Are Israeli Entrepreneurs Afraid of Open Source?

  • By TLV Partners
  • 02 Oct, 2015
By Rona Segev
Looking at the global market, it is quite clear that open source is widely adopted, especially with computing infrastructure. Numerous open source companies have proven that it is possible to build substantial and profitable software companies using an open source model. For example: MySQL, XenSource, Red Hat, and Jboss.

With Google, Android, Chromium AngularJS, Facebook and Twitter using open source, the “sleeping giants” have also turned to OS; Microsoft has just announced .NET execution engine will be open sourced and IBM has committed $1 billion to fuel Linux and open source innovation. Just recently, Google announced that it will be joining the OpenStack Foundation.

Equally as interesting is that fact that many of the hottest private companies in the enterprise software domain are open source companies, and all of them have raised substantial amounts of funding from top tier VCs. (Docker, Github, Puppet, Elasticsearch, Cloudera, Alfresco, MongoDB, SugarCRM and Canonical, just to name a few).

Taking Open Source Seriously
Four years ago I started to explore adopting open source as a marketing strategy for Israeli software Infrastructure companies. As part of my research, Liron Zighelnic and Roy Leiser prepared with me a presentation on the pros and cons of adopting open source strategy.
Click here to see the presentation>>>

Wake Up And Smell The Coffee
So. if using open source as a way to market your product and develop it is so prevalent in the US, why are Israeli companies hesitant about jumping on board the open source train? Two reasons come to mind:

1) State of mind - Israel, as a country strongly influenced by the military,runs pretty much as closed units. Much of the work conducted, for example by cyber security startups, is confidential in nature, making the option to open source the code unrealistic. The typical Israeli developer is taught early in life to keep his code confidential.

2) Lack of knowledge - We simply lack the experience and don’t know how to work within the open source framework. Very few Israeli companies have been successful with an open source strategy.

Still, I believe we are currently seeing some change in Israel, as more companies are experimenting and using open source as a marketing tool. We look forward to seeing progress within the Israeli startup community, and exploring investment opportunities with open source companies.

Back to the website

TLV Partners Blog

By TLV Partners 14 Jun, 2017

For years there was a common belief amongst venture capitalists that participating preferred is always better for investors.

Here’s a brief overview of the various liquidation preferences investors may ask for:
  • Pro-rata distribution: Upon an exit, each shareholder receives their percentage in the company multiplied by the exit size, i.e. - shareholders that hold 20% receive $20M in an exit of $100M, 20% x $100M=$20M).
  • Non-participating preferred: Upon an exit, the investors with this preference receive their money back OR the exit proceeds are simply distributed pro rata. Whichever yields more money to the investor.
  • 1x participating preferred: Upon an exit, all investors with this preference get their money back and then the remaining proceeds are distributed pro-rata amongst all the shareholders (including the investors). This is often referred to as “double dipping”.
  • 2x+ participating preferred: Same principle as above, however in the initial distribution to investors they receive 2x their money back prior to the pro-rata distribution of the remaining proceeds. In some cases, especially in cases of struggling companies, investors insist on an even higher multiple of 3x-5x.
  • Interest: Investors are often entitled to annual interest of 4-8% on their investment to “make up” for the time from investment to exit. Practically, this means that after a five year period, a traditional liquidation preference is 1.2x-1.4x times the initial investment

VCs have one common goal - they all aim to increase shareholder value. Luckily, many Israeli entrepreneurs share this dream as they want to build long-lasting companies. This alignment of interests between VCs and entrepreneurs is crucial to make sure all shareholders are working to achieve the same goal.  

The problem with participating preferred is that it creates an inherent misalignment of interest between VCs and entrepreneurs.

Take for example an entrepreneur, who raised $21M and is subject to participating preferred plus interest rate . This entrepreneur is now faced with a decision whether or not to sell the company for $80M. The shareholders agree that the company’s potential could be much higher in 2-3 years, but the company would have to raise another $20M in order to reach said potential.

Luckily, there is a late stage VC who is eager to invest in the company at a reasonable valuation (i.e. - $120M pre money). The decision, therefore, should be simple -  on the surface this a good opportunity to increase the value of the company at a reasonable price. But here is where the participating preferred misalignment kicks in. For the entrepreneur, raising another $20M means that upon an exit, he/she will have to pay back the investors $41M plus interest before seeing any profits. If the entrepreneur suspects that the chances of substantially increasing the value at exit are not high enough, he/she will be hesitant to bear more risk. In order to match the entrepreneur's current return, the next potential exit would need to be at least $200M, in order to compensate the extra dilution from the D round and the added preferences.  As such, many entrepreneurs at this stage will decide to sell the company and reduce their personal risk. The loss of potential value for all shareholders in this scenario could be huge, by far exceeding the potential profit stemming from the participating preferred.

By TLV Partners 05 Jun, 2017
By Eitan Bek
By TLV Partners 25 May, 2017

Cloud computing is an area we find especially exciting. It has brought enormous change to the world of applications and it would be no exaggeration to say that most of the innovation in IT over the past decade has been enabled, catalyzed, or caused by cloud computing. Currently, we are in the midst of a microservices revolution, one that has, until now, been championed by containers. Through our investment in Aqua Security over a year ago, we have witnessed first hand the rapid growth this market is experiencing, and believe it will continue to proliferate enterprises across the globe.  We are now on the cusp of another revolution in cloud infrastructure: the move to serverless computing.


By TLV Partners 11 May, 2017
By Rona Segev
By TLV Partners 27 Apr, 2017
After a half-decade of quiet advancments in artificial intelligence (AI), 2016 was a turning point in AI. Computers are now smarter and learning faster than ever. The timing of this progress is no coincidence, rather it comes as a result of several coinciding market factors.

Take image recognition for example. Recent advancements in this field can be traced back to a team of University of Toronto researchers, who won the world’s top image-recognition competition in 2012. That team was eventually recruited by Google, and its approach, which relied on a technique called deep learning (a subset of AI), was quickly adopted by the company. In a short period of time image recognition systems based on deep learning have become much more accurate; test error rates are down to about 5%, roughly on par with a human’s performance.

By TLV Partners 02 Mar, 2017

We are pleased to share with you our glossary of must know terms that all entrepreneurs should understand. Founding a start-up is a significant undertaking, knowing the basics is the best place to start! 

Good luck!

http://bit.ly/VCglossaryTermsTLVPartners


By TLV Partners 07 Feb, 2017
Not long ago, I was invited to an event held by one of the world’s leading investment firms. The similarities between most people in attendance were uncanny: powerful men, wearing suits worth thousands of dollars, and watches that probably cost a small fortune. Not surprisingly, the atmosphere surrounding the event was almost a cliche of how powerful men talk and behave.

Throughout the day, many panels on doing good business were held, and each speaker shared their version of proper behavior when investing. Most of the ideas revolved around taking good opportunities, and aggressively attacking them. For example, one speaker said that the first thing he does when investing in a company, is getting rid of all the members of management, and appointing members of his own.

But then, someone different took the stage. He was head of one of the smaller firms in attendance (still in the billions, though), and from the minute I saw him, in his modest-looking tweed blazer, he attracted my attention. When asked what he thought is the most important aspect of business, he used a word that was previously not uttered that day: “Nice.”

“To me,” he said (and I’m paraphrasing), “as important as it is to find good opportunities, being decent and nice to the entrepreneurs you work with, is no-less important.” The room fell to silence. An air of contempt was felt, as he calmly continued to explain the reasoning behind his word-choice. “Being nice is good for your business, great teams will want to work with you, will be willing to give you better terms - not to mention that you all benefit from the pleasant atmosphere. It’s important to me that if my kids meet someone I do business with, they would hear: ‘your dad is a really good guy.’”

I was in awe of this man. There he was, in a proverbial shark tank, surrounded by these corporate warriors, discussing the importance of being nice. What really impressed me was the fact that he wasn’t hesitant or apologetic, and showed as much confidence as any other speaker there, while presenting his rare business philosophy. In an ocean of forceful language, he was an island of calmness. As powerful as all the other men in the room were, in my eyes, he was the bravest speaker there.

I admire people who are not afraid to do things their way. If there’s something I’ve learned in my many years in the field of venture capital, it’s that there’s no one way to succeed. So many of us in the industry yield to these notions of power, and forceful language, and forget that things could be done differently. I think the most important thing I took from this event is the notion that, when you’re good at what you do, you can be successful without having to give up on what you believe is right. When doing business, it is important to be assertive, make good decisions, and take advantage of good opportunities - but you could still be “nice” when doing so.

By TLV Partners 13 Dec, 2015
By Eitan Bek and Roy Leiser
By TLV Partners 04 Dec, 2015
They will be joined in the round by hi-tech entrepreneurs Michael Fey, President and COO of Blue Coat Security; Giora Yaron former Chairman of Mercury and Boaz Chalamish, former SVP and GM of VMWare.

Scalock was founded in 2015 and has 10 employees. The company develops SaaS security solutions for virtual containers (e.g. Docker). Scalock’s product provides protection and security against internal and external threats to container-based applications and micro-services, and a complete access control mechanism to monitor and enforce security for virtual containers in run-time. The company plans to use the funds raised to establish its presence in the US.

Dror Davidoff and Amir Jerbi the founders of Scalock, are both seasoned Entrepreneurs with an extensive background in the hi-tech industry. Davidoff was the CRO at Clicktale, and EVP of Sales at Sentrigo and Cyvida. Amir was principal software architect at CA Technologies and led the development of virtualization technologies and cloud environments for CA’s ControlMinder product line.

Back to the website
By TLV Partners 04 Nov, 2015
Pitching to VCs is much more than just going over a presentation. Your presentation can help you better articulate yourself, but even the best presentation can’t compensate for interpersonal mistakes. One of the common mistakes founders make in the first pitch is to cover as many aspects of their business as possible, instead of focusing on a small set of the best selling points. The purpose of the first pitch is to ignite interest and to convince the VCs it is worthwhile to start a due diligence process. You will have enough time to go over all aspects of your business if successful.


Some Do’s and Don'ts of Pitching to VCs:


  • The presentation should be short and clear. The VC is trying to digest the main aspects of your business in a short timeframe, not to become an expert in your technology or market.

  • Don’t come alone, VCs don't like sole founders. They look at it as a sign that the Founder is either failing to attract talent or afraid of strong people around him/her.

  • The team is one of the strongest selling points you have, assemble top notch professionals and let them present some of the slides. It is extremely unattractive to have the CEO present while the other team members sit quietly during the whole meeting.

  • Solve your team conflicts before you start fundraising, and never reveal them during your pitch.

  • Invest time in sizing your market. As a rule of thumb, the VC is looking for companies that have the potential toexceed$1B in value in a few years. We are looking for a market size of at least $700M-$800M, so come prepared with all the necessary data to prove your market size. Your ability to find the correct data and do the math right is also being assessed.

  • Validate your market - you don't need millions of dollars in your bank account to call potential customers and set validation meetings. Fundraise after you have at least 5-6 potential customers who are willing to talk to VCs and be your design partners.

  • Prepare a prototype to demonstrate your product. They say a picture is worth a thousand words; a demo is worth a million.

  • Surprisingly enough, most investors will spend a lot of the time on your projected financials even though everyone understands that Excel can tolerate any assumption. It is important that you look at comparables in your industry and fully understand revenue growths, expected costs and all business model assumptions.

  • Do some basic research on the VC and their portfolio before you set a meeting. Discovering ten minutes into the meeting that the VC just invested in your direct competitor is frustrating and embarrassing.

  • Don’t become defensive. The VC may ask you some tough questions or argue with your assumptions. Dealing calmly with the challenge will impress the VC; becoming defensive will end the meeting promptly.

  • Come to the meeting open minded and be prepared to learn. VCs usually invest in one out of every 100 companies they asses. You can benefit from the meeting even if you don’t get the funding.

  • Regarding valuations - how much you should aim to raise and how to deal with the valuation negotiation - the best advice here is to follow the norm, which may change with market conditions. For example, if good A round companies in 2015 are raising an average of $4m-$5m for 33% of the company, you will need a good reason why you are raising only $2M, or $8M, or why your valuation is much lower or higher. Unless you have a good reason, you will be viewed as either desperate or out of touch with reality.

  • Last advice - unless you have a clear indication that you are about to receive a term sheet from other VCs, try not to share too much information. You can safely assume that the VCs all know each other and will share information with one another. 


Feel free to ask us questions, we are happy to help.

Good Luck!

Back to the website
More Posts
Share by: