October 2017 - Monthly Insights - Israeli Venture Capital
THE ISRAELI FOUNDER: USING DATA TO DRIVE INVESTMENT DECISIONS
The rise of Israel to ‘Startup Nation’ over the last few decades has led many to try to understand the unique qualities of the 'Israeli founder'. The founder’s personality, risk appetite, innovative thinking and cultural upbringing stand at the focus of this attempt. However instructive some of these softer data points are, we decided to focus on the core metrics of the Israeli founder by using data driven analysis to assess the success probability of a founding team. We achieved this by utilizing our proprietary data collection tool, FOREST, which aggregates data from multiple sources to track over 120 funds, 150 GP’s and 1,200 companies. This data is an important component of our fund selection process, which we like to share with our portfolio funds to encourage a smarter, data-driven investment process.
As the winning attributes of the Israeli founders continue to evolve over time, we decided to focus our recent findings on a core sample of all ‘exits’ from 2017, that are valued at above $20 million. Using this sample size, we performed several correlation analyses between the size of the ‘exit’, versus a range of data points related to a company including the number of founders, their educational background and their technological expertise. The first interesting result which we found was the disproportional number of Israeli startups with only two founders, which accounted for around 60% of all ‘exits’. In contrast, just 30% of U.S. based unicorn companies (as of 2013) had two founders. There was also a stark difference in the number of companies with three founders, as only 13% of Israeli companies had three founders, versus 30% for U.S. unicorns. From a financial perspective, companies with two or fewer founders achieved a higher return per founder than companies with three or more founders, $75 million vs. $52 million, respectively. While we did not identify a significant correlation between the number of founders and the size of the ‘exit’, the correlation decreases once founding teams are greater than four members. In the venture world, the topic of the 'solo founder' has been much debated. Paul Graham, the co-founder of Y Combinator, is known to be a strong opponent to the 'solo founder' approach and has set the tone for the global ecosystem in recent times. Paul cites the importance of the different skill set that each founder brings to the company and the importance of having the ability to convince a co-founder that the idea is truly great, as reasons to invest in teams with more than one founder.
As expected, we found a high correlation between companies with at least one technical founder and the probability of an ‘exit’, as 92% (100% for cyber) of the companies in the sample had, at least, one technical founder. We did not, however, find a strong correlation between having more than one technical founder on the team and the size of the ‘exit’. Given that Israel ranks second among OECD countries for the percentage of 25-64 year-olds that have achieved a higher education and the fact that the vast majority of Israeli entrepreneurs come from a 'higher' social-economic background, we were surprised to see that about 12% of the founders did not have a bachelor’s degree. Finally, we focused on the prior track-record of the founders, which, in almost all cases, included at least one founder which co-founded a prior company. What has been commonly known for many years (and documented), is that founders with prior success ('second timers') tend to ‘exit’ companies at a higher rate. This was also affirmed in our review, as almost 25% of founders have already ‘exited’ at least one company, a very high number when considering the general success rate of exiting a startup. Accumulating data in an asset class where data is limited and deploying it into our investment process is a key element of our investment strategy. We strongly believe that risk can be mitigated through 'smart' data driven investing and we continue to assess our fund investments, and their portfolio companies, by relying on these tools and insights.
AMAZON AND ALIBABA LEAD MULTINATIONAL EXPANSION IN ISRAEL
s we move through Q4/2017 we continue to witness strong confidence from multinational players in the ability of Israeli based companies to develop innovative technologies.
Amazon recently announced its intention to open two Israeli R&D centers in Tel Aviv and Haifa, further deepening the e-commerce giant’s presence in the country. These R&D centers will be the backbone of the development of Alexa, the AI driven and voice empowered shopping device of Amazon and will employ about 100 engineers. Amazon has been an active player in Israel for the past several years following its acquisition of Annapurna Labs in 2015, which employs about 200 employees.
Alibaba, another e-commerce giant, recently announced that it will spend $15 billion on 'moonshot' projects. As part of this, Alibaba plans to set up seven research labs and hire over 100 scientists, who will develop cutting edge technologies in the fields of AI, IoT and quantum computing. Recognizing the high level of technology coming out of Israel in these fields, Alibaba has decided to open one of the research labs in Tel Aviv. Alibaba has been an active player in Israel for the past several years following itsinvestments in Jerusalem Venture Partners, Visualead and Twiggle.
NOTABLE INVESTMENT ROUNDS
Infinidat, a TPG Growth portfolio company, secured its series C funding for $95 million. The round was led by Goldman Sachs Private Capital Investing and TPG Growth. Infinidat develops petabyte-scale data storage solutions.
BlueVine, a 82North, Kima Ventures and Bank Leumi portfolio company, secured its series E funding for $130 million. The round was led by the existing investors and included Silicon Valley Bank, SunTrust Bank, Triple Point Capital and Bank Leumi. BlueVine provides business owners with online invoice factoring and lines of credit.
Playbuzz, a Carmel Ventures, Saban Capital and FirstTime Ventures portfolio company, secured its series C funding for $35 million. The round was led by Viola Growth with participation from existing investors that included Disney, Carmel Ventures, FirstTime Ventures and 83North. Playbuzz is an online publishing platform for publishers, brand agencies and individuals.
SAP, a German software enterprise, acquired Gigya, which developes a customer identity and access management platform, for $350 million. Gigya was a Vintage Investment Partners, Intel Capital, Greenspring Associates, DAG Ventures, Mayfield Fund and Benchmark portfolio company.
Playtika, an Israeli gaming company, acquired Jelly Button Games, an Israeli company which develops online games, for an undisclosed amount. Jelly Button Games was a Kaedan Capital portfolio
VizEat, Europe’s largest social eating platform, acquired its Israeli-founded competitor EatWith, which is North America’s dominant communal dining player, for an undisclosed amount. EatWith was a Genesis Partners, Greylock Partners and TripAdvisor portfolio company.
RECOMMENDED VENTURE CAPITAL READS
The 26-year-old millennial is the new target customer for American retailers. [The Wall Street Journal]
SoftBank’s Vision is a Blur of Investments [The Financial Times]
The island nation of Vanuatu has become the first country to accept cryptocurrency in return for citizen status. [Business Insider]
Miwa Sado, a journalist in Japan, worked 159 hours of overtime during one month in 2013. Then, she died. [The New York Times]