The big money flowing into the technology sector in recent quarters is reflected in a surge for tech stocks, and an abundance of IPOs on the stock markets. This money has also produced many unicorns (privately-held companies raising funds at valuations of a billion dollars or more) in Israel and around the world. According to Mony Hassid, Microsoft M12 investment fund general partner, it is also changing the dynamics of raising capital for early-stage startups.
"We usually invest in A and B Rounds. The valuation of the startups raising funds in these rounds is much the same as before, but these days, they come with much less in hand," says Hassid, who manages M12's investments in Israel and Europe. "Once upon a time, a startup going into Round A could show me a million dollars in annual recurring revenue (ARR) and four or five nice Fortune 500 customers. By Round B you'd already see a company with $4-5 million revenue, which they'd tripled annually. Suddenly, today in Round A you see a company with under $200,000 in revenue, that's in the Proof of Concept (POC) stage with a customer, and Round B companies with revenue of just $2 million."
How do you react to this change in the market?
"We watch and learn. I don't for one moment look at it, heaven forbid, as a company's attempt to take advantage. We want to be an active player, and we can't change the market, but it reinforces the need to be very professional in our choices. Even when the stock market is on a rise, there are still phenomenal stocks worth investing in. Our goal is to find companies that could be valued at a billion dollars in the future, no less. If I have to pay more in Round A, and instead of x come in at 2x, that's fine as long as I believe in the company. So, instead of 15x earnings, I'll only have 10x."
The big money flowing into technology gives entrepreneurs, certainly successful ones, more power, and a choice of potential investors. M12 invests in companies that develop B2B solutions targeted at enterprises, in areas like cybersecurity, enterprise software, and applied artificial intelligence. These are among the most competitive and active sectors in Israel today, and M12 has had to compete against powerful American funds Lightspeed Venture Partners, Battery Ventures, and Insight Partners. In these situations, Hassid has had to pitch the startups personally, explaining why they should accept M12's funding, and how multinational Microsoft can assist with marketing, business development, and sales.
The market situation is compelling Hassid and his competitors to find startups in need of investment at even earlier stages. "I don't want to meet entrepreneurs on the day they launch their Round A because by then it's too late," he explains. "So, as soon as I hear about a company that's raised a seed funding round, I talk to them. Already at this point, I want to tell the entrepreneur about the value we can bring, and hear their story. After that, I'll check to see if their story has changed over time, and based on that I'll decide about the investment".
"We're aligned with entrepreneurs"
Hassid is a veteran investor with more than 20 years of experience in the venture capital industry. He previously managed Motorola and Qualcomm's investment funds in Israel, before joining M12 in 2016 as one of its founders and its second employee. Unlike other corporate funds, M12 defines itself as a financial fund that works to deliver the highest returns to Microsoft. However, it has an even bigger goal.
"The goal is to signal Microsoft in advance about technological trends and business insights," Hasid says. "When the company becomes a unicorn, everyone already knows it. We want to invest in it four years before that. We invested in WhiteSource in 2017, for example, and through that, we identified the need for cybersecurity already in the development stage. We invested in At-Bay last year and learned that the cyber insurance world was growing. Every three months we present Satya (Microsoft CEO Satya Nadella) with four or five companies that we've invested in, or are about to invest in. I can tell you that Satya is very fond of M12 -- not because of the money we bring, which doesn't affect Microsoft's financials -- but because of the signals."
What does Microsoft do with these signals?
"These signals indicate that there's some sort of a shift in the market and that an early solution can be found. This doesn't mean that we'll do exactly what WhiteSource does. On the contrary, we bring it to Microsoft and try to support the emerging trends with more tools."
To date, M12 has invested in twenty companies in Israel, the average investment being $5-10 million. So far, the fund has not had any exits, but Hassid is unconcerned. "From the moment you start investing, you have to look five years ahead. We started in mid-2016, so you should start seeing exits this year. At Qualcomm, we invested in Ravello and already had a great exit within 16 months, but that was a Round C investment, and at Microsoft we enter in Round A. We have portfolio companies that could long ago have made the sort of exit you used to see. These days, we back them and push them to go as far as possible."
What will you do if one of the companies wants to be acquired by Google, which competes with Microsoft?
"We are board members and are therefore committed to the company. We're usually aligned with the entrepreneurs and when there's an exit, I'll state my opinion. Bottom line, however, at the moment of truth, I'll support the entrepreneurs if they want to sell. In any case, Microsoft will have had the opportunity two, three and four years before the exit."
"We made the right decision with Anyvision"
M12's affiliation with Microsoft can sometimes affect an investment's fate, as in the case of Israeli facial recognition company Anyvision. After M12 invested in it, there were media reports that the company's technology was being used for mass surveillance of Palestinians in Judea and Samaria.
In response, Microsoft appointed an investigation team headed by former US Attorney General Eric Holder. The team found that, contrary to the allegations, the technology was used only at border crossings, therefore, the company did not violate Microsoft's ethical principles governing the use of facial recognition technology. Despite this, Microsoft decided to sell its stake in Anyvision, and avoid future facial recognition investments through M12.
Hassid refuses to view the case as a failure. "Things change and facial recognition has become a central privacy issue. We realized that it was very difficult to be a minority investor with 5-10% of a company that develops very sensitive technology, so we decided to let it go. We respect them and they us, and everyone went their separate ways."
Maybe you shouldn't have gone in?
"Our decision as a group was the right one and I feel very comfortable with it. This was a coming together of business and ethics, and I think it's good for the world that a company like Microsoft has ethical principles. It benefits us, as a positive force in the market."
- Manages activity for Microsoft's M12 investment fund in Israel and Europe, since joining in 2016 as its second employee
- Before that, managed investment funds for Qualcomm and Motorola in Israel
- Holds a master's degree in electrical engineering. Married. Father of three. Lives in Tel Aviv
- Usually does his daily fitness training at home at midnight, at the end of the work day
Published by Globes, Israel business news - en.globes.co.il - on February 15, 2021
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