An Open Letter To Zeev Holtzman - The Sky Is Not Falling in Israel. It Is Getting Brighter

Dear Zeev,

I have known you for a long time. You have been both a pioneer and a champion of Israel's venture industry and technology start ups. You are and were one of the leading lights during the last 18 years in which Israel transformed itself into Start Up Nation. So, as you can imagine, I was shocked to see in PE Hub that you are reported to say "Israel's Venture Capital and start up industry is headed for collapse." From my perch that could not be farther from the truth. In fact, what is happening is a great transformation of Start Up nation. Let me explain.

It is true that by your counting methodology, no venture capital funds were raised in 2010. However, Battery Ventures relocated a senior partner to Israel and built a team here to invest out of their main fund; Bessemer Ventures Partners hired a local partner to invest $100MM+ in Israel, Benchmark (where I work) is investing out of its main fund, Sequoia is investing at a prodigious pace and Greylock just announced a new fund focused on Europe and Israel. In addition, Accel Europe continues to invest in Israel and Index Ventures, with Saul Klein on the ground in Israel for the last 12 months, has deployed capital into Israeli start ups. Additionally, a number of companies have recently attracted very large rounds (cumulatively over $100MM), that brought other large funds to Israel. Wix (where I serve as a board member) raised $40MM from Insight Ventures and DAG. Kayma raised $18M from Kleiner Perkins and DFJ. Prime Sense raised $50MM from Silver Lake. To me, this does not feel like an industry on the verge of collapse.

You also say that "the industry, which is the economy's growth engine, is liable to be irreversibly damaged." Anything is liable to happen but in the last 6-12 months, I have witnessed and incredible inflow of deals and innovation, the likes of which I have not seen since 2000. In particular, entrepreneurs are focusing on really interesting initiatives in Mobile (where the world has finally caught up to one of Israel's great strengths), Cloud and Saas, and agricultural tech, where we lead the world. There is an incredible surge of innovation going on in Israel, focused on truly global markets and not just the US and Western Europe. They are not all getting funded but the best ones are, and this is good. I wrote in my Humus Manifesto (maybe you missed it, so here is a link to part 1) that one of the challenges facing Israel is that anyone who is an engineer starts a company, making it more difficult to find engineering and product talent with which to scale companies to the larger sizes needed to generate venture returns. Just yesterday, one of my early stage portfolio companies proudly told me that 3 of their new engineers were people who started a company, and then decided it would be better to join a venture backed company than to go out and raise money. That was a big win for Israel and for the ability of this venture-backed company to scale. This is representative of maturity and not of collapse of the venture industry as you suggest.

Scale brings me to the next topic. The challenge of Israel's venture capital "industry" has not been lack of government intervention, aid, assistance or anything else like that. There is no reason to send letters to Prime Minister Netanyahu. He is busy with Obama and getting the world off oil. The challenge has been that Israeli VCs have not grown big companies needed to generate venture returns for LPs. It is a known fact of the VC business that "Home Run" companies generate the bulk of returns for the entire industry. LinkedIN, Facebook, Paypal, Zynga and Groupon all could have been created in Israel but they were not. Hence, some LPs have turned negative on some Israeli VC funds. But this shakeout of both entrepreneurs joining VC backed companies and less VC funds in Israel is actually doing the trick. For the first time since I have been involved in Israeli VC, numerous entrepreneurs and their backers are "going for it." They are trying to build big blue and white companies, with the backing of their VC, who have long term views of the market and entrepreneurship. Ask Yaron Galai at Outbrain, Amobee CEO Zohar Levkovitz or Wix CEO Avishai Avrahami what the difference is between their last companies and their current companies. They are now going for it big time. Conduit's (where I am a board member and Benchmark is an investor) purchase of Wibya this week is a harbinger of things to come, where larger scale companies gobble up the products and talents of smaller companies in an attempt to build very valuable and very large companies in Israel that generate venture scale returns (the government has been properly helpful here with favorable tax treatment of Israeli companies buying other Israeli companies to bulk up). This is the great transformation going on in the market that favors both entrepreneurs and funds with a long term view and the ability to recruit executive and board level talent to grow large companies. And it is happening.

This great transformation has also created a niche in the investment world that value added angels and others like Avichai Nissenbaum and Yaniv Golan of LOOL, Sani Sanilevitch and Avi Domoshevitzki of Yatir and Kfir Moyal of Cyhawk are rushing in to fill. These micro funds are sprinkling money and help on very early entrepreneurs who develop innovative solutions that can be sold to companies that are looking to bulk up. As best as I can see, they are all raising money and entrepreneurs are running to them with innovative, low-capital-requirement projects. There must be $100MM sloshing around in these micro funds and in the pockets of angels who invest alongside them or instead of the micro funds. We have also witnessed a renaissance in the semiconductor space. A number of companies like Wintegra have sold recently and others like Siano and Wilocity (Benchmark company) have raised significant amounts of money. It seems like the capital is available to back industries where Israel truly has a global advantage.

Our country is not without challenges on the innovation side. We could use government investment in advanced research around, cloud, mobile, agriculture and high speed communication. We need help in recruiting executive talent for sales and marketing and we need some focused late stage funds to keep funding companies to become large players who can return meaningful sums to VCs and LPs. But the sky is not falling. In fact, it is getting bluer by the day. The shakeout in funds in the last ten years has enabled us to build larger companies. The arrival of longer term players has given the entrepreneurs courage to build big companies and recent technology trends are playing to our national advantages. Just today, one of my entrepreneurs currently living in Silicon Valley told me of 6-10 tech industry families coming home to Israel this summer because of opportunity. Israel is attracting the talent back home, richer for their experience of working in the Valley and scaling companies. Rooly Eliezrov founder of Gigya (another Benchmark company) told me today that he is "very excited to be coming back to Israel this summer since he thinks the Israeli start up industry has finally arrived. Now we can build big companies with the talent in Israel," said Rooly. So Zeev, we are actually in the first inning of the arrival of the great transformation of Start Up Nation into Scale Up Nation. All the pieces are coming into place: Bigger ambition, long term funders, returning scale-up talent and consolidation. This all makes me very optimistic. Scale Up Nation is on the march. I hope you will join us.

The Euro in the Eye of Stanley Fischer

I have written frequently about Bank of Israel Governor Stanley Fischer's insightful views of market dynamics and insistence on surprising the markets. In that light, the world should take note of Fischer's raising of Israel's interest rates yesterday by 0.25%.

You see Fischer is looking to both cool off Israel's housing market and Israel's creeping inflation. However, Fischer's challenge in using interest rates to cool both of those indicators has been the strengthening Shekel, particularly against the US Dollar. The strengthening Shekel has become hard for Israel's export oriented economy whose most important market is the United States. The rising shekel is making Israel's tech workers and exports more expensive in Dollar terms and Fischer is walking a tightrope in trying to cool the economy and not hurting exports.

Therefore, the surprise increase in Israel's interest rates yesterday is worth noting. In my opinion, Fischer is spotting a significant weakening of the Euro due to the debt contagion and slowing economic growth in Europe. Fischer must believe that the debt and slower growth will likely hurt the Euro, forcing currency traders to flee to the "Safer" Dollar and strengthening the Dollar. This gives Fischer some leeway to raise interest on the Shekel, by using the weakening Euro and flight to the Sollar as air-cover to keep the Dollar:Shekel exchange rate relatively stable.

So if you are long Euros or long Euro Bonds, you may want to take note of the prescient Fischer and the interest rate on the Shekel.

President Obama's Speech on the Middle East - A Non Event

I received a few notes to comment on President Obama's speech on the middle east. I was reluctant at first but here are some short thoughts.

President Obama's speech on the Middle East was a non-event. The primary target of Obama's highly anticipated speech was the Arab world and not the Israeli/Palestinian conflict and it represented a desperate attempt to find a firm and forward looking point of view on the dramatic events redrawing the Middle East over the last few months. Obama's rudderless policies and pronouncements at the outbreak of the Tunisian, Egyptian and Libyan revolutions and his meek response to the beginning of Bashar Assad's ruthless crackdown on Syrian protesters reinforced what both Americans and the international community now know about the President. He neither has a plan for changing America's economic course nor does he have a strategy for addressing the rapidly changing world he is encountering. In fact, the only change that Obama brought and that anyone believes in happened outside of the United States. Washington has remained status quo and the President's power and persuasiveness is weakening from Capitol Hill to Cairo.

This is now classic Obama. His instincts in foreign policy are detached from reality much like his economic policies. He made the early hallmark of his presidency an outreach to the muslim world and diplomacy with Iran. He misjudged the reality of Iran's belligerence to a point that has endangered the world and he muffed true opportunity for change in the muslim world when he wavered and waffled during the Egyptian revolution, alternatively backing Mubarak and the protesters. Obama may believe in change but he has not shown that he knows how to confront it or harness it. In yesterday's speech, he tried to correct course with oratory but it is not working. Killing Osama strengthened Obama for a minute but the world can see right through it to his weakness in leading Congress and a changing world. And they are rushing in to assume the mantle of leadership. Additionally, I think Americans care a lot less today about what happens in the Middle East. The deficit, healthcare, jobs and the Mexican border are far more burning issues for both the average and the intellectual American so history and diplomacy will need to be made in the Middle East and not in Washington going forward.

Which brings me to the President's pronouncements on the Israeli Palestinian issue. Only someone totally detached from reality can ignore Mahmoud Abbas' audacious rewriting of history in the New York Times this week as well as his embrace of Hamas and then merrily go on discussing peace. Obama's "frustration" is understandable. When you are microwaved from a community organizer to President of the United States, you think you can microwave peace as well. LIfe is not like that. It takes a long time to make peace especially when the 1993 Oslo accords led to nothing but more bloodshed and the withdrawal from Gaza brought 8000 missiles and a Palestinian population oppressed by ruthless Hamas killers taking orders from the butchers in Iran and Syria.

President Obama ought to do less oration and more listening. Even the Israeli left represented by the Smol Haleumi is not talking about peace but about annexing parts of Judea and Samaria and letting the Palestinians have a State on the other parts. Everyone, even Abbas, knows 1967 broders are not happening. But this is the President. He is detached from reality and focused on his positioning. He is trying to reattach himself to the Arab democracy movements but he has lost critical time and credibility. He is making small harsh pronouncements on Assad but ignoring the Iranian elephant in the room. He is trying to be more Arafat than Abbas on settlements and borders in order to appease the Arab street but he thereby boxed Abbas in, closing off all paths to negotiations. He is attempting to bully Netanyahu into "peace" but there is nobody on the other side. So, once again, Obama will be left on the wrong side of history as he was during the Egyptian revolution, the Iranian appeasement and the need to slash US government expenditures.

None of this should be seen as an attempt to absolve Prime Minister Netanyahu and the Israeli government, past and future, of blame for the current diplomatic mess. This generation of Israeli politicians has lost its nerve and verve. As I wrote on a recent Facebook post, Zionists always took initiatives. Today's Israeli governments only react, leaving the script to be written by others and and diplomacy to be governed by those who fill the vacuum for politics abhors a vacuum. We have ministers working at cross purposes, espousing mixed messages and generally fumbling both diplomacy and messaging. We have lost our self confidence in the righteousness of our ways because we stopped initiating. Greatness is achieved in entrepreneurship and state building when leaders initiate. The great people of Israel continue to create a successful Start Up Nation while successive governments squander the future with facile policies and confused messages. Paradoxically, this contributes to the average American's waning interest in Israel. The world has been inspired by the book Start Up nation because it is the "initiating little-engine-that-could" story of a small nation doing great things and actively making history. The early days of the state saw similar brazen initiative in agriculture, diplomacy, undercover operations and military victory but today they see defensiveness and mixed messages.

We need to initiate. I do not know whether initative should look like Naftali Bennet's suggestion to annex parts of Judea and Samaria immediately or whether it looks like the Smol Haleumi's annexation of the settlement blocks and building a state for the Palestinians. What I do know is that words are hollow and defensiveness and delay are deadly. If we do not take the initiative in the press, in diplomatic circles and even militarily, Abbas will write the history in the New York Times and the EU will rush in to fill the vacuum created by Obama's ineffectivness.

What Disruption Looks Like!

With HP's early announcement of results that beat the market today but guided reduced earnings going forward and tough times ahead, I thought about the creative destruction in the market. On CNBC this morning, Leo Apotheker (see video) only referenced Japan's impact on the printer business, strategic shifts in Services and Consumer PC slowdowns. In reality, like RIM (Blackberry), MSFT and Nokia, HP is being disrupted.

So here it is in pictures:

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As reflected in the stock market (ouch):

My partner Bill Gurley has written extensively about the Android freight train, the impact of tablets particularly on consumer PCs is becoming obvious to everyone but I think under-appreciated for HP and perhaps IBM is the impact (worth reading) of the consumerization of IT on the services business at HP and IBM. This is a massive structural shift that implies simpler services, less integration, self service and individual buying initiatives (not IT) and more web services or cloud solutions. HP is in the PC business and being disrupted by Apple and Android tablets. They do not play in mobile in any meaningful way, where more content consumption and computing is happening and the enterprise is changing dramatically. Disruption is upon us.

Real Measurement: Quantcast V. Alexa V. Compete.com

One of the core tenets of the internet, internet media and internet advertising is that everything is measurable. Advertising and targeting users has become data driven science and businesses are more efficient because of it. Wix (A Benchmark company) for example, tweaks the time, text and offers in its email marketing based on detailed conversion analytics gathered every minute, optimizing marketing at an incredible frequency.

What I find surprising therefore, is the disparity in data that we accept from internet measurement companies. Fundamentally, there are two ways to measure internet traffic and engagement: sampling and real data (which requires pixel placement). Sampling was the state of the art measurement for TV and Radio because that was truly all that was technically feasible. Nielsen built an enormous business out of sampling audiences for TV, retail shopping and anything else that needed to be measured. The question is: why should we settle for sampling in the internet era when everything can be measured. Openly on the web, Compete.com uses sampling data from ISPs and Alexa uses Alexa toolbar data which is necessarily skewed by who installs the toolbar.

This is how Compete describes its data collection methodology:

How We Get Our Data

Compete's data comes from a statistically representative cross-section of 2 million consumers across the United States who have given permission to have their internet clickstream behaviors and opt-in survey responses analyzed anonymously as a new source of marketing research.

For contrast, Quantcast uses a pixel to accumulate real full data. From Quantcast's methodology:

Direct Measurement

In a major advancement over traditional panel-based measurement methodologies, Quantcast couples machine learning with massive quantities of directly measured data to deliver detailed audience data in real-time for all forms of digital media including websites, video, widgets and advertising campaigns.

Using Seeking Alpha (A Benchmark company) you can see a clear example of discrepancies in Unique Users between real measurement (Quantcast for Seeking Alpha) and Sampling (Compete.com for Seeking Alpha)

Compete.Com estimates that Seeking Alpha has 1.8MM Uniques per month

Quantcast puts Seeking Alpha's US user # at 3.9MM Uniques Per Month

Quantcast, using a pixel on Seeking Alpha's site measures more than double the US users for Seeking Alpha than Compete measures using its sampling data and also suggests a significantly larger growth curve. But let's dig more. Most of the Alexa data is relative (that is relative to other sites) so it is hard to find apples-apples comparisons but Alexa's estimates on Seeking Alpha's US vs. International traffic vary pretty widely from Quantcast.

Alexa estimates that 67% of Seeking Alpha's users are in the U.S.

Quantcast knows that almost 83% of SeekingAlpha's users are in the US

I would love to compare Page Views (PV) and Page Views Per Visit (PPV) between Quantcast and Compete but I could not bring myself to pay the premium membership for the sampling data at Compete. Contrasting Alexa data and Quantcast data, you can see an almost 100% discrepancy in Page Views Per Visit (PPV) when looking at the Seeking Alpha Data:

Alexa estimates that Seeking Alpha's Daily PPV per user is under 3

Quantcast knows that Seeking Alpha's Daily PPV per user is around 8

As I started perusing these sites, I found a few nuggets interesting. First of all, you are not required to publish your Quantcast data publicly but it does provide a measure of transparency that is reassuring to readers, partners and advertisers. For example, I tried looking up Techcrunch on Quantcast but the Data was hidden by the owner. The Compete.com data for TechCrunch showed a slide in users but my assumption is that were we to have the real data, we would see a similar reversal to what Seeking Alpha showed. Huffington Post is available on both Compete and Quantcast, with Compete showing almost a 10% drop before the recent rise and Quantcast showing only up and to the right (I assume the big spike in traffic is Osama Bin Laden driven).

I think the conclusions are pretty clear as to the advantages of direct measurement yet many entrepreneurs who come pitch us quote the Alexa data in particular very frequently.