Video Blog

I did a series of video blogs for Jerusalem Online yesterday. The first one is up here. Since it is not my normal audience, It is a pretty basic overview of Israeli Venture Capital.

Today Israel is a Normal Country

How nice it was to wake up this morning and see that the top headline on Ynet was that Snow was coming, the top story on the radio was that snow was coming and the top story in the leading free daily was - you guessed it - snow is coming! Growing up in New York, traffic and weather on the 1s or 8s were the must listen items on radio.

Here in Israel, the top headline is usually some mixture of military news, politics or corruption (or most likely a mixture of all). Well, for all of you pining for a return to Israel's normal fare, fret not, salvation is on the way. In the heart of the snowstorm expected in Jerusalem tomorrow, the Winograd Commission will issue its report on the Army and Government's handling of the second Lebanon war. The glaring lights of the media will melt the snow as Prime Minister Olmert will mount his defense and sharpen his political survival instincts. The Army Reservists and others disillusioned by the government will aim their verbal guns at the media, Defense Minister Barak and some weak links in the Kadima party, hoping they will all help topple the government.

And, once again, despite the allure of a beautifully snow covered Jerusalem, true Israeli normalcy will again be upon us.

Case Solved - iPhone = iSRAELphone

I saw that Eric Savitz posted on Seeking Alpha trying to reconcile Apple's announcement that 4 million iPhone's were sold and ATT's announcement that they had sold 2 million.

Eric - Come to Herzliya Israel. Your mystery is solved here. In our tiny country of 7 million people, you can find the missing 1 million iPhones, proudly cracked and displayed. In fact, one of my colleagues even include in their signature on emails from the iPhone the following line:
"Sent from my icrackedPhone."

See this Hebrew article from TheMarker on Israeli's obsession with the iPhone.

What Is The Connection Between The Pending Recession and Q4 2007 Earnings Results?

My previous post on the impending US recession, the falling dollar and its impact on start ups was still fresh in my mind, when this report on IBM from my good friend Andy Neff at Bear Stearns came through my email (I italicize below form emphasis in point 1).

IBM Corporation IBM–$101.10–Outperform

Should Someone Tell IBM’s Customers About The Pending Recession? Strong 4Q07 Results And Optimistic Outlook For 2008; Raising Ests And Target To $118

· STRONG QTR, OUTLOOK. While we’re not oblivious to potential global macro weakness, it seems that IBM’s customers may be, as the company delivered an impressive quarter w/o any red flags (i.e., weakness in short-term signings or elevated IP levels) and provided a favorable ‘08 outlook of 15-16% EPS growth. We’re raising ests back to levels before our 1/14 cut and our CY08 target to $118.

· OPTIMISTIC TONE. Similar to JAVA’s comments, while all companies will be impacted if a recession scenario unfolds, IBM continues to execute well as it benefits from a diverse product portfolio, balanced geographic mix (65% of revs outside US), strong annuity stream (e.g., software maintenance, services signings), and improved productivity from restructuring actions. Despite $0.50 EPS benefit from pension savings in ‘08, IBM also has the tailwind of solid services momentum and new hardware platforms (zSeries in Feb, rollout of Power6 in pSeries).

· IMPRESSIVE 4Q07. IBM reported 4Q07 EPS of $2.80, in line w/ its pre-announcement and well above our $2.62 est. (Street at $2.68), driven by stronger revs and better GM (despite weakness in Services GM) and partially offset by higher opex and lower int. income. Revs of $28.9bn (up 10% YoY) were driven by strength in Services (up 17% YoY) and non-US markets (up 15% YoY). Services signings of $15.4bn were above $14-15bn expectations given short-term signings strength (up 8% YoY).

· RAISING ESTS. Given strong execution and progress on IBM’s long-term goal of 2010 EPS at $11 (or ~15% avg EPS growth over the next 3 yrs), we’re raising EPS for '08 from $7.95 to $8.30 and for ’09 from $9.00 to $9.40.

· RAISING CY08 TARGET. Based on our analysis which compares IBM to its mega-cap peers, we believe IBM’s improved consistency and stronger 3-yr growth profile should warrant parity w/ the peer group on P/E basis, which should translate to further valuation upside. We’re raising our CY08 target from $113 to $118 using a 12.5x P/E on ‘09 EPS.

In my view the strong Q4 is actually a sign the recession is coming. (even though the Talmud says that prophecy in this generation was given to fools, I will venture in here) IN fact, I think many enterprise companies will have strong Q4s heading into the recession. Why? Because IT people know the budgets will tighten in 08 as the recession bites. Wall Street IT departments are getting ready for the slashing the will come when the subprime mess filters down to their departments' budgets. So, in Q4 they grabbed every extra dollar in the budget for their IT projects before the someone turns off the hose.

Coming Bandwidth Problems

I wrote previously about Israel's need to make the internet and bandwidth a national priority. Now, Scott Karp lays out the coming problems for bandwidth in the USA.

"Well, I guess you could say that broadband capacity hasn’t been indexed to the inflation of video downloads and streaming on the web. At first, it’s only going to hit people who download lots of movies via BitTorrent, but soon high-capacity video downloading will include just about everyone.
Here’s another metaphor: If you’re in Washington, DC, and you want to head due west on a highway, I66 is your ONLY choice — all TWO lanes. During rush hour, the ENTIRE highway goes HOV, but it still doesn’t help."

In this comment lies the problem and the answer. The internet is like the highway system. Who builds highways? the government. It is critical infrastructure that expands national economies in the same way highways and railroads do. In fact, one of Scott's commenters, hits the nail on the head with this comment:

"bernard lunn

In 1995 the Korean government invested $1.5 billion in broadband. 90% of the population has 3mbps in home and almost the same wireless. That has enabled firms like Naver to take 77% of the local search market (vs 1.7% for Google) and spawned new industries such as a $4bn online game market (not bad for a population less than 50m). The high price here is based on scarcity and thats good for a few companies with a lock on the market and lousy for innovation and wealth creation."

We are going to face this problem in spades in Israel if the notoriously slow government does not wake up and smell the Java.

Open Letter to my CEOs and Israeli Entrepreneurs

Budgeting at start ups is always a perilous task. The unpredictability of start ups makes it very difficult to project revenues but normally reasonably easy to predict expenses. This is not the case now in Israel and entrepreneurs would be wise to think about this.

The US is entering a recession. In fact, it may have entered the recession already. The Israeli economy is still growing robustly. In the last year, this divergence has already had a 20% impact on the shekel expenses of Israeli start ups, due to the declining value of the dollar. As the dollar reached a new low today beneath 3.7 shekels to the dollar and with no bottom in sight, entrepreneurs would be wise to take a very conservative view of the shekel/dollar exchange rate in projecting their expenses. I have been advising my companies for months to use 3.65 shekels to the dollar but that may be an overshoot now. Israeli companies raise money in dollars but spend most of their early money in shekels so this can be a meaningful difference that could impact your out-of-cash date.

In addition, with the US entering a recession, it is folly to think that it will not impact revenues. This is especially true if you sell to financial services institutions but will likely impact consumer spending and other industries. This will impact on the ramp up of revenues at companies and should also impact projections and budgets.

As we enter this period, conservative projections and lower burn rates are the name of the game. As Fred Wilson wrote so wisely,

So why do venture investments fail? Well if I look at the ones I’ve been involved in (including deals my partners led but where I shared the pain of loss) there are two primary reasons.

1) It was a dumb idea and we realized it early on and killed the investment. I’ve only been involved in one investment in this category personally although I’ve lived through a bunch like this over the years in the partnerships I’ve been in.
2) It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.

Four of the five failures I’ve been involved in fit into this second category and probably 2/3 of all the failures I’ve seen “up close ad personal” fit into this category. I don’t blame the entrepreneurs and managers entirely for these failures. The investors and the boards of these companies (ie me) are responsible for failures like this. Entrepreneurs may not have the experience to know the folly of taking burn rates to levels which make “figuring it out” impossible. But we as investors know how high burn rates kill companies and we have a responsibility to fight them at every turn."

As we enter the recessions and shekel expenses rise, pay attention to #2 above.

Moses, Olmert and the Art Of Negotiation

In Jewish Tradition (at least the Babylonian tradition) since the beginning of the first millennium, we have been completing the reading of the Torah annually. I see the same texts and weekly portions every year but sometimes, or maybe often times, new insights emerge.

Maybe it was the cold outside and maybe it was George Bush's visit here but something struck me in last weeks Torah portion, Bo.

When Moses goes to Pharaoh after the plague of hail (Plague #7), he once again asks Pharao to let the Jewish People go celebrate in the desert and, ultimately, leave Egypt. Pharaoh asks who will go and Moses retorts "with our young ones and our old ones we will leave, with our sons and our daughters, with our sheep and our cattle." Pharaoh, unmoved by 7 plagues, suggests that only the men should leave "for that is what you are asking" and he proverbially gets up and leaves the negotiating table.

God then brings the plague of locusts and once again Moses confronts Pharaoh and asks to let the Jewish people go. However, when Moses enumerates his demands this time he adds a request: not only will we go with all of our people and possessions but you, Pharaoh, will give us sheep and cattle for sacrifices. The additional request struck me this year for the first time.

I explained to my children that this is the art of negotiation. Moses, sensing he was gaining more leverage as the plagues increased, went for the jugular and asked for more, "you pharaoh will give us cattle and sheep." He did not lay this all on the table up front but rather conducted a negotiation, trying to improve his leverage and position in the negotiation at all times (I guess with God's help, you can always improve your position).

Contrast this with the way the Israeli Government and Ehud Olmert conduct negotiations. First we announce that we are ready for painful concessions. Then Olmert announces that the 1967 borders are the basis and that we are ready to discuss all issues. Then we sit down to negotiate. Did I mention that Olmert also froze building in Jerusalem, the capital of Israel. Moses leveraged up, Olmert stripped down first.

The government has no negotiating strategy. It does not know what the end goals are and it does not seem to be seeking leverage. That is the art of negotiation and it is lost here. Sderot gets bombarded with rockets from Gaza and we lose our negotiating nerve. Israel loses a war in Lebanon and negotiates from weakness. We freeze building in Jerusalem and negotiate from further weakness.

Do not misunderstand me: I am for peace and I am in favor of negotiations. I just think that if you want to have a successful outcome to negotiations, one needs to negotiate from strength and build trust over time - a lot of time. You cannot microwave peace.

The Google Effect

Israeli newspapers and the wires were filled with the news that Incredimail, a provider of email solutions (NASDAQ: MAIL) was terminated by Google Adsense. Immediately the stock dropped 30%. Now, the street must be aware that there are alternative ad solutions to Google Adsense. Yahoo and many other ad networks have similar programs. Wall Street likely assumes that either nobody else will touch incredimail as a customer if it was an abuse problem but even so, Google's monetization is so dramatically better than all other solutions, it will be hard to make up the lost revenue in any other partnership.

This is analogous in many ways to Answer.com's over-dependence on Google traffic and likely why Answers went out and looked to buy Dictionary.com. It is all about reducing dependence on Google. (By the way, I wonder what happened to that deal? I seem to recall it was supposed to be consummated by the end of 2007).

This is the Google ecosystem circa 2008 and it creates quite a paradox. One the one hand it is very easy to generate traffic and revenue. On the other hand, it is both addictive and can be difficult to build a sustainable company when one is so dependent on Google as a revenue and traffic source.

Born to Email?

Timing is everything in life. When and where you were born, graduated college and started work has a lot of influence on where you end up. The same is true of email accounts. What do I mean?

My 7 year old daughter came to me yesterday and asked me to sign her up for an email account. Her friends have started emailing and she wants to join the fray. "Happily," I said and I sat down at the home Mac to sign her up for a Gmail account. Then I tried to get her a user name. What a nightmare! The normal naming conventions of first initial and last name: forget it. A full name like I have on Yahoo? Doubly forget it. Then comes the name generator nameX2007$%@gmail.com or eisenberg2006X2000(first name)@gmail.com.

How on earth can a 7 year old remember and input these kind of user names to an email account? We will have a generation of new email users that cannot get normal email addresses and makes it more difficult to get them on to email. So I wonder what will happen with these users? Facebook and other social networks become more efficient and easier to use email systems under this challenge. Does this open a crack for competing email systems who are more virgin territory for user names?

Scott Karp posted earlier this week on the fact that email is the social graph. Maybe for Scott, who probably has a great username. But what about for my daughter? Might the social networks with their real world personas be a replacement?