“It seems that you shouldn’t ask me this question,” responded Eden Shochat to the rumored assumption that he should be a role model for many Israeli high-tech entrepreneurs. Shochat may be correct, and the four Israeli entrepreneurs who listened to his conversation with “Globes” editor-in-chief Hagai Golan at the final ceremony for the SmartUp3 competition would have replied in the affirmative. Shochat (38) is a technology entrepreneur and investor who is best known for his part in the founding of facial recognition software developer Face.com that was sold to Facebook Inc. (Nasdaq: FB) for around $100 million in 2012.
Shochat was also once a partner in Genesis Partners, and now manages Aleph, a venture capital fund launched in 2013 with a $150 million first fund. His co-founding partner is Michael Eisenberg, a former partner at Benchmark Capital in Israel.
“Globes” and Bank Hapoalim (TASE: POLI) are the co-organizers of the SmartUp3 competition, now in its third year, which seeks to assist new Israeli start-ups. Shochat attended the SmartUp3’s closing ceremony at Bank Hapoalim’s digital branch at Ibn Gvirol Street in Tel Aviv to share his thoughts about high tech and venture capital.
“This is the second golden age of Israeli high tech,” says Shochat about the current boom in the industry, ranging from the sale of companies, through IPOs, to the raising of capital from venture capital funds by early-stage companies. “Venture capital in Israeli was founded in around 1993 when the government did something amazing with the creation of Yozma Group to encourage venture capital investment in Israel. That was the first golden age. It took technologies developed by the military, such as the firewall of Check Point Software Technologies Ltd. (Nasdaq: CHKP), and optimized it. It was fantastic and wonderful, and it created part of the contemporary economy.
“Conversely, in the past five years, while New York is celebrating its first $1 billion exit (the reference is to the sale of Tumblr to Yahoo! Inc. for $1.1 billion in the summer of 2013 T.T.), the Israeli scene ‘floated’ Wix.com Ltd. (Nasdaq: WIX), sold Waze Ltd., and sold Trusteer, exits at almost a $1 billion each. In other words, the second golden age is expressed with far more patience. Venture capital funds no longer urge a quick sale; they have learned how to compensate entrepreneurs who want to take their companies as far as they can go. For example, they buy some of their holdings as part of a financing round, creating a structure that resemble a modern kibbutz where everyone helps everyone else and together they create Israel big companies. There is no question: this is an amazing time to be in Israel. It’s an amazing generation.”
Golan: “The prices at which companies are sold or floated are also much higher than before.”
Shochat: “Prices are the symptom. It’s not the original thing. The original and substantive thing is that skills have been found in Israel and the high-tech industry has matured, on both the venture capital side and on the entrepreneurs’ side. For example, my partner in the founding of Face.com returned to Israel three months ago, after three years at Facebook in the US, and he is now taking everything he learned at Facebook to teach the next generation of Israeli entrepreneurs. That is an important change.”
How will this be expressed in the third golden age?
“At the moment, Israel’s high-tech industry produces 18% of GDP. In my opinion, the third golden age is simpler than founding a new political party. It means doubling the number of high-tech workers from 270,000 to 540,000, and generating NIS 90 billion revenue from the industry, which is double the Ministry of Education budget.”
What are the current hot niches in high tech? What idea is now considered innovative?
“It’s hard to talk about specific ideas, because the ideas are constantly changing. The interesting thing is that this is an industry in which nature or compensation or receipts are virtual, such as Bitcoin. That is the biggest change that has happened in the world since the internet came into our lives. It means creating some kind of place, which does not depend on any single entity, on which you can register something, like ride-sharing with your car, and you can use your payment to purchase a service from someone else. No one can cheat is such a place. This is a horizontal change, called distributed financial system, just like the internet is a distributed computer network.
“The ‘machine learning’ niche is also very interesting. This is the ability to do things that were once thought to be purview of people. Face.com is a good example; it identifies facial features 97% of the time.”
What about fintech? This is an industry operating in a regulatory vacuum. How might this affect Israeli start-ups?
“The biggest opportunities are actually found in heavily regulated sectors, i.e. where there is a lot of regulation. Airbnb is an example. In New York, it is illegal to rent an apartment for less than a month, and if you rent through Airbnb, you’re breaking the law. Companies like Airbnb are worth tens of billions of dollars. Something similar is happening in fintech. There is something to replace and improve throughout the financial industry value chain, from the Bank of Israel through mobile payments.
So the idea should be based on the need to change regulation?
“Not necessarily. More important what will this idea give the customer, the end user. For example, my and my partners’ fund, Aleph, recently made $13 million seed investment jointly with Sequoia Capital, effectively the biggest seed investment in Israel to date, in Lenonade, P2P insurance company. This company basically realized that it’s impossible to bypass the insurance industry, which is heavily regulated, but had to cooperate with it.”
There are now a great many accelerators, incubators, and angels? To what extent is their presence critical to companies’ success?
“I founded Israel’s accelerator five years ago, The Junction. I always told the participants that had to exploit this opportunity given them to do the shortest MBA in history. What you learn during 3-4 months at an accelerator cannot be learned anywhere else. It’s apparently the most important lesson on the road to founding a company and another company.
“An accelerator offers an alternative to the education system. Something that the latter does not provide right now. The problem is that the accelerator has no financial model. After all, an accelerator cannot invest more than $2 million, so an investor in it has no motivation, because turning $2 million into $6 million is really interesting. There is a failure here, a kind of vacuum that maybe the Office of the Chief Scientist or a major corporation might fill.”
What turns an idea into a successful company?
“There is no recipe. There is no answer to that question. For example, I teach on the Zell Entrepreneurship Program at the Interdisciplinary Center Herzliya. What makes this program special is that many of its students are not working on big problems. We recently held a session called, ‘Let Your Ideas Go’. We invited entrepreneurs, starting from the assumption that not everyone has the time to work on all their idea, so why not share them with others and let others try to implement them? In the construction industry, for example, there is no innovation at all, and, in fact, wherever you look there is something that could be improved by technology, thereby creating great value. In other words, wherever there is a technological wilderness, there is an opportunity to create big companies.”
What is the commonest mistake that should be avoided?
“To realize that time will not return. My first company was engaged in 3D on the internet, and it failed to gain shape. In fact, this field is still not developed. You have to know when to stop and move on. I invested six years in that company, but I knew within two years that it would not work.”
Israel is known as the Start-up Nation, but some people claim that the start-up industry is a bubble, an isolated island unconnected to the rest of the economy. How do you make it possible for more and more people to benefit from the cream rather than yearn for it?
“I’m originally a kibbutznik, and as I said at the beginning, the high-tech industry is like a modern kibbutz. The kibbutzim proved that it is possible to milk everything and still have nothing. In high tech, there is a lot to milk. How to expand the circle of high-tech workers? Take a vacuum cleaner salesman for example. He earns an average salary, but if his English is good enough, he can use his sale skills to sell something else online. The whole difference is English. This is an industry largely built on people who want to help others, and all that you have to do is to train, practice, and learn. It’s hard for the government to train people, so it’s necessary to seek the help of large companies and to understand that we don’t have a monopoly. We don’t have to be a nation of Jews even in high tech.”
In your opinion, what is the government’s role in high tech?
“Mainly, do not disturb. We always laugh at investors, 90% of whom do damage, 9% are neutral, and 1% are outstanding. It’s so hard to find that 1% that you have to be satisfied with the 9%. And this is also true for government. There are places where it can help. For example, in agriculture. It’s possible to establish a database of farmers who are prepared to experimenters of agrotech. It’s very simple. Israel is also one of the worst countries in the world with regard to the commercialization of knowledge created at universities. We’re really good at being bad at that.”
You sold a company to Facebook. Tell us a little about your experience with the dynamic of working with a giant corporation. i>
“During the negotiations for the sale of the company, Facebook had 4,000 employees. It now has 12,000. I and am my co-founders were in California, and Amin, who is Iranian and is responsible for mergers and acquisitions at Facebook, whom we already knew, called us and said, ‘Come. We have to talk.’ He updated us that two product people would join the meeting, and we thought that they wanted to complain or something like that. We met, and Amin began asking us questions like someone who wants to buy you, such as, ‘what is your capital structure’, and so on. So we asked him, ‘Where are the two product people you said would join the meeting?’ He replied, ‘Facebook’s VP for product development will shortly come.’ He came and accidently spilled coffee on us as a beginning. Then he said, ‘Zack will be here in a moment.’ And Zack is Mark Zuckerberg. Zuckerberg arrives and we are stunned. He asked us to tell him about our vision for facial identification. We tell him, he looks at us and says, ‘That doesn’t seem big enough to me.’ Then, over the next 90 minutes, he lays out before us our vision for facial identification, concludes, and says, ‘My girlfriend is completing medical school today, so I have to go. But if the number sounds logical, you should talk about it.’ He got and left with Amin. Amin comes back, with a face of someone who just got approval to acquire a company, and says, ‘Okay. I’m Iranian and you’re Israelis. Let’s bargain.'
Shochat has never confirmed the exact value of the acquisition.
SmartUp3’s 4 winners: Business has greatly expanded since the program began
The entrepreneurs of the four SmartUp3 winners were invited to the event to update us about what they have undergone since gaining the sponsorship of “Globes” and Bank Hapoalim. The Grid CEO Gur Harel said that, in the three months since the start of the program, the company has tripled its business. The Grid is a platform for providing moment-to-moment delivery services, within 90 minutes in the city, through a proprietary app that is transparent and accessible to every user.
TapReason CEO Nimrod Elias related that the company has made progress in all areas. “Ten weeks sounds like an eternity in the life of a start-up,” he said, adding that the company found many business opportunities. The company’s solution helps distribute mobile apps by encouraging current users to promote, share, and recommend the app in their social circles.
PayBox CEO Tal Grinberg said that the company would soon launch the 2.0 version of its solution, and subsequently launch the solution in the British market. He said that, from this year, the company stopped charging a fee for its solution in order to grow more. The company has developed a social payments network a kind of digital wallet for groups.
Finupp VP marketing Lior Albeck described what the company has undergone since the start of the program in one word, “Boom!” He said that the company’s revenue has tripled in this period. “I have become a customer of Bank Hapoalim, and it’s quite cool to work with this bank,” he said, concluding, “I hope that we will continue to success, especially for the people who want a tax refund.” The company’s cloud-based solution makes it possible to obtain a tax refund without the help of a CPA or tax expert.
Published by Globes [online], Israel business news - www.globes-online.com - on January 17, 2016
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