I am not sure why we haven’t heard more about the effect of the sub-prime mortgage crisis on startups and VCs, but it seems clear to me that we will see an effect. The bad 3Q results (and bad 4Q forecasts) for many financial institutions will have a delayed effect on many later stage enterprise software startups. 

The Finance industry is a very large consumer of technology, and in many cases willing to be an early adopter of interesting technology. Of course, as with any downturn, new initiatives are always an easy target, and usually the first to go. Many enterprise software startups pin their hopes on selling their products to large US financial institutions. Those that have already signed deals- congratulations! Those that have deal propects in the pipeline, but haven’t signed the deal - don’t count your chickens, at least until the banks start growing again. 

No matter how the larger economic issues play out - the subprime  mortgage crisis will be a bad deal for startups.

I am sort of surprised that I am back on this subject again, but when I read that Microsoft’s Ballmer plans to buy 20 smaller companies next year (Ballmer: We Can Compete with Google) it drives home for me the importance of being able to integrate well in the aftermath of M&A. My best guess is that those 20 companies will include 1-2 large companies, the rest being small and midsize companies - companies that are “innovating in the marketplace” (a term we used to use at IBM Research). So Microsoft is effectively outsourcing a good portion of their innovation, and placing a big bet on being able to integrate these acquisitions into the fabric of Microsoft.Thee types of smaller acquisitions seem to be in the cards for IBM and Google - and I think more and more technology companies will be outsourcing their innovation this way - augmenting internal “organic” growth with external  ”inorganic” growth. Oracle seems to have gotten this down to an art (though they tend to swallow whales rather than minnows), and even SAP has jumped on the bandwagon. One issue that will clearly come with these acquisitions is how the acquiring company doesn’t kill the spark of innovation that exists in these smaller companies  (of course that is assuming that they want to keep the innovation alive, and aren’t just buying a specific technology or existing product.I had the opportunity the other day to speak with someone that was on the Corporate side of an acquisition and discussed what was their thought process at the time of the acquisition, and how that differed from how things turned out after the acquisition.One thing that struck me was that both sides were fooled since they were (paraphrasing Bernard Shaw)  ”two companies separated by the same language”. The company being acquired thought they were communicating important information about the acquisition, but it turns out that they were using internal shorthand to describe people and situations, which were interpreted completely differently by the other side. This was probably exacerbated by the fact that one side was Israeli and the other American - but it could have happened with any two companies - especially when there is a high impedance mismatch between the two (or in English - the companies are of very different size). . For example when one company said a manager “kept the trains running on time” - they meant a clerk that could keep to a schedule - while the other side thought  they meant someone could manage a complex system with all its nuances and make sure that it keeps working. Understandably these kinds of miscommunications caused a lot of faulty decisions to made during, and right after the acquisition.In my experience it takes about 9  to 18 months until the sides really start to understand each, how the other side works - and how they need to work together. That is assuming that everything goes smoothly. If you try to speed it up too much - you will end up killing the innovation, and you may end up killing any possibility of a successful acquisition.So what is the bottom line? Assume that you will need to keep the current structure of the acquisition intact for about a year before you can make any drastic structural or strategic changes. See the rest of my recommendations in previous posts - and perhaps hire a consultant that has been there and can help smooth the transition.

I actually “borrowed” the title from an interesting article in the Journal of Economic Psychology’s January edition. Not a journal that I usually read, but my interest was triggered by a post in Marc Andressen’s blog. When I first saw the article (especially the introduction) that explained that “The strongest cross-national covariate of an individual’s entrepreneurial propensity is shown to be whether the person believes herself to have the sufficient skills, knowledge and ability to start a business. In addition, we find a significant negative correlation between this reported level of entrepreneurial confidence and the approximate survival chances of nascent entrepreneurs across countries.”

So I thought to myself “aha – I finally understand why there are so many high-tech entrepreneurs in Israel” – the national trait of over-confidence is actually causing the Israeli propensity to create startups. This actually fit pretty well with the findings that I mentioned in an earlier post on Age and the Israeli Entrepreneur. Then I looked a bit closer at the numbers in the article.

Turns out the article is about new business in general, not just high-tech, and Israel has an relatively low percentage of entrepreneurs that perceive that they have sufficient skills, knowledge and ability to start a business (only 30% of respondents, as opposed to 61% in NZ, 55% in the US – but only 11% in Japan, Israel is in the bottom third of the countries mentioned). So clearly it isn’t a national trait, but one that seems more localized to the technology community. Given that, I think there may be a different trait involved rather than just self-confidence. Since the Israeli technology community is relatively small (and pretty close knit – many having served together in the Army) I think another factor mentioned in passing in the article may play a larger role in Israel’s technology startup phenomenon - “Knowing other entrepreneurs is also positively associated with start-up propensity.”

 I just read an interesting study on the problems with existing news RSS feeds from the University of Maryland’s International Center for Media and Public Relations. I think it is a great example of how user’s can’t depend on the organization that creates the content to provide access to the content in the form or format most useful for them, and why the ability for users to create their own feeds is so valuable. To quote from the study:

“This study found that depending on what users want from a website, they may be very disappointed with that website’s RSS.  Many news consumers go online in the morning to check what happened in the world overnight—who just died, who’s just been indicted, who’s just been elected, how many have been killed in the latest war zone.  And for many of those consumers the quick top five news stories aggregated by Google or Yahoo! are all they want.  But later in the day some of those very same consumers will need to access more and different news for use in their work—they might be tracking news from a region or tracking news on a particular issue.

It is for that latter group of consumers that this RSS study will be most useful.  Essentially, the conclusion of the study is that if a user wants specific news on any subject from any of the 19 news outlets the research team looked at, he or she must still track the news down website by website.”

Bottom line, as long as we depend on publishers as both content providers and access providers we as consumers of content won’t be able to get what we need in the way we need it - just like with APIs.  The only way to solve the problem is to allow users or some unaffiliated community to create the access to content (or API), as opposed to limiting that ability to only the publisher.  As web 2.0 paradigms catch on with the masses, turning more and more of us to prosumers, this will become more and more of an issue.  Publishers that try to control access will lose out to those that provide users the to tailor the content to their own needs. Publishers need to understand that this benefits both them and the users.

I see signs that this is actually starting to happen (in a small way) with the NYTimes and WSJ both announcing personal portals for thier users. The jump to personalized feeds isn’t that unthinkable…

In Israel, it has become close to impossible to get an investment for an Enterprise Software startup, even worse than in the US. One of the main reasons is that enterprise software sales are hard, and expensive ( a lot of high cost man power, and long sale cycles) - which is true. Everyone is looking at models to get around those issues (e.g. open source, SaaS), but fundamentally it remains an issue.
Not that there aren’t problems or opportunities in enterprise software (see The Trouble With Enterprise Software for a nice overview of some of the issues), there are huge issues with enterprise software, and SOA (Services Oriented Architectures) are no panacea. So opportunities for technical innovation abound, it is just that most VCs don’t believe that it is a good investment of time or capital. Since VCs are awfully busy, and have more on their plate than they can handle, once this is a “rule-of-thumb” it is hard to get their ear.
I think this will have grave implications for Enterprise IT shops (and vendors). In last few years most large IT vendors have gotten into the habit of “outsourcing” their technical innovation - they buy companies rather than develop the technology in-house. If the VCs stop investing - then in a few years, innovation in the enterprise software market will dry up. Given the current state of enterprise software, that can’t be a good thing….
I think that things will change - since there is still a lot of money in enterprise software and large vendors need technology, someone will have to provide them with it. Enterprise software companies probably will have smaller chance at IPO - but given the relative lack of competition they should have a better shot at M&A. The trick is to have unique, innovative technology that solves a problem for enterprise IT departments – or even better, for the business. I also think the pendulum has swung too far, and will swing back in a couple of years - making any investment done now, much more valuable in the future

• Israeli Press Releases about Investment

• Read/WriteWeb on DapperAds

I read with interest a whole set of blog posts about the age of successful entrepreneurs in the US (one of the better ones was by Marc Andreessen, you can find it here  Age and the entrepreneur, part 1: Some data). In my opinion it was a debate over whether youth and enthusiasism trumped age and experience in the high-tech startup world. One thing that immediately jumps up at you is that most of the high-tech entrepreneurial super stars were young (e.g. Bill Gates, Larry Page, Sergey Brin).

I was wondering whether anyone had done any real studies on how things worked in Israel.  Even though the Israeli VC and start-up model is based on the US model, the culture, environment and people are different than in the US.  Thigs work diffefrently here (and I think the Israeli VCs will need to change in order to adopt - but I’ll write more on that in a separate post). For example, most Israeli entrepreneurs go through maniditory army service - for three years or more (and many Israeli high tech companies started are based on teams that worked together during their Army service). I guess that is why Israeli work better in teams than Americans - and the list of differences go on and on (probably write a post on that too:)

That leads me to an article I read yesterday in the Marker (an Israeli business daily) that quotes a study by Dr. Eli Gimon (sp?). I would have put up a link but I couldn’t find the article on the web - and both the article and summary I found was only in hebrew….

I thought it was telling to see what he actually measured - whether a company that started in a high-tech incubator was around for at least seven years. That was his definition of success. I am not sure any VC would agree with that definition - but it does make sense in an Israeli context. While most US VCs (and Israeli too) are looking for the elusive “home-run” - Israeli produces very few of those. It mostly produces companies with innovative, solid technology - which is why so many Israeli companies are snapped up by overseas companies - they provide technology innovation, depth and skills. These companies get acquired for anywhere between $10M-$200M - where over $100M is rare and high-end. Very different than the US model…

Bottom line - what Dr. Gimon (sp?) found was that the most important ingredient to success for an Israeli start-up is management skill and experience - not age, sex, schooling or national origin of the founder. Also whether they built the company based on their own technology made a difference.

I imagine these findings are probably very different than in the US…

Gartner just put out a report on “Who’s Who in Enterprise Mashup Technologies” whcih contains all of the usual enterprise paltform companies and all the usual web mashup players . They gave some good, though standard advice that you should understand the problem, before you choose the technology (duh?) - but I thought it was interesting that they didn’t try to define a best practices architecture, or give some guidance on how to combine technologies or choose between them (see my post below).

One thing that was clear is that all of the Mashup Platforms are trying to be generic - allow users to build any type of mashup application. As always, being generic means being more abstract - and making it harder for people to easily build a mashup for a specific domain or vertical. This isn’t unusual for platform builders, since by building a generic tool they can capture the broadest audience of user. But I think that they might be making a mistake with respect to Mashup Platforms - the whole idea is to make it easy for anyone to build “situational applications” - that solve a specific need for information quickily, and that can be used by non-developers. For me, that means that platforms will have to be tailored to the domain of the user.

I am expecting that in the next wave of Mashup Platforms we’ll start seeing vertically oriented mashup platforms that will make it even easier to build a mashup for a specific vertical - from standard verticals like Finance, to more consumer vertical like advertisements.

I was just looking at the new version of Israel’s “Chief Scientist’s Law” (the new version - updated June 2005) Encouragement of Industrial Research and Development Law 5744-1984. For those of you unfamiliar with this government program - it is essentailly a loan program to startups (and other manufacturing\technology companies) that is repayable as royalties or as a settlement on sale of the company. Companies submit proposals to the Office of the Chief Scientist, which decides on the merits whether to provide funding. The law itself is relevant for both manufacturing and IP based companies - but for most start-ups, the rules regarding IP are the the more interesting.

So is it worth it? Seems like easy money - right? Fill in a few forms, talk to a few people and get some serious funding. So whats the catch?

In general the law tries to be fair - if there is a sale of the company the government gets a percentage of the sale value relative to the amount invested, plus interest. More or less like any VC - except the calculation seems to be as if the investment is the relative part of 100% of the company ((government_grants/all_investments_in_company)*sales_price) - so what about the founders and employees? Is that supposed to be only out of the other investors share? Well, for that there is clause 19B.j.1 “The Ministers may affixx rules for calculating the Sale Price in a manner that will take account of the shares that have been issued to entrepreneurs and employees otherwise than for cash ” - besides the weird english (well, it isn’t an official translation) - it seems to say that the government doesn’t have to actually leave anything for the founders and employees from thier part of the proceeds, but they may decide to…

However, the biggest problem is with uncertainty that the law creates with the transfer of IP outside of Israel in the event of an acquisition. They allow for the transfer based on the decision of a committee (described in text of the law) - which according to the wording doesn’t have to allow the transfer of IP (though in most cases it probably will). Not being able to transfer IP abroad could kill an acquisition - or make it less valuable to the acquirng company. Many international corporations (e.g. IBM) require that all of their IP belong to corporate - so if the IP can’t be transferred, the IP remaining in Israel could be an issue - and will at least be a price negotiation point.

So if you are facing a choice between closing the company (or not getting off the ground) and taking Chief Scientist money - take the money - but make sure you know what you are getting into. Like with any transaction - caveat emptor…

Related reading: Export of Technology Developed With Chief Scientist