ironSource founder and CEO Tomer Bar-Zeev was meant to have spent August with his family and a couple of friends in chilly Alaska. Everything was planned - a family caravan trip, the route, and some rest from work. Just before his scheduled departure, he was about to close a massive, $85 million investment round - the first ever in ironSource’s short but successful history. But the closing of the investment round, in which serial investor Tal Barnoach’s venture capital fund Disruptive invested $15 million, alongside Chinese and US investors, was delayed by 2-3 days, and the trip was cancelled. The investment round was carried out at a company value of $800 million and ended well, but the family had to settle for a trip to Greece
Alaska and Greece aside, Bar-Zeev is leading ironSource, which has developed an application installation engine that recommends downloads based on the applications that are installed on the user’s computer, among other things, is on course from being a rather anonymous company, to becoming a local Internet giant. In its new office building abutting Tel Aviv’s Rothschild Avenue start-up scene, ironSource, which was founded five years ago, is becoming a technology giant. With no toolbars, with no IPO, and with just one investment round, the company is already distributing dividends regularly to the company’s employees and founders - Bar-Zeev and brothers Itay, Roy, and Eyal Millard - who still hold most of the company shares.
“Before the investment round, we held 85% of the company, and the remaining 15% was held by Carmel Ventures, which bought shares from the founders. After the investment round, which 13 investors participated in, we were left with 73%,” Bar-Zeev explains in an interview with “Globes.” The last investment round was carried out at a company value of $800 million, but this was a pre-IPO round, which gives new investors a 50% discount. The industry actually estimates the company value at $1.6 billion.
The company has not disclosed any other financial data, but estimates suggest that ironSource will end the year with $265 million in revenue (up 30% relative to IVC’s estimates last year, and 100% compared with 2012), and $65 million in profit.
Bar-Zeev is unwilling to discuss the numbers, but he explains how a big company can be built today. “One of the things that has changed in the Israeli market is the idea that in order to build big companies, the entrepreneurs and employees need to meet the money before the exit or the IPO, in the form of dividends, because, otherwise, you are selling too soon. Many companies were sold too soon because the entrepreneurs did not have enough money, relative to the risk.
“If you have profits, you distribute dividends, and if you have investment rounds, you buy shares from people, not just from within the company. As the potential grows, you mitigate your risk. We distributed dividends each year, and we sold shares almost every year. The main goal is to build something truly big. But you have to understand how to get there.” Bar-Zeev admits that the last investment round was not for the money. “ironSource makes a lot of money. We didn’t really need the investment itself. We wanted to first build the right syndicate of foreign investors who invest in public companies, but also do pre-IPO. We wanted to get a valuation from Wall Street that we would be able to use to make deals, and to use the money towards future acquisitions.”
Mergers and acquisitions are among the many things that have brought ironSource to where it is today. To date, the company has acquired and merged into itself five Israeli companies, among them DealPly, AfterDownload, and ClickMeIn. The acquisitions, which were not for substantial sums, were intended to diversify the company’s portfolio, and Bar-Zeev says that the founders of all the companies continue to work at ironSource.
“Five out of five of our deals succeeded because we knew how to match the DNA of the acquired company to our own DNA. Today, we have developed the ability and methodology to carry out acquisitions. When you buy an Israeli company, by the way, things are generally easier. It is easier to know in such a situation whether the merger will work or not, because, one way or another, you know the people.”
Babylon’s business fell apart
One of the mergers that was meant to have been carried out but fell apart at the last minute was with Babylon. The merger, which was announced in August, 2013, and shined the first spotlight on ironSource’s operations, was cancelled two and half months later. This was due to the cancellation of the mega-deal between Babylon and Yahoo! - a development that reduced the potential value of the merger for ironSource. “Sometimes, when you look at opportunities, there are things that are beyond your control. Babylon’s business fell apart. I am sorry that what happened to them happened, but I am glad that it didn’t happen after the merger took place,” says Bar-Zeev.
ironSource managed to grow in the Internet world with no need for toolbars, a shady area that Internet users and many in the industry do not look upon favorably. But Bar-Zeev, despite the fact that he is not involved in it, tries to put things in perspective. “There is negative sentiment towards Babylon and Perion in the industry, which I think is overblown. I think that, in the end, you can like or dislike a business model. But if you zoom out on the industry, the Internet is a giant entity that lets us, the consumers, enjoy content and applications, mostly for free, but in order to pay for the free, we get commercials. On ‘Globes’ or Channel 2, it is understood, and you are less nasty about it, but when Perion or Babylon make money from search, people look at it differently. Search is a very relevant business model for companies like Baidu, Yandex, or Google. Babylon, Perion, and Conduit’s search allowed millions or billions of people around the world to enjoy content for free. I am not for or against; we chose to be a platform, and not to rely on search. We could have been an even bigger company, and made more money, but we didn’t go there.
“The bottom line is that I thought the merger with Babylon was a good enough opportunity to add them to our DNA and to turn them into an even better company within two years, but in the end it didn’t happen,” explains Bar-Zeev.
Despite the disappointment, Bar-Zeev continues to seek new opportunities, and says that in the coming year he will be very active in the area. “We are looking at companies that are worth $100 million or more, in mobile, as well as other areas.”
In order to build on the positive momentum, the company decided to shift direction toward mobile. The rate of application installation on personal computers is expected to drop, so the company is focusing on smartphones and tablets - more than 100 people work in the company’s mobile division, which is a growth engine. “I like to be a latecomer, and not to rush to enter new markets,” says Bar-Zeev, “I prefer to see that something works, and then to enter full-force. There are companies that entered in the early stages and were left without resources. So we preferred to develop on desktop until we saw we had models that work on mobile, and a year and half ago we entered the field.”
In mobile, ironSource is competing with slightly bigger and more well-known companies, such as Google, Facebook, and Twitter, but Bar-Zeev is not concerned. “Mobile activity has grown 20 times over in terms of our revenue. Desktop still leads in revenue, but I believe that by the end of next year, it will even out, and 50% of revenue will come from mobile.”
ironSource has 470 employees today, compared with only 30 two years ago. “We have no problem recruiting people, because we are considered one of the sexiest companies to work for in Israel,” he says. “We are a vibrant start-up, an established, diverse company, and we also have an organic culture. We hire the best people there are,” says Bar-Zeev.
Activity: Applications recommendation engine
Founders: Tomer Bar-Zeev, brothers Itai, Eyal and Roy Milrad, Tamir Carmi, Arnon Harish, Nathanel Shadmi, Omer Kaplan
Capital raised: $85 million.
Investors: Disruptive (Tal Barnoach), with Chinese and US investors
Published by Globes [online], Israel business news - www.globes-online.com - on October 30, 2014