Tuesday, June 02, 2009

Israel Venture Keynote: When Failure Is An Option

This year the Israel Venture Association invited me to deliver the keynote talk at their annual conference. I agreed, since our 15 investments in Israel have outperformed our overall portfolio, and I wish to support Bessemer's office in Herzliya. After the talk a lot of people asked me for the slides, so I'm publishing them here. 

But SlideShare doesn't include notes, so here's the gist of what I said:

The world lost $100 trillion in the last 6 months. That effects LPs, who have generally told their VCs to slow down, and now have to re-think how to allocate what's left. The venture industry has underperformed as an asset class for over 10 years, and so only the very top performing funds will raise more capital in this climate. [I have to say that at this point in the talk, the folks didn't seem to be enjoying it much.]

But then I talked about the opportunities for innovation, and showed the 2 slides below. I had stolen the first one from someone else's presentation in 2001, and I updated it for today. These illustrate that innovation is decoupled from economic cycles.

Jumping forward, I believe that Slide 17 demonstrates my theory as to why Israeli VC has underperformed the venture industry this decade. In Israeli culture, failure is not an option. So look at all the money going into the 276 active companies among the 325 Israeli startups funded since 2002 (acc. to VentureSource). Wow, imagine how much more valuable that portolio would be without that big blue bar. The little grey bar of failed companies is inconsequential to the portfolio's result, but the blue bar is killing it. They need more grey.

Slide 18 is a prettied up version of my Internet Law that shows why internet investing is the most capital efficient opportunity in venture capital. 
As an example, I shared screenshots of Votizen, a fully functional site that my friend Dave Binetti designed (and he's not a programmer) that operates a social network of registered voters who can share ideas, circulate petitions, and generally assemble online for political purposes. By utilizing contractors around the world, Dave got this site up and running -- fully operational with some nice polish -- for $1203. (That includes the costs of hosting and legally incorporating.)

The rest of the talk was about investing in a capital efficient manner across sectors. My general advice was to plan for failure -- write small checks to test ideas, and assume that many will fail, so you and the entrepeneurs will approach the question of continued funding scientifically, without defensiveness or shame.  The truth is that today, sometimes the cheapest -- and certainly the most accurate -- form of due diligence is to just build the damned thing and see what it happens.

In case that didn't pick up their spirits, I demonstrated capital efficiency at work in my portfolio by describing how Smule partially validated its business on an initial round of $500k from Bessemer, Maples, and Jeff Smith. Showing off my Leaf Trombone, I played an Israeli favorite by Naomi Shemer  titled "Al Kol Eleh" (from which I borrowed the title for my talk "..on the bitter and the sweet"). Here's DocJazz playing it on both Trombone and Ocarina. I think this was the part that drew the standing ovation. At least it made an impression on The Globes, Israel's business daily, which ran a full centerfold on my talk and translated it to Hebrew.

My conclusion: Israel invests more of its GDP in venture capital than any other country, and her economy depends upon technology innovation more than any other nation's.  While failure is hard for them to admit, Israelis understand the need for resource efficiency. If they can make the desert bloom, they can save a shekel in their startups. 

1 comment:

  1. The importance of failure to efficiency and corporate survival of the fittest is often overlooked. It's upsetting to see companies fail, and it's not as viscerally upsetting to think about the companies that will never come into existence because weak companies are propped up and keep investment money tied up - money that could go to potentially more successful start-ups. The book The Power of Small is about how people should pay more attention to the less obvious details and not obsess as much about the big picture in front of them. Sounds like your lecture to the Israelis made a similar point. I hope it made an impact.