Waze to go

Shmulik Shelach

Waze is a highly unusual exit for the Israeli tech industry, but it points to a new level of capabilities.

1. Waze Ltd. is a highly unusual Israeli exit. Not technology for developing processors, not a system for streamlining communications equipment, not smart software for improving storage systems, and not even sophisticated algorithms for boosting revenue from hits on Internet pages. Simply an application for users. There are few such cases in Israel, and it is doubtful if we'll see another Waze in the near future.

For a moment, it is possible to imagine Israel as a branch of Silicon Valley, with a real option to create here a Google Inc. (Nasdaq: GOOG) or Facebook Inc. (Nasdaq: FB), or more accurately, an Instagram or YouTube. These are companies which are accessible to the end user, who is captured by their magic because of an attractive user interface and application, which becomes part of daily digital life, an ostensibly simple recipe that almost anyone can follow. This perception has for a long time motivated scores and hundreds of start-ups in Israel and around the world, which dream of becoming the next Instagram or YouTube. Now people will fantasize about being the next Waze.

2. This is a celebration for Israeli venture capital. Years have passed since a local fund made such a big return on investment. "To pay back the fund with one deal" is the ultimate ambition in venture capital, and Magma Venture Partners, which manages mid-sized funds, has achieved even more than that. Although the big money of US high-tech investors has already returned to enterprise information systems, the deal will undoubtedly help boost the standing of the Israeli option among the suppliers of working capital.

Waze's story is another stage in the maturity of the local industry, evidence that Israeli high tech can do much more than we have seen until now. At the moment, it is still a one-off, which can be explained by timing, cheap money, a fierce struggle in the Internet arena, willingness to pay a premium for a social feature, and a great dilemma over the right model for generating income in the mobile sector. If there are no big market shocks, in the coming year, we will see more such deals, possibly not in such large amounts, possibly with less sexy pricing battles, but definitely deals that will signify a new level of capability in Israeli high tech.

3.The story that the buyer's identity was decided because of the wish to continue operating as a company in Israel sounds plausible, but the numbers tell a different tale. Facebook has $9.5 billion in cash, had cash flow from operations of $700 million in the last quarter, and its capital expenses on computer and communications equipment are $1-2 billion a year. A billion dollar-plus cash acquisition is challenging for Facebook. Google, which has $48 billion in cash, has no such problem.

Continuing operations in Israel is a worthy aspiration, but not one that would jeopardize a billion dollar deal. The entrepreneurs would have to be irrationally arrogant to torpedo a deal with such an argument, which would have prevented foreign investors - or Israeli investors for that matter - from providing them the future financing that would have been needed for the company to carry on without being sold. Without substantial revenue, Waze was short of tens of millions of dollars needed to survive independently.

4. Google was founded as a company that encourages mathematics. Everything about it, from its buildings to its computer infrastructures, is based on a deep science background. When this is taken into account, and combined with the substantial amount that the company is spending on navigation and mapping efforts, it seems that this is a field the importance of which is greater than the sum of the numbers we see now. Google has sufficient resources to gamble on directions. But if you want to understand the Internet giant's conduct on the basis of past experience, then the comparison that Waze invites in Google's hands is that it is the YouTube of navigation.

Published by Globes [online], Israel business news - www.globes-online.com - on June 10, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Tzahi Hoffman and Shmulik Shelach
Izhar Shay
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