Last week we reported that Facebook is in advanced talks to buy Israel-born social traffic and mapping app Waze for up to $1 billion, but that there were still some questions over whether Waze’s R&D efforts would remain in their home country, or move to Facebook’s HQ in California. Haaretz has now advanced the story, saying that the current deal has it that Waze’s R&D will stay in Israel, where it will also continue to be a registered, tax-paying company, while Waze’s Palo Alto office will move over to Facebook and Menlo Park. While reports are now swirling that Apple could still come into the negotiating room again (if you believe Apple was ever there in the first place), the deal raises some interesting details and debate about what is happening in the Israeli startup scene currently.
Consumer apps
In a country more renowned for its B2B and technical exits — Cisco’s $5 billion NDS deal being one example from last year, but so are Facebook’s two previous Israeli acquisitions, feature phone interface designer Snaptu and facial recognition company Face.com — this is one of the first big consumer tech exits in Israel. Yaron Samid, founder of the Israeli tech startup network TechAviv and himself a serial entrepreneur, notes that this is in fact the first $1 billion exit for such a company. Waze’s rapid rise over the last couple of years, he notes, has already been having an impact on the community, with the exit being the final flourish.
“The inspiration has already taken hold like wildfire among the countless Israeli founders who’ve been told that they can’t produce a billion-dollar consumer Internet/Mobile company – and now know that they all can,” he writes. (He also takes the opportunity for a little self promotion, claiming that he’d been one of those suggesting current CEO Noam Bardin after he couldn’t take the job himself.)
There are numerous Israeli Startups that could get a lift from the ‘new order’ where consumer startups, not just B2B and enterprise, can emerge from the country. These could include Wix, GetTaxi, Fiverr, Bizzabo, MyHeritage, Wishi and Mobli, among others.
Facebook Israel foothold
The other interesting development here is that this could give Facebook a foothold into the Israeli tech world. Unlike Google, Facebook does not have an operation in Israel, which could well create useful ‘boots on the ground’ in a nation renowned for its engineering talent. This would make it the second Facebook development arm outside the U.S., after London.
But the suggestion so far is that Waze will remain an independent company operating in Israel, with R&D staying in Israel, while the business side, including CEO Noam Bardin, is expected to move over to Facebook U.S. HQ.
But, there is a cultural clash on the horizon here.
Some local players are already coming out against this idea. Local VC and TechCrunch contributor Roi Carthy says he would like to see Facebook shutter Waze’s local presence, and relocate the tech personnel to Palo Alto.
Why?
Because, he says, although the Waze R&D center could be a beach-head for a full-blown Facebook R&D shop, and thus good for Facebook, “it could have catastrophic effects upon local early stage startups’ ability to compete on salaries and benefits.”
His argument is that if a big company like Facebook stays away, then the Israeli tech ecosystem is more likely to be able to “push more innovation” towards Silicon Valley, which would be in the “best interest of both the local startup industry and Facebook.”
Certainly, such a large acquisition inside such a relatively small country could well change the successful dynamics of the Israeli eco-system. If it became a mere engineering centre for Facebook, Apple and Google, the implication is that we might not see quite the same levels of startup activity as we’ve seen emerge in the past from Israel.
That is almost certainly overstating the ‘problem’. It’s more likely that the experience of being inside these big tech companies in Israel is more likely to create a virtuous circle of new entrepreneurs, spin-outs and new projects. Plus, more eyes and ears on the ground for potential acquisitions.
Haaretz is also reporting some details about the financial terms of the deal. Anywhere from 40 percent to 60 percent of the $1 billion price (the current offer) will be in Facebook shares, with the rest in cash. Israeli investors woud prefer more cash; others prefer Facebook shares. Specific investors like Li Ka-Shing will land $116 million from the deal after investing $30 million via the Horizon Ventures Fund along with Kleiner Perkins less than two years ago. Microsoft will pull in $102 million after investing of $25 million in December 2010.
Matrix Partners just announced the close of Matrix X, the venture firm’s tenth early-stage technology-focused fund. As Fortune’s Dan Primack reported in a scoop in April, the firm raised $450 million for this fund.
The fund will be used to make early-stage investments in consumer Internet, mobile, enterprise software and IT infrastructure. Matrix’s portfolio includes Gilt Groupe, HubSpot, JustFab, Zendesk and others. Generally Matrix’s initial investments are between $2 million and $10 million, and on occasion the firm will make seed-stage and later-stage investments.
The firm’s past two funds also totaled $450 million, and Matrix says that they chose to keep this fund size, “despite significant over subscription.” While past reports indicated that Matrix raised a slightly lower amount than in previous funds, the firm said that this was the third consecutive fund that totalled $450 million. As explained in a release: “Unlike Matrix IX, this fund will be our only US investment vehicle. Due to the unusual market conditions in 2008, we coupled a $150M Special Opportunity Fund with Matrix IX to take advantage of some unique investment opportunities we thought might emerge, but we never called any capital in that fund.”
In addition to the U.S., Matrix also makes investments in China and India.
Back in December, the sort-of-Series-A-crunch led VC analysis firm CB Insights to predict that more than 1,000 startups will be orphaned at the seed stage. But it seems there is silver-lining to the seed boom/cash crunch — at least for CB Insights itself, which is selling a list of “dying” startups. Or to give it its full title a List of Early-Stage Tech Startups Running Out of Cash (Dying). The price-tag for the list? Almost $5,000.
How is CB Insights determining that an early stage startup is running out of runway? The unlucky number is apparently 13 (or more) months since the startup raised its last round. “This list highlights seed and angel-backed technology startups whose last round of financing was more than 13 months ago and thus who may be running out of runway (aka cash) or for lack of a better phrase – may be dying,” the firm notes.
It’s unclear how many startups have made this ‘deadpool dive’ list (presumably it could be more than 1,000, if CB Insights’ past analysis is on the money — update: the list is generated in real-time and has had between 1,000 and 1,400 companies on it to-date). Or who exactly is on the list — CB Insights says only that “tech startups on this list span internet, mobile and software companies”. We’ve asked to see the full list but since we’re not a paying customer we’re setting our expectations accordingly.
Paying customers can expect the following data on each listed startup:
- Name of company
- Website
- Company description
- Industry classification
- Mailing Address
- Phone number
- Total amount of money raised
- Date of most recent financing
- Amount of most recent financing
- Investors
It’s also unclear where CB Insights is sourcing its startup financing data from. Update: CB Insights has provided some info on how it generates the list — see below for more — and confirmed that it does use public data, and does not contact the startups individually.
It would be possible to pull public financing data from CrunchBase, for instance, but there are lots of problem with using only public data (if that’s what CB Insights is doing) to judge whether a startup is ailing since not all rounds are disclosed in full or disclosed promptly. Add to that runways vary because of’ varying monthly expenditure, and funding can be done in tranches based on set milestones. In short: there are lots of variables so public funding data can present a misleading picture of the health (or otherwise) of a startup.
Of course it’s possible CB Insights has been contacting startups itself to track their financing and is therefore privy to private financing data which it’s using to compile the list. We’ve asked about their methodology and will update this story with any response. Update: CB Insights said it uses a “number of data points” and its own tech tool — called Mosiac — to create the list. Scores are “derived algorithmically”, using public data crunched via its Mosaic tool — which apparently analyses “thousands of information sources” to identify “signals of strength and weakness” in private companies.
“Some of the inputs Mosaic looks at and calculates are cash-on-hand, quality of investors, industry heath, and HR activity among others,” said a spokesman. “Companies not exhibiting signs of strength make the list.
“We received National Science Foundation funding to develop Mosaic as our belief is that there is a lot of digital exhaust that companies create or ‘breadcrumbs’ they leave behind which if properly extracted and analyzed give you predictive intelligence about their health. We do not talk directly to companies as (1) that effort doesn’t scale and (2) even if we did, it’s unlikely we’d get the facts, i.e., it is not in their self-interest to tell us they are not doing well.”
The spokesman added that the number of companies on the list varies over time as the list is generated in real-time — so companies “that may be dying” one day, may stop looking so sickly the next. Over time, the number of companies on the list has ranged between 1,000 to 1,400, the spokesman added.
So who wants to buy a list of possibly moribund startups? A varied group, according to CB Insights, including companies looking to do acqui-hires, VC investors on talent recruitment duty, HR teams generally and companies wanting to cherry pick ailing startups’ IP. Indeed, “inbound requests for this list from the likely buyers” is the reason why CB Insights created the list — the first such one it has compiled — in the first place.
It said the following types of customers have “asked us for/purchased this file already”:
- M&A groups looking to do acqui-hires
- Venture capital investors looking to help portfolio companies recruit talent
- Company HR/recruiting teams that are looking to find talent including hedge funds and more mature later stage technology companies
- Organizations interested in the potential IP that these startups may possess
