Mark Tluszcz, chairman of Israeli website building platform Wix.com Ltd. (Nasdaq: WIX) and co-founder and CEO of Mangrove Capital Partners, which owns a 20% stake in the Nasdaq-traded company, is one of the world's more unconventional technology investors. He has appeared on the Forbes Midas List of top tech dealmakers on three occasions and was the first investor in Skype - which raked in nearly $3 billion for its shareholders at exit.
His unorthodox opinions have made him a favorite of the television networks, as someone who can be relied upon to say something controversial and provocative. For example, Tluszcz does not believe in online music ventures.
"I am highly critical of music startups because you cannot make money out of them," he tells Globes "G" magazine in an exclusive interview. "Even the global leader, Spotify, with its 30 million users, cannot make a profit. It’s crazy."
What else would you avoid as an investor?
"First, I would avoid paying a lot of money. My business is based on buying low and selling high, in contrast to the trend in recent years among the VC community of paying exorbitant prices for startups. Everyone is looking for unicorns - companies worth a billion or more - but I say most of these unicorns are fakes."
In what way?
"There's a big gap between private markets and public markets. Wix is worth a billion dollars today, and it reported revenue of $325 million. Other companies present no revenue and are priced on the private markets at a billion dollars. Something has to give here. Either we are actually worth $5 billion - which would obviously make me very happy - or these other companies are worth significantly less. At the end of the day, the real judge is the public market.
"We went public with Wix at the end of 2013 at the same time as many of these companies, most of which are now traded below their IPO prices. Some of these startups celebrated winning the World Cup before ever reaching the finals."
How many companies fall into this category?
"They say there are 200 unicorns in the world. The top ten - like Uber and Airbnb - are truly global phenomena, but most of the rest celebrate victory before the game, and I'm pretty critical about that. Wix always believed that first you play the match, show genuine numbers, win, and only then celebrate."
Give an example of a fake unicorn.
"Shazam is one. The way it reached a billion-dollar valuation was that someone invested $20 million for 2% of the company based on a value of a billion dollars. OK, so some idiot wanted a small slice of Shazam and was willing to pay a lot for it? That isn’t a real capital round and it's not a real value. What's more, their business is going nowhere. Both iOS and Android now have similar products.
"One company that was popular - and we regretted not investing in it for years - was Evernote, but when we invested in Wix we said no to Evernote, and for seven years my partners said, ‘Look Mark, what a mistake we made.’ It was a great idea, but there was no business model behind it and they were worth $2 billion on paper because that's what somebody wrote. But now, every browser in the world offers something similar."
Let’s talk about trends like Fintech - online financial services. Many believe that that's the next big thing. What do you think?
"Billions are being poured into this field, but I'm fairly skeptical about it. There hasn't been too much innovation in this area. The most successful Internet company in the field is PayPal - and it’s already 18 years old. The next phase was online banking, but the banks went ahead and did it themselves; nothing has happened since.
"There’s peer-to-peer lending, and it was supposed to be so wonderful. The companies opened websites and said, ‘Send us your money and you'll make profits.’ But people don't send money that quickly. It's easy for people to use various online services, but they are much more cautious and concerned when it comes to their money.
"Furthermore, most of the financial services are just improvements what already exists. In London, for example, there's a company called TransferWise, and it really is the darling of London investors, but all it does is transfer money. I think Western Union has been around for a bit longer. Sure, they do it more cheaply. But "cheaper" isn't interesting, it's not something that generates change. I think there will be lots of changes in financial technology, but only smaller businesses will come out of it, no really big business."
So you don't share the view that an earthquake is on the way, a change of all our habits in this area?
"Not in the next five years. For the time being, it's a niche field. Good businesses, but no global leaders. It will take more time until we see an idea that will really reinvent banking."
How do you turn down an exit?
Back to Wix, the only company in Mangrove’s portfolio that Tluszcz agreed to chair - because, as he puts it, he's in love with the company, with its entrepreneurs and its future; and also because he anyway promised to sit on its board as long as he is wanted, after leading the company to take a big gamble on its future a few years ago.
"We're at Mangrove, one of the few funds that have two billion-dollar companies, and I can tell you that until Wix started showing results there was a great deal of pressure. For the first time since Skype everyone was saying, ‘Well, you were lucky’, but for seven years I asked myself every day whether I could do it again. And not only was I putting myself under pressure, but everyone around me said: ‘We're sick of hearing about Skype; have you done anything big apart from that?’"
Did the success of Skype affect how you dealt with Wix?
"Yes. We had opportunities to sell Wix. In 2011, we received a very serious offer to sell, at a value of $400 million, and I came to the founders (CEO Avishai Abrahami, Nadav Abrahami, and Giora Kaplan, S.L. and S. H-V.) and told them I did not believe it was right to sell. At the time - before the IPO - the founders and I had much bigger stakes in the company, and we were looking at a lot of money for each one of us. We had an interesting conversation, which turned into a question of confidence between me and them. I told them, ‘You can be worth much more’ and the fact that I had Skype on my record gave it weight."
What did they answer?
"Avishai said to me, OK, but on condition that you stay on the board as long as I want you there. That's some commitment, but it's the kind of symbiosis there has to be between an investor and a company, because there are ups and downs along the way and the risk is very great. And now we have created a dynamic in the Israeli technology community that it's possible to grow a big company here, you don't have to move to the US."
What were some of the considerations in favor of selling the company at the time?
"It's very interesting mathematics. One of the limitations of Israeli venture capital is selling companies too soon; but still, I completely understand why they want to sell. There need to be more Wixes around to give people the courage to reject an exit and say ‘There can be a big company here.’"
The next stage was the IPO two and a half years ago. Since February this year, Tluszcz has deepened his commitment to the company by becoming chairman of its board. Wix certainly displays the behavior of a genuine unicorn, with Superbowl commercials and a contract with English football giant Manchester City.
You invested in Wix when it was still a very young company. How did you get to it?
"I met the Israeli angel investor Ran Tushia in Spain. He told me, ‘Mark, I gave money to these guys, can you take a look?’ I checked them out and right away said I wanted in. In 2006-2007, any business that wanted an online presence needed to pay $10,000-$15,000 just to build a website, and it was obvious to us that in the future every business would need to be online. And they were offering to do it for free. I was involved with Skype and I love the idea of free. It's the easiest way to amass users - and no one can beat you on price."
But free services do not generate much revenue.
"True. The difficulty with freemium is that you have to give enough to make people want to use it, and keep back enough to make people willing to pay for something. The model was easy to find with Skype: computer to computer calls were free, but if you wanted to call a mobile telephone you had to pay. At Wix we examined maybe twenty ways until we arrived at the model that is now responsible for all our profits: you can use the services for free as long as the word Wix appears on your site, but you need to pay to remove it. Today, we have nearly two million paying customers."
Despite the high valuation, Wix is still not a profitable company - at least, in net terms.
"At the end of the day, net profit is important, but technology companies can reinvest all their funds to focus on revenue growth, and at the same time build the next generation of products. Technology companies have a disease: they succeed once, but find it hard to do it again. Technology companies forget that. They make a lot of improvements to their existing products, but whoever stops inventing will eventually be replaced by someone who comes along and invents something better than he has.
"You need to find the balance between medium-term profitability and short-term innovation, and that was one of the things that attracted me to the Wix entrepreneurs. They said, ‘We want to build a company for the long term’ and when I see the six products we have in the lab right now, I can smile and say yes, we are reinventing, once again, the way people build websites. When my 13-year-old son came home from school and told me a girl in his class made a presentation with Wix, I knew we had something really big on our hands."
When will you be profitable?
"We will be profitable when we decide that that is what we want. All we need for that is to stop our marketing efforts for a few months."
How was Wix received by the stock market?
"A combination of factors worked against us: a new company, and Israeli to boot. Many Israeli companies have not been a great success as public companies, and that's because they did not respect the unwritten contract with the analysts which says ‘No surprises.’ It took us two years to gain their trust."
You sound head-over-heels, but as a venture capital firm, besides what you made on the IPO, you will need to exit at some point and move on.
"Yes, I am head-over-heels, and we will eventually have to make an exit, as part of our commitment to shareholders and investors. Right now we have no such plans, and regardless of the holdings I have and will have, I have an obligation to chair the board for five years."
Big funds earn less
The 51-year-old Tluszcz, married and a father of two, divides his time between his homes in Luxembourg and Barcelona. He was born in the Congo, to an American businessman father and a Zimbabwean mother. At the age of 13, the family moved to Cairo, where he stayed until he was 18. "Egypt was my favorite place. Those were my adolescent years, so it's mingled with romance."
When he was 18, his father told him, "It’s time for you to become an American," and sent him to improve his English - French is his mother tongue. "I spoke English at home, but my vocabulary was perhaps 500 words."
After a year of high school and four years in college, he left the US because he felt more European than American. At first he landed in the Canary Islands; "My best friend had a few hotels and I begged him to let me work as a pool boy or a waiter. A year later my mom told me, ‘Hey, you’re a college graduate, come home to the US and find a proper job.’"
But on the way to the US, he stopped in Luxemburg to visit another friend, where he opened the newspaper and noticed accounting firm Arthur Andersen (which eventually broke up because of the Enron scandal) was recruiting.
"I’m a big believer in things happening for a reason, so I printed out my CV and was accepted. I didn't have a degree in accounting but in history, but at the time, unlike now, people thought that an open mind and broad horizons were important. History is my passion and in a strange way I think it has made me better able to evaluate people, and that is what I focus on when we invest in companies."
He worked at Arthur Andersen for ten years and spent the last two as the firm's venture capital fund manager. But then, two years before the big scandal - speaking of things that happen for a reason - he decided he wanted to be his own boss and founded Mangrove.
How big is Mangrove?
"We have four funds, each with 150-200 million dollars. For early stages it's enough, but for the following stages that's very small. It does, however, allow us to focus on small investments, and the dynamic of our business is such that if you want to make money, your fund must be small."
"The large funds are harder to pay back. Our profit derives from the investors’ profit; in order to make a profit you first need to repay the fund, and the statistics of venture capital are clear. The moment the funds crosses the $200 million mark, the return tends to be smaller. I mean, how often do you get a company like Wix in your portfolio? If you have one, that’s great. But is it likely that you'll have two? If you have a $500 million fund, you need two of those to achieve good results. It comes down to statistics."
It is fair to assume that Mangrove paid back its original investment in Wix at the time of the IPO, as its initial investment amounted to $3 million. In Skype, incidentally, the initial investment was $100,000.
Mangrove was founded 15 years ago and has made 150 investments, at an average of $500,000 to $1 million per company, and of course sometimes there are follow-on investments.
One field which Tluszcz believes has reached the end of the line - "apart from special ideas" - is e-commerce, but that what is far from having exhausted its potential is online services. As proof, the Mangrove portfolio includes a company that allows users to order online housekeeping services. It's a company that faces quite a few difficulties, since it's not all that customary in that industry to keep paperwork and pay taxes.
Still, Tluszcz believes it can nevertheless change a few habits, and what he's now looking for is an investment in an "old-age home at home", online services that could replace expensive retirement homes that force old people to change their routines and leave home, and provide the required services in the existing home, at half the price.
But his main goal these days is to solve a larger problem: how to disconnect. "In a world that is always online, we need to do a few things to maintain our sanity," he says, "to spend time in conversation without looking at a smartphone. I want to figure out how that translates into a business. I believe that finding the balance between connectivity and the need to stay sane and human will be a sizeable challenge and the next big thing."
Published by Globes [online], Israel business news - www.globes-online.com - on May 30, 2016 © Copyright of Globes Publisher Itonut (1983) Ltd. 2016