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PAH! A Million of Anything is Quite Something

Last night, I learned that PAH!, a new iPhone application built by Israel Roth, Eyal Shahar, and Yosi Taguri, had cracked the top five apps on the AppStore. The game allows users to control a stylized spacecraft by yelling loudly into their iPhone. It’s a brilliant bit of execution – and a brilliant joke in which the user is a willing participant. Yes, it’s fun to play an iPhone game in the privacy of your own private iBubble, but wouldn’t it be more fun to play a game that shatters the walls of that bubble and forces everyone within earshot to be a part of your game? It’s comic genius.

More impressively, however, I learned that people have yelled “PAH!” into the game well over a million times. The game does not have a million users yet – and not even 100,000, but the users that it does have seem to really love it.

It is, of course, too early to tell if – at $0.99 per download – PAH! will generate multiple millions for its founders (possible), if PAH! will be the first step in building a valuable mobile game development shop (no way to know), or if from now on, more and more mobile games will involve people yelling into their phones at full volume (highly unlikely).

What is clear is that Israel, Eyal, and Yosi have caused people to do something a million times. That’s a very meaningful milestone in the life of any company. It almost doesn’t matter if you’ve gotten a million people to do something once or ten thousand people to do something a hundred times – as long as that something is not trivial (and yelling is not really trivial, is it?) it’s an impressive milestone that should cause angels, VCs, acquirers, and others to prick up their ears.

If you are building a digitally delivered business – direct to consumers, prosumers, SaaS, whatever – ask yourself – what is the company going to look like when people do what I want them to do one million times? And how long will it take me to get there?

In the meantime, check out the app at


The five elements of fast fundraising

At this morning’s Seed Camp Tel Aviv, I was approached by a founder and found myself in a discussion of fundraising strategies. As we’ve all observed, there are some founders that seem to be able to raise money effortlessly and others that languish for months or even years before an investor finally decides to cut them a check.

After some reflection, I think there are five – largely orthogonal – elements that converge to create a successful financing strategy.

  1. Core attractiveness of the team/concept/market. There is no getting around this. Having discussed hundreds of start-ups with hundreds of other investors over the years, there is no doubt that some teams are seen as intrinsically better than others, some markets are intrinsically larger, and some ideas are intrinsically more compelling. This is the most important driver of the speed and difficulty of fundraising – but it’s not the subject of this post.
  2. Credible bootstrapping strategy. One of the most effective ways to shorten the fundraising odyssey is, perhaps ironically, to de-emphasize its importance by building a truly credible strategy to get by with less. It’s painfully obvious, but can’t be over-stated. The lower a company’s monthly-burn rate, the longer it can survive, and the higher its monthly revenues, the lower the burn rate. Some people call this “lean start-up” methodology, and my fund, Gemini Israel Funds, is a sponsor of the Lean Start-up Meet-up in Tel Aviv.  Others call it bootstrapping. Most entrepreneurs that I know who are actually practicing this in reality just call it good business sense. My point is that companies that manage to keep their burn-rate at a minimum and present a credible bootstrapping plan are typically those companies that are able raise money faster. Why is this? Two reasons. First, bootstrapping offers real proof of management ability – which VCs love to see. Second, bootstrapping helps VCs realize that you may not need their money for a while, or ever – and that increases their motivation to act faster.
  3. Create a (genuine) sense of scarcity. For better or for worse, VCs are subject to psychological processes that affect their decision-making. Nothing is as attractive as scarcity and exclusivity. When a VC feels that he is seeing a business plan that everyone else in the world has seen and that the company is desperate for VC money, that’s less psychologically compelling than when a VC feels that he has access to a company that not everyone has seen and that may not need their money (or any money). This is often not rational, but it’s a real. An entrepreneur can create a feeling of scarcity in many ways: credible bootstrapping, emphasizing angels and existing investors over new investors, meeting VCs for advice instead of financing. Like anything else, don’t take this too far – and don’t fake it.
  4. Keep your business metrics ahead of your financing needs. I spoke recently to an entrepreneur that wanted to raise $2M for a company with very very early consumer traction on the web. By contrast, I met a team recently that has $2M in the bank and is seeking to raise an additional $2M to finance working capital on a signed commercial agreement worth up to $80M. Same check size, but vastly different stages. In other words, don’t tell a VC “if you fund it, I will built it, and they will come.” All three must happen simultaneously in in sync – development, market traction, and funding. Try not to raise more than you need or more than your market traction would justify in the eyes of an experienced investor.
  5. Love. The final element is also not rational, but it’s important. Lots of investments happen because an investor fell in love with a company, or – more often – a team. Obviously, you can’t control when an investor will fall in love – but you can take steps to increase the likelihood. Spend time with your potential investors, treat them like advisors, and share with them your challenges and how you are thinking about them.

The speed of your fundraising process is going to be a function of these five drivers. Understand them, try not to abuse them, and do what you can to leverage these elements to make your fundraising process less painful.


Pentalum: Turning sniper rifles into better turbines

Pentalum, an innovative Israeli wind power company, just closed a $9M venture financing round from Cedar Fund, Evergreen Venture Partners, and an as-yet unnamed US fund. Pentalum is interesting both because it’s a great company with a really interesting technology and offering, and because it’s an interesting reminder that great VC cleantech opportunities can exist where you might least expect them – even in Israel.

Pentalum’s technology – called SpiDAR – is based on something called LIDAR. LIDAR (Light Detection and Ranging) is an optical sensing technology that can be used to measure distances as well as other atmospheric conditions such as cloud density, pressure, wind, humidity, trace gas concentration, etc. (if you are really interested in the details, you can start with Wikipedia). The team that founded Pentalum actually got their start in military applications of LIDAR. Specifically, they were working on advanced sights for sniper rifles that can adjust for wind along the route to the target and on systems for measuring wind over large areas to help predict the dispersal of poison gas from enemy missile strikes. One of LIDAR’s unique abilities is to measure wind at a great ranges – and this is the ability that Pentalum is leveraging.

Pentalum has been fairly quiet about what they are actually building, so I am not planning on blowing their cover. That said, I think Pentalum is an important reminder of a few things:

  1. Israel can be cleantech powerhouse. Great investment opportunities are few and far between, but they do exist. The jury is, of course, still out on Pentalum, but they can be added to a long and growing list of proven and/or potentially super exciting cleantech opportunities coming out of the Israeli eco-system: BetterPlace, Ormat, SolarEdge, Xjet, Tigo, Emefcy, Brightsource, bSolar, to name just a few.
  2. VCs and other investors will need to think out of the box. Israel hasn’t yet proven its ability in wind energy – but alternative energy in general is still an emerging space, and Pentalum has a great shot at success. Our job as venture investors is to get comfortable in new and uncomfortable spaces. Lots of the successful companies have operated in unconventional spaces and many of them have required unconventional (non-VC) financing.
  3. Brown-fields are greener: The aftermarket is your friend. Growing and scaling an alternative energy company typically takes a ton of capital. Technological innovation that increases generation efficiency often needs to be integrated into complex systems (solar cells, turbines, generators, etc.) – and this integration often happens at the point of production – the manufacturing line itself. This means you either need to endure a long sales cycle to a manufacturer or you need to build a line yourself to prove that it works before you can scale. If, however, you can find a way to build a self-contained product that can be added to an existing system in the field at minimal cost and that can drive higher efficiency – that means three good things: lower capital needs, faster time to revenues, and a much larger market.
  4. Swords can indeed be turned into plowshares. Israel’s high-tech military plays a huge role in sparking and supporting the innovation eco-system that benefits us all – entrepreneurs and investors. Historically, military-related technology in Israel typically had to do with advanced communications systems, security/encryption, or intelligence systems that drove world-leading IT prowess. In Pentalum’s case, the military origins of the technology come from an unlikely source: LIDAR. It takes a real visionary to take a system used to build sniper sights and predict the harmful effects of poison gas and turn it into a system to that makes wind turbines more efficient. But, then again, Israel has never been short on vision.

Pentalum is good news – for wind energy and for the Israeli innovation eco-system.


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Trench-vision: the downside of bootstrapping

Trench-vision is my term for the negative effects of a very positive thing. As someone who spends most of my waking hours meeting entrepreneurs, I can say there are few things as impressive as a company that has bootstrapped its way from idea to revenues. Companies that are able to bootstrap benefit from a number of advantages:

  • Product-market fit questions get resolved earlier. By definition, bootstrapping means that customers have agreed to use your product and pay something for it. Typically, you can’t get there unless you have begun to wrestle with the key product-market fit questions and found effective answers. No amount of due diligence is as compelling as a real purchase order from a savvy customer.
  • Progress down the sales learning curve. The sales learning curve (SLC – described in this outstanding slide deck by Mark Leslie) is a constraint facing all start-ups – and understanding it  is a challenge that takes time and money – the question is: how much? When a company is bootstrapping, it has already begun to progress down the SLC which means that a lot of otherwise theoretical questions about the selling process and the customer adoption cycle can be addressed with some initial real-world data. When a CEO can show me his real data from or her real pipeline in Excel – that’s immensely valuable and often very impressive.
  • Customer interactions. You can’t bootstrap unless you are out there talking to customers and partners – something that almost every start-up should be doing from day one (I am rarely an advocate of total stealth mode). In my experience, CEOs that are bootstrapping tend to have better market insights than others because they are engaged with customers.
  • Indication on pricing. Bootstrapping companies get an early indication of price – of how much their product or service is really worth. Even if they are selling at a huge discount to early customers, this information is, pardon the pun, priceless.
  • A real budget. Bootstrapping companies don’t have the luxury of building Excel budgets to meet VC fantasies. They are running real businesses, which means that their financial forecasts often have an inescapable air of reality to them. In addition, because the business is real and not imaginary, they tend to run a tight ship. I like that.
  • The best source of financing. Revenues are the best and lowest cost source of financing for a company (double points if they are recurring!). All things being equal, as an investor, I would much rather my investment dollars be matched by revenue dollars than by more equity dollars (which dilute both management and me) or by debt dollars (which bring other problems of their own).
  • Management proof point. Perhaps most importantly, bootstrapped companies have tangible evidence of management ability to define a product, bring it to market, and generate sales. At the end, it’s about people and there is no proof better than the pudding itself.

Trench-vision. There are, however, a handful of dangers that face the bootstrapping CEO, and I wanted to point them out. Bootstrapping is very demanding – financially, emotionally, and physically. Bootstrapping founders are like soldiers engaged in hand-to-hand combat deep in the trenches. They are fighting their way forward one knife-fight and one customer at a time. It’s slow, painful, and all-encompassing. Ironically, the focus and determination needed to prevail down in the trenches of bootstrapping can work against you when you are sitting at the polished VC table trying to pitch your start-up. This is trench-vision, and it has a few symptoms:

  • It’s hard to see the dream from inside the trench. VCs come in many different flavors, but a lot of us are also vision people and most of us are really focused on generating LP returns which means we need big exits. Basically, we need you to sell us a dream and a realistic path to get there. We know that your first revenues might be coming from a less sexy product or that you will have to jump through all kinds of hoops to win your first sales – but at some point, we need to fall in love with your long-term (3-year) vision for the company – the same vision that got you started down this path in the first place. Make sure you share that with us. It’s hard to be visionary if you are in the middle of a knife-fight – but try to step back enough to see out of the trench you are in right now.
  • VCs are a source of cash. Be sure to focus your presentation on what your plans are assuming you have an influx of fresh VC money.  As a VC, I’m very interested in what you have achieved so far and in how efficient you have been (and will be). But my objective is to put money to work so you can do great things with it and grow the business as fast as possible. Make sure you talk about that vision. Don’t limit your plans based on the amount of cash you can generate from operations or the amount of financing you think you can raise from insiders or angels – if you’re raising a VC-scale round, show me a VC-scale plan.
  • Don’t forget scalability. Early customer wins are impressive and very important for all the reasons listed above, but to grow large, the company will need to find a scalable formula for repeated sales. In other words, you have to show me how you will continue to progress down the SLC and convince me that there is a good chance you’ll achieve real scalability. In bootstrap mode, the most pressing goal is often survival which means managing cash flow. In VC-backed mode, the most important objective is usually growth, which means focusing on scalability in all its aspects: market fit, product, technology, sales, team, etc.

Again – there is nothing as impressive as the bootstrapped start-up. On your way into the VC meeting, however, just make sure you aren’t suffering from trench-vision.


Attempting to explain phase two of market penetration, France, 1917.


BI is a big deal

I woke up this morning in San Francisco to news that SiSense’s financing round is now public – and so now I can offer a hearty public congratulations to the amazing team at SiSense (Elad Israeli, Eldad Farkash, and their outstanding dev team) as well as to Gary Gannot of Genesis and Dan Avida of Opus who together led this investment.

SiSense was the last project I worked on at Genesis Partners, and I was able to see the investment close just before joining Gemini Israel Funds earlier this month. It’s a company I have been tracking for over three years, and one that I believe in greatly. Let me share some of my enthusiasm here.


BI is a four-letter word. When I started tracking SiSense in 2006, Business Intelligence (BI) was a four letter word. No one in the VC community was taking any interest in a small team of engineers working in an office park somewhere in Netanya. Enterprises had spent billions of dollars on complicated BI implementations and had little to show for it. BI systems were extremely expensive and cumbersome – and usage was very low. Aside from a handful of critical reports on KPIs, most business would report that their business users were rarely if ever making use of the sophisticated querying and reporting functions offers by BI packages such as Cognos (acquired by IBM in 2009), Business Objects (acquired by SAP in 2007), or Hyperion (acquired by Oracle in 2007). BI was a critical part of the enterprise stack – after all, reporting on business data needed to come from somewhere – but BI was widely considered a failure and – aside from the critical reporting functions – any incremental BI spend was generally considered wasteful.

The reasons for the failure of traditional BI lie in the database architecture itself – something that I came to understand through hours of conversation with Eldad and Elad and many discussions with BI professionals in Israel and the US. BI systems were originally modeled on their cousins – the operational/transactional databases without which there would be no data to analyze in the first place. Operational/transactional database were designed to facilitate rapid writing and reading of “rows” in the database. When a customer purchases a product, the details of that transaction need to be rapidly written into the database which is (to simplify) basically the addition of a single row of data on the bottom of the database. Similarly, when a customer calls a call center and his/her data needs to be pulled up for the rep, that requires the rep’s software to read from a single row in the database. Operational/transactional databases were optimized to be able to perform these operations rapidly and reliably – row by row by row, one row at a time.

OLAP as duct-tape. But analysis requires an entirely different way of reading (and writing) data. Lets suppose a mobile operator wants to make a table of the top ten sales reps in each month who brought in the customers who generated the most revenue under a particular type of monthly plan. This is a very logical request from the perspective of the business analyst who is asking the question – but from the perspective of a traditional relational database, it’s a nightmare. To figure out the top ten each month, the BI system needs to read every row (a “full table scan”) of the relevant database and store in memory the top ten at every given phase until it can come up with the overall top ten in every month. In addition, the BI system will need to “join” the sales rep table with the customer revenue table – creating a new table – in order to perform this analysis. These types of operations are complex and costly in terms of time and computing resources. To overcome these challenges, OLAP (Online Analytical Processing) was developed. OLAP achieves dramatic time savings in doing these sorts of calculations by pre-processing the data and storing it in a series of  “OLAP cubes” that are suited to potential queries of the type suggested above. The challenge with OLAP is that for very large dataset, the OLAP cubes themselves are massive (often larger than the original dataset) and – more importantly – very rigid. OLAP cubes must be determined in advanced and stored somewhere – and changing them as analytical needs changes is painful. Traditional enterprise BI implementations involved just this sort of massive complexity and cost. Business analysts need to determine ahead of time which reports or queries or drill-downs they might want to do, the database team then goes and determines the right OLAP cubes to meet those needs, and then an infrastructure team goes and figures out what storage and computing resources are going to be required to maintain and handle all of those massive unwieldy OLAP cubes that are going to be sitting on EMC boxes waiting for a user to call them up. This staging ground of OLAP cubes is what is called a “Data Warehouse” and its the critical (and most expensive) part of any BI implementation. Without a properly configured data warehouse, none of the analytical tools (such as SPSS) or presentational packages (such as Tableau or Spotfire) will be able to function effectively.

The Qlikview approach, and IPO. The reality is that OLAP (and data warehousing) is really a very sophisticated (and expensive) way of getting around the limitations of the underlying database architecture that is optimized for row-by-row read/write operations and not for data analysis. One alternative approach to this problem has been pioneered by Qlik Technologies, a Swedish company, that has been very successfully selling an in-memory database system called Qlikview. Qlik Technologies, which has filed to go public, has an Israeli connection – although entirely Swedish in original, it received an investment from JVP, which stands to profit handsomely from the IPO. The attraction of Qlikview is that by loading all of the database into memory, their system creates a simple “data warehouse” that doesn’t require pre-configuring and can run on any machine provided there is enough memory. This capability – and the huge demand from the market for low-cost flexible BI systems that actually work – has driven Qlik Technologies to be one of the fastest growing emerging software companies in the past five years – with revenues of over $150M in 2009. The incredible success of Qlikview is a powerful indication that BI is broken – but their approach is not without its weaknesses. First, it requires hardware with very large amounts of memory (this is easier to achieve than a full-blown data warehouse, but its still an obstacle). Second, Qlikview breaks down on very very large datasets – the sort of datasets that Internet companies (even small ones) generate on a regular basis. An Internet company I know of recently set out to try Qlikview and was told by their sales reps – “sure, but only if you buy new, more powerful hardware.”


Enter SiSense – The Data Warehouse Alternative. SiSense – from their small office in Netanya – has set out to completely rebuild the BI stack from the ground up starting with the underlying database itself. Here are the elements of the SiSense approach to BI:

  • Going vertical. SiSense started by throwing out the traditional relational (row by row) database and adopting a vertical column-based (“columnar”) approach of the type pioneered by companies such as Vertica. This means that SiSense simply takes an enterprise’s data and writes it into a new database that is optimized for the sorts of analytical queries that are so challenging for relationship databases.
  • Efficient swapping from disk to memory and back. Next, SiSense built a really smart memory management system. Unlike Qlikview, which throws the entire database into RAM in order to process it, SiSense selectively pulls individual columns out of the database and puts them into RAM for only as long as it needs to perform a particular part of a query. The vertical structure of its database makes this particularly feasible. The result is that SiSense should be able to handle far far larger datasets than Qlikview. In fact, everything in the SiSense approach is based on responded to queries on the fly. Very little is “staged” in advanced.
  • Intuitive mapping and joining. SiSense has created a very intuitive interface that allows even a simple business user to map the relationships between various databases and tables (such as a sales rep table and a customer table) and connect them in a logical way. These tables do not need to be “joined” in advanced (as they would in OLAP). Instead, SiSense stores the relationships between the tables so that it can join them on the fly as required for a particular query.
  • Ability to perform ad hoc analysis. As an occasional analyst myself, I know that analysis is a creative thought process. It’s about looking at a problem and saying “i wonder if we’d get an interesting result if we cut the data in this new way.” Traditional BI can not support this sort of ad hoc creativity because OLAP cubes must be defined in advance for specific sets of queries. SiSense, because it does away with OLAP, allows true ad hoc querying for the first time. My prediction is that even large business with full-blown BI implementations will find value in this aspect of what SiSense offers.

There are other advantages to SiSense (such as a beautiful web-based authoring environment and the elimination of the need for complex SQL scripting in favor of a GUI-based query language that any user can quickly learn), but the four advantages above are the most important ones. This is what SiSense means when it refers to its solution as a “Data Warehouse Alternative.” The problem with BI is first and foremost a problem with the way data warehouses are built. By addressing this challenge from the root causes, SiSense has the opportunity to lead a revolution in BI. I’ve seen the system running on very small datasets (my own) as well as on large datasets from internet companies with millions of rows. SiSense has been able to build BI solutions for customers in a few days – solutions that would have taken months of planning, provisioning, and infrastructure deployment using traditional methods.

No longer a four-letter word, but a massive market opportunity. As Qlikview has shown, there is a massive market for BI solutions that actually work – and with the growth of online businesses, this market is exploding. In the course of a few years, BI has gone from an untouchable four-letter word to an opportunity that many people recognize. Web business generate tons of data – even small ones. Every time a user action hits a server, there is a bit of data created in a database somewhere – data that could be analyzed if there was a proper BI system in place. Most web businesses are two small to afford large BI implementations and web-based offerings (such as Google analytics) do a great job of analyzing web traffic data, but don’t interface with other sources of data. In addition, the amount of data being generated on the web is unlike any other business – and it requires low-cost flexible solutions that can handle very large scale data.

SiSense has the potential to become a true Israeli success story. From their small office, they are taking on a massively complicated industry and literally rewriting the rules of how BI is done. It’s about time someone did that, and I wish them continued success on their challenging road ahead.

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Cars, innovation, and the garage

In past years, I used to use the automotive industry as a case study to illustrate the dynamics of industries where VC financing didn’t make much sense. Why aren’t there lots of VC-backed companies, I would say, pioneering innovations in brakes, internal combustion engines, power steering, and tires? The auto industry is rife with innovation (such as this fuel injection system driven by a piezo ceramic actuator) but for years, most of these innovations have originated within the large automakers or within large auto parts suppliers such as Delphi and Continental. The auto industry wasn’t right for VC investing not because there was a lack of innovation, but because the locus of that innovation had shifted away from private garages and into the laboratories of large corporations.

The locus of innovation can shift away from start-ups and towards large corporates for a number of reasons. In the case of auto industry, it has a lot to do with very long product design cycles, extraordinarily high distribution costs that drive consolidation, the relatively incremental nature of most automotive innovation, and the ability to fund innovation with corporate earnings as opposed to (much more expensive) venture capital dollars. All of these factors combined to make it nearly impossible for a start-up to succeed in the automotive industry.


Enter Tesla. Today, I came across this excellent article in Earth2Tech in which Katie Fehrenbacher makes a powerful argument for why the Tesla  is so important despite the overblown hype, despite the widespread expectation that the stock will underperform, and despite some real challenges in the company’s operational plan. Tesla’s recent IPO, she argued, showed that public markets are willing to reward early stage investors in next-gen automotive with solid returns and are willing to take on some very real risks themselves in order to have a shot at long-term returns. Tesla’s IPO is a shot in the arm for those entrepreneurs and investors willing to bet on a challenging new industry, and offers the first evidence that the VC model can work in an industry that hasn’t seen a successful VC investment for as long as anyone can remember. Could we see a number of VC-backed automotive IPOs in the years to come? It’s no longer as crazy as it would have sounded just a few months ago.

betterplace-charging-thumbFocus on innovation. The case of Tesla is, for me, a timely reminder of the basics of the VC industry. The emerging electric vehicle eco-system is a massive discontinuous shift in the automotive sector – and it creates the opportunity for start-ups to take share from incumbents and upset the supply chain. VCs can make money whenever there are such discontinuous innovations that create real value – regardless of which industry they are in. Tesla is such a case. Even in Israel, there are a number of automotive companies that stand a very good chance of generating VC-style returns: Better Place, Mobileye, and ETV Motors come to mind. Generating VC returns in industries with few acquirers and long development/sales cycles is difficult, but its not impossible, and those opportunities shouldn’t be ignored.

Telsa illustrates how the locus of innovation can shift away from the corporate lab and back into the garage. But Henry Ford started in a garage too. The Model-T was the FourSquare of its generation. It’s becoming clear that many of the sectors that sustained VC returns (telecom equipment, semiconductors, traditional licensed enterprise software) in the 1990s have failed to do so in the 2000s. In almost any industry, growth inevitably slows, consolidation occurs, and – sometimes – the innovators leave the garage.


Three iron-clad rules for pitching your start-up to a VC


As a VC blogger, I have tried to avoid the inevitable blog post on “how to pitch.”  First off, there have already been many wonderful posts on the topic including this one by my good friend Eric Wiesen over at RRE and this one by the always insightful Chris Dixon. Some of these were even aggregated in to a single quite useful post by ReadWriteWeb. You can also find a Powerpoint I once gave on the topic here.  Second – and more importantly – I’m quite confident that most aspects of advice on “how to pitch” are not readily generalizable across the wide range of entrepreneurs, start-ups, and VCs that exist in the world. An approach that one VC loves might seriously annoy another. A demo or mock-up might be absolutely essential for certain types of applications and might be a total waste of time for others. Some enterpreneurs do best with Powerpoints, others do much better without them. Some people insist on standing while they deliver their pitch. This used to make me uncomfortable, but I learned that if this is what makes the entrepreneur comfortable – that is the most important thing – and I’ll just concentrate on the information he or she is delivering. Form is important, but the substance of the team, the market, and the plan are far more important. Finally, some of the advice on how to pitch is actually advice on how to live – it’s just generally true in many situations including the VC pitch: tell the truth, listen, do your homework, give respect to competitors, admit what you don’t know, etc. This is critically important advice, but it’s not specific to the VC pitch.

So with those caveats out of the way, over the past few days I’ve been in a series of meetings with entrepreneurs that have finally inspired me to put in my two cents worth of blogging on how to pitch. There is a lot of room for creativity and flexibility in pitching VCs, but I’m convinced the advice below is almost always helpful because these tips are about at creating the right context for a productive discussion.

1. Start by introducing yourself.  This may seem obvious, but it is amazing how often this is not done. Before the person you are pitching to can understand (or evaluate) your business, he/she must know who you are, what your background is, and something about what makes you tick. This is essential for putting other pieces of information in context during the course of the conversation. Even if the VC starts a conversation about something else or starts firing questions at you, you should gently but firmly insist on introducing yourself and your team. The team slide should either be the first slide in the Powerpoint or should come right after a slide with a company description. Almost all VCs will agree that the team the most important element of any VC-backed company.

2. Tell the VC what your start-up does in simple language that any idiot can understand. This might be the single most important tip I can think of. It seems blindingly obvious, but it’s not. In the very beginning – right after or right before the team introduction – you want to quickly and succinctly explain what business you are in or plan to be in. And do it in plain simple English (or Hebrew, as is often the case in Israel). This is essential because your listener needs to understand what you do in order to put the rest of your pitch in context. If the entrepreneur is going on at length about technology trends, market sizes, brilliant advisory boards, or revenue growth – the VC will have a very hard time understanding the significance of what is being said unless its in a context. It’s great that your advisor/angel/partner is the CEO of Vodaphone, but until I know that you are selling software to mobile operators, I will not be able to put that information into the right context and understand its value – nor will I be able to ask intelligent questions about the information you are conveying. My advice is not to build any drama or suspense into a VC pitch. Tell the VC what you do, and then go into greater detail – but don’t keep the VC waiting on the edge of his seat for 30 minutes before you reveal the business plan. Be clear about distinguishing between legacy offerings and the new offering you are raising money for, as this can be a major source of confusion and a huge time-waster in meetings. I want to hear about what you’ve done in the past, but I do not want to waste most of the meeting talking about the wrong product. It’s up to you to focus the VC on the right product – the product you are asking him/her to fund – so the meeting time is well spent. Also – do not avoid clarity because you think the VC might not be excited by the truth. If you make most of your revenue from the financial betting industry – just say so. If you are primarily a professional services operation – just say so. If you are competing with large established companies – just say so. It’s true that many VCs have pre-conceived notions about what is or is not an attractive business – but nothing is as big a turn off as lack of clarity.

3. Tell the VC what your objective for the meeting is. If your goal is to raise $5M from two VCs or a small $0.5M seed round, say so. But that is not always the goal. I often meet with entrepreneurs who are in the early stages of idea formation. They are not really ready to raise VC money, and – in many cases – they don’t have answers to some really important questions. This is absolutely fine, and I would rather meet with a company too early than meet with them too late. Often these are productive meetings that lead to long-term relationships, brainstorming, and, occasionally, investments. It’s essential, however, that expectations get set appropriately. If it’s too early to talk seriously about raising money, you want to make sure the VC knows that you know that. If you’re meeting for the purpose of fleshing out an idea or getting some early feedback, let the VC know. This will free up time in the meeting for the brainstorming and back-and-forth that you are looking for – and it will be position you better for when you come back to raise the real money.

Aside from these broad outlines, I think there are many ways to be successful in a VC pitch. A lot of this is a matter of personal style and the challenges of communicating the specific aspects of your particular business. I’d be more than happy to get to know you and your unique pitching style. Just drop me a line and let’s meet. And yes, that is a photo of Chewbacca pitching. In case you were wondering.



Online advertising moves into the end game

Recently, I’ve found myself in a series of meetings in both the Silicon Valley and in Israel with technologists, media people, and venture capitalists – all of whom seem to be equally despondent about the state of the online advertising start-up. The online advertising industry is in the final stages of consolidation, they argue, technology doesn’t matter all that much, and opportunities for online advertising start-ups to break into the revenue stream are going to be scant to non-existent. What’s the source of all this pessimism, and where might opportunities exist for venture investors in this market?

Let me start by saying that the online advertising market is extremely complex (probably far too complex for it’s own good). A good friend once gestured at the floor of the London Ad:Tech conference. “You see all these companies?” he asked with a smile. “80% of the clicks on the Internet pass through 80% of these companies. It’s a total mess.” He was exaggerating of course, but it’s not far from the truth. To help make some sense of this, let me put forward a few observations that I’ve gathered and try to tie them together into a thesis. As always, thoughts, comments, and critiques are welcome.

  • Consolidation in the industry is very real. There has been a trend of acquisitions large and small over the past several years. Traffic is being concentrated in fewer and fewer major media companies. The buy-side is consolidating as the major agencies snap up digital agencies and lock up market share. In addition, networks and exchanges are consolidating as the bigger players see the value they can extract from scale. As the market for online ads becomes more efficient, the need and opportunity for niche players has contracted dramatically. This trend is raising the bar for start-ups. To achieve significance, a start-up must penetrate one or more of a handful of major players in the industry – and that can only be done if the offering is very valuable and very unique.
  • The evolution from ad networks to ad exchanges is a profound shift, the implications of which are only beginning to be understood. Ad networks aggregate buyers (agencies) and sellers (publishers) with the promise of superior targeting and easier transactions. Their profit margins, historically, have been based on the spread they were able to achieve by buying low and selling high. The thing is – publishers prefer to sell high and advertisers prefer to buy low. Ad networks will continue to survive in certain markets and niches, but for the most part, the market has evolved to the far more efficiency ad exchange model. An ad exchange is exactly what it sounds like: a fundamentally neutral marketplace where buyers ask and sellers bid and transactions occur where there is a match. The ad exchange model is built on high volumes and low margins – they don’t have much of a spread to profit on and make their revenues from a relatively low commission on every trade. Many networks have tried to adopt aspects of the exchange model, but as profit margins contract, the exchange model naturally evolves towards scale – and we are seeing that today. There are already several major exchanges (Google’s Ad Exchange, Yahoo’s Right Media, and Microsoft’s AdECN to name the major ones), and there is no reason to expect more than a handful to persist over time.
  • Automated online advertising will become become increasingly liquid. This is already happening with the shift towards real-time bidding. As they compete for volume and share, exchanges are going to make it easier and easier for advertisers and publishers to transact in real time. Specific audiences, contexts, keywords, cookies – it is all going to be up for grabs in real time (if one wants).
  • Direct sales is still king of the castle. For any publisher of any size, direct sales remain the best way to sell quality inventory. Advertising will remain a relationship business and technology tools that help publishers to understand their audiences and validate the impact of campaigns will be weapons in the arsenals of direct salespeople who will continue to drive the bulk of revenues. The question is what will happen to “remnant” inventory (the stuff the direct sales guys can’t sell)  and inventory of publishers that do not have direct sales teams.
  • Targeting is a cocktail – and those cocktails are getting more complex. As a venture capitalist, I’ve had the privilege of meeting with many start-ups each with their own targeting technology and approach: contextual, semantic, retargeting, demographic, psychographic, dynamic content, etc.  Unfortunately, it’s getting harder and harder to get excited by companies that offer a one-dimensional improvement in targeting technology. Those companies may be able to raise the value of impressions all things being equal – but all things are not equal. As exchanges drive the market towards ever more dynamic advertising transactions, the winning solutions are going to be able to investigate multiple targeting possibilities on the fly. The bigger the publisher (or the advertiser or the network), the more data is going to be available to drive decisions across the daisy chain and within it – and the better the clearing process is going to be in the matching of audiences and inventory. Point solutions may have a place, but my guess is that they will be increasingly relegated to the role of market participants – buying and selling remnant inventory at a profit based on their proprietary algorithms. If a company has really powerful algorithms, it might be able to make good money – but these companies are unlikely to be good venture investments. Like algorithmic hedge funds, the smart online advertising companies will raise a small amount of seed capital and trade for their own book.
  • The locus of advertising intelligence will shift. With the shift from networks to exchanges, the locus of “intelligence” will shift from the center of the market to the extremes. Whereas once publishers and advertisers relied on the intelligence, experience, and good will of the networks to match supply and demand, the shift of volume to exchanges means that the intelligence driving pricing and purchasing decisions will migrate to the two ends of the spectrum. We have already seen this happen. On the publisher side (the sell side), yield management companies such as Rubicon Project, Pubmatic, Admeld, and others offer publishers the ability to optimize the way they offer their (most remnant) inventory across a spectrum of networks and exchanges, each “competing” for that inventory on the open market. Likewise, companies such as MediaMath and X+1 have emerged that offer similar yield management solutions for the buy side.
  • Format companies face an uphill battle. Companies offering creative ad formats face an uphill battle in this new, streamlined online ad universe. This is for two principal reasons. First, most ad inventory purchases are made by checking off boxes on the “Chinese menu” of fairly standard choices. In order to get on that menu, a new format needs to achieve some level of standardization (ideally through the IAB). This is hard to do for a new format, and the process of wrangling buyers and sellers together around a new format can choke a start-up. Secondly, online advertising (at least the profitable kind that VCs like) is all about scale, and scale is all about reach. Unless publishers are ready to sell your format, you cant bring advertisers on board no matter how hard to try – and the revenues of a format company will always be bounded by the reach of the format.
  • Data is tradable too.  Companies such as BlueKai and the Israeli company Exelate have shown that data on user behavior is just another commodity that can be moved readily from place to place to enhance targeting. This further levels the playing field between publishers and networks – and increasing the ability of advertisers to buy specific audiences. Increasingly, online advertising is less about impressions and context and more about audiences. Context plays a critical role, but now that behavioral data can be moved around easily to be leveraged far from where it was generated, context is just part of the picture.

All of this means that the online advertising industry is changing and consolidating. That said, I think the generalization that “there is no more room for online advertising start-ups” is only as true as most generalizations: It’s mostly true – but its sometimes wrong….and as a VC, I’m looking for those companies that can find and exploit islands of opportunity in the new era of online advertising. Below are some areas where I’m looking, but I’d be happy to hear suggestions for more:

  • Yield management. It’s a tough market, and a crowded one – but I think there is quite a bit of evidence that the yield management space has yet to fully mature. Developments such as ad exchanges, video ads, real-time bidding, new sources of user data, and opportunities for dynamic creative create tremendous complexities for publishers, networks, agencies, and advertisers. Existing yield management tools were, for the most part, born in a simpler era and are not up the task. The good news here is that there are lots of potential customers (on both the buy side and the sell side) and that the exchange-based eco-system is ripe for optimization – in fact, it demands it. A new Israeli start-up, IgniteAd, is one of the more interesting upstarts on the publisher side – but they face a tough battle against incumbents.
  • Video and video analytics. It’s become clearer that online video is here to stay and that a revenue model will emerge, but we’re not there yet. Video brings a new set of challenges in terms of analytics and profiling – and there may still be room for a start-up to emerge that will help organize this still-nascent space. Video (or other interactive formats) also hold the promise of reversing the phenomenon of analog ad dollars turning into digital pennies. Interactive formats could provide the emotional resonance that will allow branded campaigns to achieve online the same level of impact that offline adds achieve. Innovid, an Israeli start-up with unique capabilities around interactive video advertising and analytics, is one of the emerging leaders in this space (and a Genesis Partners portfolio company).
  • Hyper-dynamic advertising, With more and more data on user behavior available and an increasingly real-time environment, we are likely to see more and more hyper-dynamic advertising. By hyper-dynamic, I mean that all elements of the ad itself (creative, text, location, format) will increasingly be customized on the fly to drive performance. The Israeli company Dapper is one of the leaders in this space, and an important company to watch.
  • Advanced user profiling and psychographic analytics. Ask the large social networks and they will claim that they are already doing this, but I believe opportunity still remains for powerful semantic technologies and profiling engines to help websites categorize their users better. Advertisers are increasingly buying specific audiences as opposed to impressions – and publishers should be able to provide a much better picture of their users than they are today. Any website that allows users to express themselves (and there are more and more of those) as well as any website with deep and highly specific content should be able to generate a psychographic profile of a user – much like the detailed psychographics that underpinned the offline publishing industry. Israeli start-up Nuconomy, which was just rolled into LivePerson, had some very powerful user profiling technology, although it’s not clear where that technology is headed today. Facebook is experimenting with this, as are start-ups such as Peerset

If you are working on a start-up that has a strategy to win in the brave new world of online advertising, I’d love to hear from you.

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Gary Vaynerchuk and the Era of Almost Free Digital Distribution

A few days ago, a video from the always-entertaining Gary Vaynerchuk caught my eye. The video is of a talk Vaynerchuk gave back in October at The Booksmith, a San Francisco bookshop. The entire hour-long talk is worth watching, but the first twenty minutes are enough to get the point across.


Vaynerchuk rose to fame through the phenomenal and well-deserved success of Wine Library TV, an independent video blog produced by and starring Vaynerchuk. Today, he is out promoting his new book, Crush It!, which is a primer on how to build a personal brand and a personal media business in the age of digital/social media. In the talk, he makes a few pretty interesting points about media in the digital age. A few observations:

  1. Direct-to-consumer is a cottage industry now. Web publishing has enabled anyone and everyone to go direct to the consumer. This is one of several real revolutions brought about by the internet, but it’s easy to forget. We can all use the web as a publishing platform to reach an audience and drive our businesses or our personal agendas – and there are no gatekeepers or middlemen who can stop us. The democratization of media is a very real phenomenon. In Vaynerchuk’s words, we can all “go up to the plate and have a swing.”
  2. Never under-estimate the pace of change. Vaynerchuk points out that the companies and websites that have enabled his success (Facebook, Twitter, Viddler, etc.) did not even exist a few years ago. We are still at the very beginning of a massive change in what media means and how it gets produced and consumed. Vaynerchuk reminds us that this is a very exciting time and that we’re privileged to live in it – but the pace of change is relentless.
  3. It’s not about being Oprah. Vaynerchuk reminds us that – because of the way media is changing – the media game is no longer about being Oprah. Even today, small publishers and video producers who focus on a niche audience are able to earn a very respectable living by providing value to that niche. This is something that was pretty much unthinkable before the internet. And this is all happening before online advertising has really figured out how to monetize audiences efficiently. When that happens, the cottage industry of online media will grow even faster. To succeed in digital media, you don’t need to be as big as Oprah.
  4. Technology doesn’t care about us. Vaynerchuk describes a conversation with an old-media executive who complained that is wasn’t “fair” that social media and online marketing was destroying his business. The truth is – technology has a mind of its own and it doesn’t care about whether or not certain executives will have jobs or not. People are spending more time online and less time consuming traditional linear TV or printed media. People are walking around with their eyes on their iPhone/Blackberries and less on out-of-home advertising. As our attention migrates, ad dollars will migrate as well – and there are billions and billions of ad dollars at stake.
  5. Real businesses. Vaynerchuk started out as a guy with a wine store who figured out how to leverage social media to drive his brand and his company’s sales. Some of my best friends are social media consultants – but social media is not really about social media consulting and its not even about technology companies. The big revolution – the really interesting one – is that regular bricks-and-mortar business are beginning to realize that they can leverage social media. The even bigger revolution is that the tools needed to do this are getting so easy to use that these businesses are increasingly doing this on their own.

And now a word on online music start-ups…

With Vaynerchuk’s talk fresh in my mind, I noticed this outstanding piece by Paul Bonanos at GigaOM. Paul covers a discussion of venture funding for online music companies at the SF MusicTech Summit which took place on Monday. While there have been some exits in the online music space (Israeli company FoxyTunes which was bought by Yahoo and the stunning $280M acquisition of Last.FM by CBS), the sense on the panel was that the digital music space has become a pretty tough place recently. Recent exits of Imeem, iLike, and Lala has not generated the spectacular returns hoped for by VCs and VCs are apparently increasingly skeptical that the space will generate great returns.

Why is this and what is the connection between online music start-ups and Gary Vaynerchuk?

I think there is a connection. Vaynerchuk is talking about a world in which digital distribution costs are approaching zero – a world in which content is truly king. As distribution costs go down, friction is taken out of the system. Vaynerchuk doesn’t depend on editors or content programmers or distributors or networks to get his content out. He does it himself – efficiently and effectively and the content goes where it needs to go because it gets pulled by the users that want it. Vaynerchuk’s costs are low so he doesn’t really care how many people watch and given episode of Wine Library TV. The more the merrier – but there is little financial risk involved.

In the world of online music – content is also king and always will be. I now regularly access music from at least four different providers (Rhapsody, iTunes, Grooveshark, and YouTube). What interests me is the music itself – the song or video I want. The distribution of that content – however – is pretty much a commodity. As much as I love GrooveShark, I’m not sure it’s a company that can grow to tremendous scale because there is very little if anything that Grooveshark does for me that any other music service doesn’t do. They all offer sharing, they all offer radios, they all have great search and playlist management, etc.  Unless these online music players can come up with a way to generate truly unique value from their user base – I think their opportunity might be capped. Market frictions are a distribution company’s friend. The TV market still has enough friction in it (connectivity, UI issues, programming guides, search, lack of a widget platform, etc.) that companies like Boxee and Roku may be able to create tremendous value by simplifying things for users and building a loyal user base. Online music, however, seems to have reached a point where access is so convenient and pervasive that its hard to build a distribution-based business.

The real winners in this new world of near-zero digital distribution costs are content owners (U2, Radiohead, and Gary Vaynerchuk) because they own the rights to the product of their own unique creative efforts – and that is ultimately good news.

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Lessons for Venture Capital from Andreessen Horowitz

In July, Marc Andreessen and Ben Horowitz announced the launch of a new $300M venture capital fund, Andreessen Horowitz (AH). Between them, Andreessen and Horowitz are the guys behind NetScape, Opsware, Ning, and many other smaller but no less notable ventures. Anything they decide to do together is big news – and when that project involves shaking up the venture industry, it’s a very big deal.

You can find great coverage of the launch by Kara Swisher, Henry Blodget, and the Wall Street Journal, among many others. At a time when the VC model is under tremendous stress and most industry observers are predicting massive contraction, Andreessen and Horowitz had the capability and vision to launch a new major fund that leverages a few key insights – insights that I think are relevant for venture capitalists everywhere, and particularly here in Israel.

Recently, Fred Wilson wrote that “the VC business is not broken. Some of the participants in it are.”  The launch of AH was a clarifying moment for me because it represents a proactive and constructive attempt to reinvent certain aspects of the venture capital model. Here are a few of the highlights, as I see them:

  • ahvFrom $50K to $50M. This is the most dramatic and important insight that AH is sharing with us. Lots of VCs have some sort of seed program, effectively enabling them to buy an “option” on the opportunity to invest in the future. AH, however, is explicitly stating its willingness to deploy very small amounts of capital – far smaller than most VC seed programs will seriously contemplate. On the other hand, they are not afraid to commit large amounts to support their most promising and capital intensive investments. This may seem like a trivial matter – but it’s not. Most VCs imagine the ideal deal structure for their model (“no less than X% at exit and no more than $X million committed per company”) and then try to invest around that model. In addition, VCs will often say that they can’t do small ($50K) investments because those investments are unlikely to generate exits large enough to impact the fund. Undoubtedly, there is a value in such investment discipline. But AH has a different message – and they are reminding us of what the VC business is supposed to be about. VC is about financing innovation and rapid growth. It’s tough for even the best VC to find great opportunities that precisely map to a single rigid theoretical model. Instead, VCs need the flexibility to find and finance innovation at whatever stage and at whatever scale allows them to invest in the best entrepreneurs with the most potential for creating value. They need the flexibility to make very small risky investments, and they need the guts (and the fund size) to be able to make much larger investments in a few massive but capital-intensive opportunities – including helping some of their successful seed investments grow. In her piece on AH, Kara Swisher suggests that the AH portfolio is going to end up looking different from a typical VC portfolio: 60-80 seed investments, 15 that need follow-on rounds, and 2-3 later stage investments. Sounds good to me.
  • Rethinking board membership. One of the reasons that VCs don’t like small deals is that small investments take the same amount of work as larger investments. This time commitment typically includes board meetings, extensive contact with the CEO and senior management, and efforts to add value through introductions and strategic consultations. A VC partner’s time is a valuable commodity and he/she is typically reluctant to spend that time on a small investment, because the cost/benefit doesn’t work out. In Andreessen’s blog post on the fund’s launch, he states that Ben and he will join boards where the fund has made a significant investment ($5M or more) but that they will “generally not go on boards of raw startups — in fact, in many cases, we don’t even think today’s raw startups should have boards.” Andreessen and Horowitz are describing a VC model that enables a large fund to actively make small investments. The key to their model seems to be investing in entrepreneurs that they trust and that do not require deep partner involvement, at least not in the early stages. This frees up partner time to focus on big existing investments where that partner’s time can make an impact on fund returns – and it enables AH to invest in many more start-ups that the traditional VC model would allow.
  • Flexibility. Throughout, AH is emphasizing flexibility. They are willing to invest in any information technology company, at any stage, and through any structure (traditional equity,, founder’s shares, LBOs, and even public equity).
  • People and product. In his post, Andreessen repeatedly emphasizes the type of people they are looking to back (a founding team that includes technical founders and at least someone who intends to be the long-term CEO), as well as their preference for backing entrepreneurs (at whatever stage) with a clear product vision.
  • Recognition of new realities of start-up costs. In his blog post on the fund’s launch, Andreessen also argues that “the process of building a new technology company is changing rapidly,” with many start-ups requiring less capital up front and much more later on. Andreessen is right. This is certainly true for software and internet start-ups, where new software architectures, third party apps and services, and cloud-based infrastructure have combined to dramatically reduce both initial development costs as well as the costs of scaling a computing infrastructure. It also can be true for certain (rare) types of hardware companies who are able to leverage externally resources effectively. Rapid growth in the expansion phase does, however, often require lots of capital. AH has the mindset to enable small initial investments and the capital to help them grow later on.
  • Geographic focus. Given their reputation, Andreessen and Horowitz will attract deal flow from around the world, but they have chosen to focus on Silicon Valley. This is a validation of what Israeli VCs have been saying for a long time. Venture capital is a local business. It depends on great access to deal flow, an understanding of local dynamics, and engagement with the local market for talent and opportunities. Never underestimate the advantages of being able to meet your VC for a cup of of coffee without getting on a plane.
  • Fund size. AH decided on a $300M fund size. This may turn out to be their most controversial decision. After all, its not easy to generate 2X (let alone 5X) return on $300M. Assuming average holdings of 20% at exit, you’d need to generate $3B of total enterprise value from the portfolio just to return 2X. This is doable, but it’s far from trivial. That said, given their access to outstanding deal flow, their track record, and their reinvention of the venture model, AH has as good a chance as any to generate real venture returns.

What does this mean for Israeli entrepreneurs and VCs? Broadly speaking, AH’s approach to venture capital makes sense for the Israeli landscape. In Israel, we are blessed with a large number of very talented early-stage entrepreneurs. Some are pursuing vastly capital intensive projects, but most are not. Lots of these ventures are potentially promising. Often they stand to generate very attractive returns on small initial investments, and – if things go well – they create the opportunity for a larger investment to fund rapid scaling.  These start-ups would benefit from being under the wing of a large established VC that could offer some guidance and assistance from time to time, but they don’t necessarily need the close supervision of a formal board meeting given their early stage. At the same time, there are a multitude of later stage opportunities that require larger investments and more creative structures. This is exactly the sort of environment in which Marc Andreessen and Ben Horowitz find themselves – and I think we could all benefit by studying their playbook.

The bottom line, I think, is that the quest to “fix the venture model” may be fairly straight-forward after all. This business about the finance of innovation – about generating opportunities to invest in great entrepreneurs who can create tremendous value quickly. Doing so consistently requires the right mix of professional discipline and thoughtful flexibility. Andreessen and Horowitz, it seems to me, are arguing that a shift towards a bit more flexibility is in order. I think they are right.

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