Venture Capitalist Jon Medved: Why Israeli Firms ‘Go Global or Go Nowhere’

MedvedJonathan Medved is one of Israel’s leading high-tech venture capitalists. The New York Times has named him one of the 10 most-influential Americans who have impacted Israel. He has invested in over 100 Israeli startups, helping 12 reach valuations in excess of $100 million. Medved was co-founder and until recently CEO of Vringo, a leader in mobile social applications that went public in June 2010. He was earlier founder and general partner of Israel Seed Partners.

What excites him today is that Israel has this “hoard of 10,000 successful entrepreneurs” — a fertile catchment to tap for new ventures. At the same time, says Medved in this interview with Israel Knowledge@Wharton, tomorrow’s successes will be those that marry global finance and markets.

An edited transcript of the conversation appears below.

Knowledge@Wharton: What are some of the strengths and the potential weaknesses of the Israeli economy?

Jon Medved: I think Israel has been lucky for a bunch of reasons. No. 1 is that our banks didn’t fail; they were prevented by regulation from doing a couple of things that turned out to be, in retrospect, bad things to do. For example, leverage: in the private housing market, you can never walk in and buy a house with a 100% mortgage. Here it was 50% of appraised value, which means way below 50% of real value. Our real estate market is probably still overheated. But it didn’t cause any banking crisis.

Knowledge@Wharton: What’s the solution to the real estate situation?

Medved: Here in this country?

Knowledge@Wharton: Yes.

Medved: Releasing some land by the government. The government controls 90% of the land. As the government eases up on that, it will bring prices down. The issue is that 70% of Israelis own their own homes. We have one of the highest homeowner percentages in the world, more than America and far more than countries like Germany. So you have to be very careful. You want to enable young people to get into the market and calm it down. But you don’t want to make everyone [figuratively] poor at once. The government has been building programs to enable younger people to get special mortgage privileges, and people are getting into the market.

But we didn’t have a banking crisis around mortgage issues here. And our banks were not very active in terms of buying these newfangled debt instruments that were packaged and sold all around the world. [Israeli financial institutions] were simply either not that innovative at the banking level, or prevented from being so. Our banks are very strong and very profitable.

In general, the discipline in terms of the budgetary process has also been rather good here. The problem now is that because we had a little war and there’s increasing social protest in the country — demanding more equality, more social spending — the budget is at risk. There has been talk about the need to cut as much as 15 million shekels ($4 billion) out of the budget. This is not easy for a small country like Israel.

Lately, our taxes have gone up. We had a very strong record of consistently lowering taxes. But now they’ve raised capital gains from 20% to 25%. And I guess we’re going to see some additional taxes.

Knowledge@Wharton: If you look at the size of the Israel economy, it’s relatively small compared to the larger economies. As a result, it is to a large extent dependent on exports.

Medved: Absolutely.

Knowledge@Wharton: The biggest markets — 70% — are the U.S. and Europe.

Medved: That’s correct.

Knowledge@Wharton: What potential risks does the Israeli economy face because of problems in the U.S. and Europe?

Medved: We are very exposed to both the U.S. and Europe. Luckily, the things we export are those that people need. They are not luxury or discretionary items. They’re basically technology. Unless the technology sector completely tanks worldwide, I think some of these slowdowns will be mitigated because of our focus.

If you travel to Silicon Valley today, it seems that the economy there is a separate economy from the rest of the U.S. There is not a lot of unemployment there. Housing prices never really dropped at all.

Europe is a huge trading partner for us. The problems in Europe are a little scary. But, if you look at the data, Israeli exports to the U.K. went up over 50% from 2010 to 2011. So it was a particularly good year for us in the face of a slowdown in Europe.

Technology represents well over 50% of our total exports. We will be moving into natural resources. There was the huge find of natural gas here in very deep water. That will be coming on line first for the domestic market, probably by early 2014. Exports will start this decade. Those efforts will represent additional opportunities for Israel to do well economically.

They have their own set of pitfalls. You want to avoid some of the [associated] problems that come with these natural resource windfalls. You want to make sure that you take the Norwegian route and build a good set of sovereign funds to invest this for the future of the country. What doesn’t go there should go into infrastructure and education; we need to make sure that our human resources are being developed.

Knowledge@Wharton: Do you believe that if gas prices come down significantly because of oversupply it will be possible for Israel to economically develop its own gas resources?

Medved: I’m not an expert on natural gas. But the people who are developing these fields are quite adept. It’s a partnership today with a large American corporation, Noble Energy. And the good news is there was a huge sale of one of the fields to an Australian gas entity. I’m sure these people are not dumb. I’m sure they’re watching the news. I think that in general there will be fluctuations in resource prices; there always are. But I think the future for natural gas is extremely positive. This is also good for our economy in terms of getting rid of coal-fired, electrical generation. This is a good thing for Israel and for the world.

Knowledge@Wharton: You made a very persuasive case for Israel as a startup nation. Lots of countries have entrepreneurs and mergers & acquisitions and buyouts. But the way you brought together all of the factors — including [the importance of a] high degree of risk tolerance and immigration — make a very compelling case. The nature of entrepreneurship, though, is that there is both success and failure. If you were to address investors who are interested in looking at a large number of Israeli startups, who want a sense of guidance on where to place their bets, what would you tell them?

Medved: … I’ve been involved in the Israeli tech business for 30-odd years, both as an entrepreneur and as an investor. I’ve managed a venture capital fund. I’ve been an angel. I’ve been a founder of companies. I’ve been a public CEO. I’ve sort of done most of this stuff.

What’s exciting for me today is the ability to invest in people with proven track records. I mean there are a lot of risks involved in investing in innovation. But you start with people and the fact is that you can invest in people who’ve been successful. There’s no guarantee they’re going to be successful again. If you have a choice between two entrepreneurs, the one who has actually failed will make a better investment than the one who hasn’t tried. But there’s no question that the person who has tried and succeeded makes the best investment.

Today, the fact that we have this hoard of 10,000 successful entrepreneurs running around the country makes people like me drool. It makes investing a lot easier. You’ve got to check out the deal. You’ve got to make sure they’re doing the right thing. But these people have track records.

What I’ve done is built a website called ourcrowd.com. At OurCrowd we select what we think are the best and most interesting angel investment opportunities. We put our own money to work in these investments, and then we make them available to a select, exclusive group of accredited investors. You have to join OurCrowd. Once you’ve joined, we bring to you these opportunities. We’ve negotiated the deals. We sit on the boards. We act like a venture capital manager; the difference here is you’re building your own portfolio. You’re basically selecting the kinds of deals and the kinds of entrepreneurs you want to invest in and the amounts of money you want to deploy as part of our operation. This is a new way to actually aggregate angels from around the world who want to take advantage of a global hotspot such as Israel.

Knowledge@Wharton: I’ll come back to Ourcrowd.com, but I have another question first. If you look at the array of Israeli high-tech startups, which of these are the most instructive failures? Sometimes you learn more from failures than from successes.

Medved: You always learn from failures. I can look at my own career. I’ve had some spectacular failures. The thing which bites me is timing. I can get the trends right, but if you don’t get the timing, you’re too early. Take, for example, video conferencing. I saw video conferencing for the first time at the Seattle World’s Fair — I was a little kid — in 1962. It took a long time for that technology to really become mainstream and for people to make money.

In 1998, some guys walked into my office with this great idea. They had come back from a backpacking trip in Thailand and wanted to send videos to their families in Israel. They couldn’t do it. They said, “Look, we can use the Internet and we can put videos up there and people will put up their own videos and everyone else will want to watch them.” It sounded like a great idea. I loved it. In those days, there was no broadband. We invested in this company. It was called Earth Noise. It grew very fast. We hired the CEO of TV Guide to run the company. We raised money. Then, in 2000, the bubble burst. Most of our investors said, “Forget it. No one’s gonna want to watch video on the Internet. It’s not an interesting business.” We were shutting this company down at the end of 2001 after struggling to keep it alive. And, of course, in 2002 the gentlemen from YouTube started their business. So you can be right, you can actually even execute but, if your timing is off….

I think that there are some spectacular entrepreneurs here in this country who have had huge successes, followed by failures, followed by successes. I can think of people such as Ariel Maislos who built a beautiful company called Passave, which was providing fiber to the home. He sold that for $300 million. Then he built a company called Pudding Media, which was a failure and lost several million dollars. And then he built a company called Anobit, which he sold to Apple for $400 million.

I can think of Dov Moran who sold his company M-Systems for a billion and a half, and then had a very ambitious program called Modu to create a new, very interesting cell phone technology. That lost over $100 million. You can look at Shai Agassi who sold his company for $400 million to SAP and then went on to great things at SAP. He has now done Better Place. It’s certainly not a failure, but they’ve spent millions of dollars and the jury’s out.

I think as an entrepreneur you have to realize that you can’t win all the time. You should celebrate and learn from your failures because they’re going to happen. The fact that people can fail big and succeed big is good. I think that the key thing is dreaming big. One of our lead investors would always come to us and have an annual review. And the message was “take more risk.” Some of my partners and I found this surprising, because you’d expect the big institutional investors to tell you: “Mitigate the risk. Watch out for this.” But here were the big investors saying “take more risk” because they understand the innovation and venture business is really about those outliers and about having the exceptional outcomes. And you only get that from taking real risk.

Knowledge@Wharton: Last question about Ourcrowd.com, looking at the year ahead, what kind of investments are you recommending to your qualified investors?

Medved: We’re recommending them all. We like them all; we’re putting our money into them all and letting people make their own decisions about what makes sense and what areas they like. The areas range from clean technology, e-commerce, social… everything. Big data. Software as a service. And we’re doing security now. There’s a whole range of opportunities. We’re polymorphously perverse.

Our idea is to automate the angel business. This has been a great business, but it’s been ad hoc. It’s been basically a couple guys and gals getting together in a room, listening to a pitch. It’s been very local. There really hasn’t been a global angel network. Now there’s this angel list, which is a great initiative. We want to be the place that people who are angels come to find the Israeli deal flow and to join other angels who are making these investments. This is only for accredited investors. It’s only for people who are willing to invest $10,000 or more in a given deal. We’ve got checks already for $400,000 for a specific deal. We’re very excited. This is new ground we’re charting.

I’m happy at age 57 to be back being an entrepreneur. I wish I had a few more hours in the day, but I’ve got a great team. And I’m excited because it really becomes a global story and a global activity. I’m now going around the world — Brazil, the U.S., India, the U.K…. The idea is that you can now link people up around the world in very early stage investments. I think that there’s a lot of both power in terms of the investment side and, ultimately, in terms of business development and assistance to the companies, by building these communities of investors who can now not just support the companies they’re putting money into, but also help them grow and get a global presence. Today, if you’re not global from day one, you’re losing it. That, again, is one of the advantages we have in Israel; we don’t really have a domestic market. Our companies either go global or they go nowhere. I think that using the power of the web for this is going to be very exciting.

Additional Reading:

From Haifa to Herzliya, the Fertile Ground of Israeli Innovation
Global Social Impact from the Innovation Nation
Israeli Venture Capital: Between a Rock and a Hard Place

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