"Tech pay boom can't go on for ever"

Jeremy Levine, Bessemer  photo: PR and Shutterstock/ASAP Creative
Jeremy Levine, Bessemer photo: PR and Shutterstock/ASAP Creative

Bessemer Venture Partners' Jeremy Levine describes a tech market awash with cash, not necessarily to the companies' good.

One of the currently most popular types of meetup in high tech is FuckUp Nights. In these events, startup people take the stage one after another. Instead of saying how great they are, they relate their most painful failures. The website of Bessemer Venture Partners, one of the world's biggest and most successful venture capital funds, has taken this one step further by founding, together with partners, a hall of fame - an anti-portfolio consisting of the companies they missed out on. Apple and Google are there, as are Intel, eBay, and Airbnb. Jeremy Levine, one of the most senior partners in the fund, is responsible for a particularly excruciating miscue.

When Levine spent a weekend at a corporate retreat sometime in the summer of 2004, one of the activities that took up his time was waving away a Brazilian-Jewish student who tried to interest him in a new startup of which he was one of the founders - some kind of social network. One day, when the nudnik succeeded in trapping Levine on the line in the cafeteria, the investor lost patience a little and cut short the persistent student's efforts at persuasion with a little friendly advice: "Kid, haven't you heard of Friendster? Move on. It's over!" The student's name was Eduardo Saverin, and if that name rings a bell, it may be because he was immortalized in the movie "The Social Network" as one of the first investors in Facebook, of which he was one of the founders. Saverin owns 53 million shares in Facebook with a market value of $10 billion.

Levine is not ashamed of such mistakes; for him, they are part of the game. They have not prevented him from becoming one of the world's 50 biggest investors this year with a resume of 15 early-stage investments that made exits of over $500 million or reached such a valuation. Among other things, he invested in the LinkedIn professional social network, the Yelp business recommendation service, and the Pinterest social network for pictures, some of today most prominent platforms on the Internet. In Israeli high tech, he has invested in Wix, MyHeritage, and Fiverr - three of the fastest growing companies in recent years.

Levine expects to visit Israel after the holidays to take part in the Journey conference of consultation and accounting firm EY Israel and "Globes" on October 17. Levine sat through the telephone interview with us from his home in New York, during which his speech was twice as fast as normal. He evades no questions, and in an untypically forthright and articulate way dares to say things loud and clear that are usually mentioned off-the-record.

Easy to raise money, even easier to spend it

Levine, who has been familiar with the Israeli ecosystem for a long time, sees on the one hand a maturing process in local high tech in recent years, and on the other hand a global trend that threatens it. "Up until recently, the consensus was that there was great technology in Israel, but it is eventually sold to a large, usually American, corporation that will take it to market. In most of the interesting exits of entrepreneurs in Israel, a company was sold all or in part to another company (in contrast to an offering on the capital market). Today, the realization that it is possible to take a company all the way and make it strong, independent, and even public with one or more offices in the US or Europe is penetrating more and more. This is a brave ambition.

"At the same time, we're seeing a change in the global capital market. In recent years, there have been crazy amounts of capital in the startup scene, and this means that many companies are liable to lose what was part of the attraction for investing in Israel - capital efficiency. Historically, Israeli startups were excellent in going a long way with very little capital. That is an advantage that you are liable to lose, because there's a lot of easy and cheap capital in the markets today.

"The global capital market, which also affects Israel, is very frothy. We're trying to teach entrepreneurs to avoid that trap. Since they're able to raise so much money so easily, and in the early stages, it's very tempting to want to spend it. This phenomenon makes them less efficient in working with capital and less attractive."

"Globes": Let me understand: is this a warning about something that is about to happen or a diagnosis of something that is already happening?

Levine: "What we've been seeing in the US for quite some time is already starting to affect Israeli companies. So to a certain extent, it's a warning, because this is what will make the Israeli startup community go downhill, and at the same time, it's already beginning."

How is this happening? Can anything be done?

"It's Catch-22. On the one hand, it's easier to raise money, but on the other hand, it's also easier for your competitor to raise money. The result is that the competitors are offering a little more to their talents, which makes you raise salaries for your important talents. Then, before you can blink an eye, all of the money that you raise is spent on salaries, instead of promoting the startup.

"There's no easy way to avoid the trap, but there are several pieces of advice that we're giving to our companies in order to use capital wisely. The most important advice is that if you have a lot of competitors, there are few cases in which being first and aggressive really makes a difference. There are many segments in the market in which the most important thing is to be the last survivor: it's important to have a fantastic product that will lead the competition, and a strategy of going to the market more slowly is preferable."

What about hot-air companies? Has this phenomenon made its way from Silicon Valley to Israel?

"Companies that make hot air have always existed, but while in the past it was hard for everyone to raise money, and them, too, now, in a capital-rich environment, companies of this type have more chance to raise money and build something from hot air. There are fewer such companies in Israel in comparison with Silicon Valley."

Sources in the local industry argue that too many companies in Israel are focusing on a few sub-sectors and abandoning the rest. Do you think that this is typical of the Israeli ecosystem?

"It's not a big issue. In any sphere, by definition, there are more and less attractive areas. There are several reasons for this, whether because the new technology is more suitable for those areas or because there are more market opportunities in these areas or because competition is less. There are a hundred reasons that one or two areas are more attractive than others, and it's no surprise that entrepreneurs are inclined towards them

"In an environment of limited capital, only the two leading entrepreneurs will get financing and there won't be much competition, but in an environment of surplus capital like now, there are 20 entrepreneurs getting capital. All of them are chasing after the same attractive opportunities, which is why there's a feeling of overcrowding. The paradox is that that more intense competition reduces the chances of each of the entrepreneurs to succeed, but it's good for the ecosystem, because the more capital there is, the more chance there is for one of them to succeed."

A disruption, not a bubble

Levine does not believe that a salary bubble has developed in high tech, but that does not mean that he thinks that salaries will remain at the same level. "As I see it, a bubble means a situation in which people are building nothing on nothing, and everything explodes in the end and people are left with nothing. So to the best of my knowledge, there's no bubble. I'm more inclined to call this a deviation or a disruption. Silicon Valley has many large companies that are so desperate to hold on to their talents that they let them take a day or half a day a week to work on their fun projects - that's standard at Google. In several cases, these super-employees start their own companies on the side: they have a job at one company and work one day a week in their company.

"There result is that in the US, unemployment is low and shrinking. In Silicon Valley, unemployment is negative, because on the average, people have more than one job. This is a positive, crazy, and fantastic work environment for employees. It's easy to be spoiled and to get used to this environment, but you have to keep in mind that it can't go on forever. It's hard to predict when something will change and what will cause it, but at some stage, the economic cycle will move in the opposite direction. There will be less capital, enthusiasm will decline, and there will be more competition for every big idea. In the end, we'll get back to a more normal environment. At the same time, right now it doesn't look as though something on the horizon will lead to this."

Another scenario that Levine does not rule out, but believes is far from materializing, is that the current technology giants will lose their places. "Some of the almost trillion-dollar companies are monopolies. Outside of China, there is only one dominant social network, Facebook. In North America, Amazon is a monopoly in retailing, and Google is almost a monopoly in search. It's very hard to disrupt a monopoly, and it can actually happen only if the government forces a change or if a new technology appears in an extreme way that makes the monopoly not so strong. I feel that this could happen, but it might take many years."

Why many years? Europe is already passing GDPR privacy legislation imposing serious liabilities on the large companies, and this legislation is not about to disappear. If the US follows Europe in this, it will have an even greater effect.

"Europe is far more advanced in consumer privacy, as the GDPR legislation proves. It had the courage to go against Google in a way that the US didn't have. But I think that there are already several signs that certain parts of the US will be more aggressive in their efforts to restrain the strong Internet businesses. One example is legislation now in the pipeline in California that is very similar to the GDPR. It's different from federal legislation, but since a large proportion of the technology companies are in California, it can definitely have an impact."

Is there a chance to stop them?

Not so fast. The large companies are wealthy and have so many means at their disposal that they can deal with any new legislation aimed against them. In order to stop them, it will be necessary to do something traumatic, something in the antitrust field, and there's nothing like that right now in the US."

Even if there is, they will tell you that they are too big to fall.

"What this means is that if they fall, they'll take the entire system with them. This isn't the case. They're not too big to fall; they're too big to be conquered."

Secret of success: Knowing how to respond to data

It is not easy to get Jeremy Levine to explain how he chooses in which startups to invest. "It's more an art than a science, and luck also plays an important part."

Everyone says that.

"I think that when you see something small and promising, you have to imagine a world in which it grows to be something big, and then think how important and powerful it can become. LinkedIn is an excellent example: when it had only a few hundred thousand or a few million users, it wasn't efficient, but if you imagined the world in which it had hundreds of millions of users, you could see that ideally it would become the database for businesses and networking.

"The second and more difficult question is whether it's realistic for any company that's small now to have a chance of getting access to distribution channels that will enable it to reach hundreds of millions of users. There are companies in which, already at an early stage, you can see patterns like a viral growth factor or a smart hack that enable a small business to grow really cheaply, or even for free. These are the patterns and features we look for."

Like Wix?

"Wix is a fantastic example of an Israeli company that built itself to be an independent public company, and it's a great success of Bessemer: it's a lot bigger than we expected it could be."

How did they do it?

"In the same way that any great company is created: a little creativity, a lot of hardwork, and a little luck. Maybe it's also because they responded to the data in the early days."

What does that mean?

"Even if you have an initial vision that you are enthusiastic about, you always have to be objective, and when the data on the performance of your business don't match what you expected or hoped to achieve, you can't continue doing the same thing and hope that the results will change. You have to make a change and see if the change works. The team at Wix did exactly that: the original hypothesis was that the monetization of their websites would be through advertising, like many Internet services these days. At a certain point, they realized that if they demanded payment for some of the platform's features, it would be a much better way of making money, and so it was."

What about LinkedIn? Is it a success from your perspective? The public doesn’t really like it, and before it was acquired by Microsoft, the share price was halved following disappointing results. It recovered only when it was on the verge of being delisted because of the deal.

"If you measure a company only by its share price in the short term, you're liable to reach a lot of wrong conclusions. This is true of both public and private companies, where this mistake is usually made when you raise money at a high value and think, 'I've done it,' while you actually haven't begun to completely understand your business.

"Look at LinkedIn's financial performance: it significantly outstripped the forecasts in every quarter since its IPO. Sometimes the market goes faster than the companies, and even faster than their growth rate, and when that happens, you can see big changes in the share price, which fell only because the company didn't grow at the speed at which the market expected it to grow. In my opinion, this is evidence that the market over-reacted when everything was going great guns, and then retreated to more normal expectations when things didn't quite match expectations. LinkedIn functioned excellently in any case. The share price in essence went back to the logical range from a really, really high level before that. You can see a similar pattern with Wix: they grew continually and still the share price fell every now and then, because the market changes its expectations about what will happen in the future."

Just as the expectation change about some share or other, can they also change in general for the entire market?


In that case, do you expect a major correction soon, say 15-20%?

"In the current stock market, especially in technology shares, if you look at any measure of real value, you'll see that prices today are the highest they have ever been, so there's a very high probability that we'll see a downward repricing in the next 3-12 months. I certainly think that we're close to a hole in the floor, but I have no idea when it will happen or what will cause it."

Published by Globes [online], Israel business news - www.globes-online.com - on September 2, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

Jeremy Levine, Bessemer  photo: PR and Shutterstock/ASAP Creative
Jeremy Levine, Bessemer photo: PR and Shutterstock/ASAP Creative
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