league sometimes do aggressive tax planning?

"It bothers me that the state is unable to deal with this phenomenon. The individual will always do the most for himself; that's how the human mind works. In the case of taxes, the state should prevent him from doing whatever he wants in order to pay as little tax as possible."

Where exactly has the state failed in dealing with this matter?

"It hasn't failed. It should just get better at it. That means getting into the wallets of everyone it can. There are a lot of wallets like that, with a lot of money in them."

What do you think about a corporate tax hike as a means of increasing state revenues?

"It's not a good alternative, because then entrepreneurs will prefer registering their companies overseas."

By the way, do you donate your own money to the community?

"Not too much. I don't believe in philanthropy. The state should help those who need help, among other things through the taxes that citizens like me pay. In general, I believe in long-term solutions, and many times philanthropy is a short or medium-term solution."

What about investment in startups? You must get many investment proposals.

"I don't invest in startups, because statistically, it's an investment that I lose on. It's not a good investment. It's enough to look at the returns of the venture capital funds to reach that conclusion. It's better to invest in the stock market."

What about Plus500?

"Plus500 specializes in online contracts for difference (CFD) for almost every underlying asset in the capital market: shares, foreign currency, and goods. Difference here refers to the difference between the asking and bidding prices for an asset. The company, like its competitors, is the one that determines the quotation of asking and bidding prices, based on the market quotation. The difference between the market quotation and the company's quotation is actually the basis of its success and the main source of its revenue. This revenue is the commission (an average of 0.2%) that the company charges for the spread between the buying and selling prices. Trading in CFD is leveraged trade, and it's much more sophisticated than trading in ordinary shares. That is one of the reasons why Plus500 states on its home site, 'Trading CFDs may not be suitable for you. Please ensure you fully understand the risks involved.'"

The Plus500 website is accessible in 31 languages in 51 countries. The website can be used to invest in almost 2,200 underlying assets, which have been selected according to their popularity and degree of marketability. Plus500 does not charge commissions on the use of its platform (such as a fee for opening an account or converting foreign currency), which is one of its advantages.

The biggest player in the global CFD market is British group IG, followed by American company FXCM. IG is traded in the UK at a $3.6 billion market cap, while FXCM is traded in the US at a $778 million market cap.

Plus500 has only just over 60 employees. This is due, among other things, to the company's high level of automation, and to a careful selection of programmers. "We're always aiming for the best, and looking for a programmer can continue for a year and a half," Gonen says."

Published by Globes [online], Israel business news - www.globes-online.com - on December 3, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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