For the first time, Zohar Gilon discusses his portfolio – which includes 40 exits – at length. In this personal interview with the Israeli angel investor, he shares what he would need to know if you pitched your company to him – an opportunity that would probably only happen once
Zohar Gilon has one of the more interesting career stories in the world of Israeli startups and investments.
We recently slipped into a window in his busy schedule and met him at his seaside office in Herzliya to hear his thoughts on entrepreneurship, the connection between a person’s resume and their career, and his guesstimate as to which Israeli companies will enter the pantheon of success.
Anyone planning to become an entrepreneur should read this interview to see how matters look through the eyes of one of Israel’s most successful angel investors.
Let’s start at the beginning, at the moment when an entrepreneur first meets an investor. One of the rumors is that you ask to hear everything about their life from the time they were a child. What lies behind this request? What are you trying to understand?
I patiently ask would-be entrepreneurs about their nursery school, how they were raised, their friends, what they did in high school and in the army, who their good friends are and what their spouse does for a living.
I am not expecting clarity. I am just conducting an hour and a quarter meeting during which I try to take the measure of this person. Here in Israel, I can precisely pin someone down. For instance, what school did they go to and how hard was it? This doesn’t necessarily mean much but it gives me an overview. Sometimes I meet a very talented person who sought out shortcuts, and that can be a bad sign.
There are very talented people who make poor workplace choices, even if they receive high salaries and good benefits. But it’s clear they chose the job for the salary and stock options. It could be someone really talented who went to work for a small financial firm or a startup.
Had I been at the same juncture, I would have known that it wasn’t a good choice because that company is unlikely to succeed. Or perhaps he didn’t check to see that the company’s investors are strong enough or that the company has the staying power to survive for at least another year and a half. He simply didn’t think things through thoroughly.
Another thing I look at is which workplaces the entrepreneur chose and how often he switched jobs. I try to assess his ability to make good choices. Sometimes I see someone jumping from job to job. You might say it’s a good sign that he’s willing to move in order to advance. But if you’ve had 22 jobs in eight years, that’s a bit too much.
Do you expect a salaried employee on the way to becoming an entrepreneur to think like an investor?
The person sitting opposite me is more of an investor than me because he is investing all of his time, energy and soul into the project he has taken upon himself. This is one of the most important decisions of his life.
I am referring to his recent decision to become an entrepreneur, but even in terms of his work history, those decisions were important. In most cases, people spend more time at work than with their wives and children. If he hasn’t made the right decision about where he has worked, it says something.
Choosing a workplace for the salary is legitimate and understandable, but if you want to be an entrepreneur you also need to choose work that is challenging, with colleagues you can learn from and with whom you might like to partner in the future. It’s a test of your ability to make choices.
The questions I ask about friends also give me a general feeling for a person. A person can be judged by their friends. The whole conversation is like a crossword puzzle. Sometimes nothing comes out of it, but at least I get a general sense of the person.
There is no formula or recipe. You gradually learn more and more about a person. This works and has proven effective for me. There is no template for a successful technology entrepreneur. Sometimes he has to have extraordinary talent at business development and negotiating deals and sometimes technological brilliance and leadership ability are sufficient.
One thing that stands out about your investment decisions is that you invest in Israelis, whether here or abroad. Why?
I invest in Israelis because I know how to assess them. I am not good at evaluating Americans. I’ve worked with Americans ever since 1974 when I was released from the air force. I’ve worked with Americans at large companies like General Electric and at smaller companies, but I still have a hard time understanding what makes them tick.
The difference is even apparent in their resumes. For instance, take the resume of someone who worked at Goldman Sachs. It often reads as if he single handedly ran the entire company. I have a very hard time distilling these resumes and being able to evaluate the person who walks in the door.
Another thing that fascinates Gilon are relationships among entrepreneurs. Not necessarily collegial relationships, but actual social connections.
(He smiles.) It’s reasonable to assume that they’ll face challenges along the way. I want to see if they can survive those [challenges both in] a social and cultural sense. Even when your company is a success, you can face tough times. I can think of at least two of Israel’s dominant companies, where there was a lot of money going around, but not a lot of respect. And both companies’ leaders fought over respect.
How big are the egos of Israeli entrepreneurs you meet?
Let’s make a distinction. I’ve never met an entrepreneur without a big ego and I don’t think an egoless entrepreneur can succeed, nor can an investor for that matter. When someone’s ego gets to be out of control, then his business will almost certainly suffer. If someone has no ego then his business will fall apart. You need stubbornness and determination to succeed, but too much is destructive.
I couldn’t have been an entrepreneur. I do have a big ego, yes, but not enough determination and doggedness. When I am conducting an acquisition, it doesn’t matter whether millions or billions are involved, I learn every detail and am meticulous, but I can’t sustain that over the long term or work 17 hours a day for nine years. I haven’t got the entrepreneurial mettle and that’s okay.
You’ve said in the past that the deals you close are not long M&A ones, that you lack patience for deals that take a long time.
It’s not that I lack patience. Every deal has a certain momentum and if it drags on, chances are that it will fall through. It’s important to understand that mergers don’t actually exist, it’s just a euphemism. There is no M in M&A. I’ve never had one. Even regarding the merger of AOL and Time Warner, in the end Mr. Time Warner said to Mr. AOL, “You’re finished and you can go home (or vice versa).”
Alvarion is one of the three examples in the history of Israel since the Second Temple that was actually a merger. Even in the Orbotech merger, the entrepreneur and the director of OPTROTECH were forced to enter the deal. Alvarion’s merger was much simpler. The chairman of BreezeCom and Floware Wireless Systems was Meir Barel. He was on both sides of the table, which made negotiations considerably easier.
I have conducted many acquisitions of companies. Whenever I was asked to do a merger between two Israeli companies exchanging shares I never agreed. You can’t really divvy up shares between two live Israelis unless you have 180 % of the pie. But there is no such thing as 180%. You can’t break apart the Israeli ego, it just can’t be done.
Do you think this is something that particularly characterizes Israeli entrepreneurs? There are plenty of mergers in the U.S. How are American entrepreneurs different? Do they have smaller egos?
I don’t know the answer to that. It’s possible that investors there are more determined and make sure it happens. I’ve even seen instances over there where the entrepreneur brings in an external CEO to replace him. That is very rare in Israel. In my portfolio there is just one entrepreneur who did this. Yuval Tal (the founder of Payoneer) at first brought in Naftali Bennett, who later left to serve his country. Later he brought on a professional CEO from Visa.
Americans are more pragmatic in this matter. They were even able to get the former CEO of Pepsi Cola to run a company like Apple.
In Israel, it’s very hard to get an entrepreneur to leave his chair. Merging two companies, especially through an exchange of shares, is almost impossible. You can do it with a cash transaction. The two sides argue over the price ad infinitum, then they finally take the check and go home.
Let’s return for a moment to the beginning of your path, to the first $190,000. What led you to take that money, which at the time was not a small amount, and to invest it in hi-tech, which at the time was not very developed? Why did you take that chance, if as you said, you knew the money more than likely would not come back?
That’s not exactly what I said. Even though I was a pretty average student at the Technion, I was always a technology freak. I studied electrical engineering and I chose it because it was the hardest discipline to get into after medicine.
At the age of 16 there is a form to fill out for recipients of pre-army academic scholarships. The form contains a page where you have to say what you want to study. I didn’t know what I wanted to study, no one at that age really knows. So as a Polish immigrant, I decided to find out what was the hardest discipline to get accepted into and I assumed that was a good profession. I asked people what the hardest thing to get into was and they said medicine. I’m the kind of person who faints at the sight of blood, so I realized that might limit my medical career.
I asked what comes next after medicine and they said electrical engineering at the Technion because there are 3,000 candidates and only 144 slots, which is the size of the Technion’s largest lecture hall. It sounded good to me so that’s what I studied. From my first day in the air force I was a technology freak. I understood that technology would take over the world. That’s what started me thinking about investing in hi-tech.
I served in the weapons division of the air force starting in 1970. It was a fascinating place, during particularly fraught times. There is no question that what saved this country was the talent of military personnel in defining a need, developing advanced technological capabilities, and operating them in an optimal fashion while exhibiting tremendous bravery.
The roots of Israeli hi-tech entrepreneurship spring from the army. Not just because technologies developed by the army were converted to civilian uses. It’s not just computer networks, microprocessors, etc. but also due to the spirit of entrepreneurship that developed in the IDF. Think of the gigantic projects were being led by young people, and the initiative and responsibility for human life that young officers and soldiers took on the battlefield. At the end of the day the methodologies of developing weapons or developing products for the civilian market are pretty similar, at least in terms of defining a need, prioritizing, timetables, and budgets. Obviously, time and budgets are managed by totally different parameters.
Every investment has a certain level of risk and sometimes you hear people present deals as either low risk or high risk, but this is nonsense, there is no such thing. All of these situations aspire to an equilibrium and there is always some sort of balance. For instance, let’s compare a seed investment to an F round investment. If there are no aberrations, then in the F round the risk is lower and obviously you will earn less.
Investing in the Zisapel brothers’ RAD group of companies in the mid-1990’s was low risk. They took the initial risk of developing the products. The market back then was completely different than today, where it’s significantly easier to launch a startup. Back in those days, to start a company you needed at least a year and a half to two years of development, and they took that upon themselves. Risk was more limited at the time because the chances of becoming technologically obsolete so soon were very low. The chances of your product not finding a market were low because the computer networks industry was a small community of a few hundred people and the Zisapel brothers knew everyone. They knew all the distributors in every country so even the danger of going to market was low. But at this stage they were already asking a high price, their valuations were very high, which is precisely what shows that such an investment was relatively low risk. Very few of their companies failed – they were bona fide industrialists.
My first investment was in Silicom Ltd. At the time I didn’t know it, but I believed that investing with that level of professional, people who know what’s going on, wasn’t potentially committing suicide. The truth is that even before this investment I had started to buy shares on NASDAQ. If you don’t know how to buy technology shares, chances are you will not be such a great investor. When you invest, you have to understand all the stages of a company, from the stage where an entrepreneur sits here on your sofa and asks you how to incorporate a company, to a hostile takeover.
This is one of the things that’s unique about me. I am familiar with companies at every stage of the process, having served on the board of directors of nine public companies.
You have talked in the past about the “unbearable lightness of launching a startup.” Please elaborate.
The situation today troubles me because the unbearable lightness of launching a startup wastes endless resources. I’m not talking about money. If there are enough people who want to give out funds, that’s fine by me, but the real waste is that excellent people are sucked into startups that have no chance of success, and that’s troubling.
We did an exercise [at Tel Aviv University’s Recanati business school] meant to show how easy it is. I told the class that we could launch a startup right now, in the middle of class, in less than 3 minutes.
First I asked if there was anyone in the class from 8200 or Mamram, two elite IDF technology units. A few people raised their hands. I chose one and said: “You’re the CTO. I came up with the idea, so I’m the CEO.” That’s how it works today.
My idea was to create a website that lists all the dentists with blonde female dental technicians. There were a lot of women in the hall, so I apologized to them and said we’re starting with blondes, but later we’ll expand to other verticals, like brunettes and women with black hair.
A student jumped up and asked, “What’s the business model?”
“There are a lot,” I replied, “Take your pick.”
We all know that dentists are not inexpensive. We could approach dentists and get a percentage off each referral. Occasionally, the blonde technician will marry one of the patients we referred. Obviously, we will ask for a matchmaker’s fee and middleman’s fee. Finally, don’t dentists need material for fillings? We can sell them that, and if that’s not enough the fourth business model is to also sell hair dye, because not every blonde technician is a natural blonde.
The bottom line is I receive about 50 queries per month and half of them are more foolish than what I just described.
Where do startups get stuck? They get stuck when trying to move from 80 users who are friends and family, to 8 million. There is no one in the world who can tell you an idea won’t work. There is no conclusive proof that something won’t work. You can say that the idea is idiotic, but if someone gave a serious pitch, I’d think that maybe he’s right. Who knows?
Gilon’s main beef is with engineers who don’t choose their career based on personal fit, but chase the dream. Because in the world of the Internet, it’s easy to launch a startup without fully understanding the implications.
My in-law Moshe Yanai (a serial entrepreneur who sold XIV and Diligent to IBM for hundreds of millions of dollars) is the world champion of storage and the architect of EMC’s first product line. He is currently building a new company called INFINIDAT. He always tells me how hard it is to find a good engineer in Israel, because all of them are bogged down in app startups. This is a real problem with resources. At the same time, you can’t prevent it in a free market.
Today’s bubble is different. The bubble of 1999 was horizontal. You’d say the words “baby food” and an investor would reply, “What an amazing vision, here’s $20 million.” Today, the bubble is vertical. There are code words like cyber, crowd sourcing, cloud, collaboration. If you include one of these in the company’s name it’s already worth $10 million. If you use two of these words, here’s $15 million.
The state of startups today is not particularly exciting. In the area of pure technology, where we led the world in the 1990s, computer networks, chips, the world has taken a kind of break. Communications infrastructure are at saturation point and there aren’t a lot of IPOS or exits of pure technology companies out there. This of course hurts us.
There are a few companies like Annapurna Labs (which was sold to Amazon for $370 million), SolarEdge (which went public and is worth more than $1 billion) and INFINIDAT (that has raised more than $1 billion) that stand out, but they’re too few. In the consumer market, we’re weak. Waze’s phenomenal success is a unique phenomenon in recent years, and that’s unfortunate when you compare us to the great success stories in the U.S.
Wait, what about companies like Fiverr and Viber?
Viber I can’t explain. I don’t even think it’s really a consumer company. It’s more of a communications company. But if you think six successes in 2,500 years is good, then good for you. In terms of Fiverr, I really like it, and I like the founders as well, but I think the jury is still out on the scope of its success. Fiverr isn’t [a unicorn, or $1 billion startup] yet but I hope they get there.
What would you say about a company like Mobli? There are claims that it is very close to that figure.
I am not familiar with the company. But no doubt its founder is very good at raising funding. He always surprises and always succeeds in jumping up another level with amazing funding rounds with larger investors. But at the end of the day, he will be tested by his returns.
So is there something Israelis are good at?
We stand out in support for Internet infrastructure, targeted digital marketing, support for e-commerce sites, payment, search: companies like Payoneer, Taboola, Outbrain, Conduit.
How do you explain the differences in valuations that exist today between Israel and the Valley? When the valuation a startup receives in the Valley is two to three times that in Israel, why raise funding in Israel at all?
I don’t know how to explain it. You have to remember that it’s a free market. But it’s not a perfect market. That means that you might know how to order a flight to San Francisco, and how to rent a car and get to Palo Alto, but what next? How do you raise money?
Here in Israel you open the list, read off several names and you have a friend who knows a friend. It’s not easy at all to raise funds in the U.S.
They say it’s much easier to build unicorns in the United States. The market is there, the money is there, everything is there.
There’s a certain type of company that you can’t build from Petach Tikvah or from Tel Aviv’s Rothschild Blvd., even if the entrepreneurs and investors are geniuses. Outbrain, Taboola, Interlude, Innovid, Tracx, Yotpo – all these companies need to partner with companies in America. You can build companies like Annapurna or INFINDAT here, but they work with at least one foot in the United States.
What about a company like Waze?
As I already mentioned, I am amazed by Waze’s success. To sell a company for $1 billion is no easy feat. I have not yet had the opportunity to sell a company for a billion dollars, but I feel discomfort with the notion that one of my companies might not have a revenue model because then you are dependent on the graces of one or two or three gentlemen who either buy your company or don’t buy it.
In Waze’s case, they got bought but if they hadn’t been bought, what then? Even the best investors would have said after 8 years that maybe the time has come to write off the investment. I personally am still old school. Perhaps because of my age, I don’t feel comfortable with companies that lack a revenue model. There is no basis for these things.
Now let’s turn to one of the questions that the entrepreneurial world has with regard to you: Tell us what your investment portfolio has looked like in recent years.
In the last three years I’ve made about 50 investments, even though this year there was a slight dip in the number of investments: only 12 new investments and 19 follow-ons. There were just fewer things that I found interesting. Soon some of the unicorns are expected to be released, and that could lead to an increase in investments, I imagine.
At what stages do you invest in companies?
I invest at every stage, from pre-seed to hostile takeover. Outbrain is a good example. I didn’t invest in them in the beginning because I wasn’t familiar with the company. I made my first investment in the company based on a valuation of $27 million, which is okay, but I also added an investment when they were worth $450 million.
I repeat what I said earlier: This is a game of venture-risk. I am not at all sure which was the better investment in Outbrain in terms of the returns, not the amount I invested at this or that valuation. Thinking about my 6 grandchildren, it seems the later investment was better since it was less risky, but the investment multiplier is lower.
You invested in medical in the end even though it’s not your industry.
I know how to pick entrepreneurs, it doesn’t matter whether they studied medicine or engineering. I am good at it and I say that without too much humility. I am happy to compete against the best when it comes to identifying good entrepreneurs. In addition, success in the medical field gives you a lot of satisfaction, and even failure ultimately advances the cause of medicine because in many cases the knowledge is cumulative.
Many American funds invest in the community, in improving relations with entrepreneurs, etc. Do you think there is a place for this approach with Israeli funds?
You can look at this in many different ways. In my opinion, Sequoia is still the number one VC fund in the world. You can achieve decent results even without appearing at conferences about “why I failed.” At the end of the day it’s a matter of a person’s character, it’s not a business tactic. But if those funds think it will bring them greater deal flow, that’s fine with me.
What is the question most entrepreneurs don’t know how to answer when they get to you? We’d like to know some of the questions you ask so entrepreneurs can better prepare for meetings with you specifically and investors in general.
From my perspective I want to stress something and that’s that entrepreneurs naturally tend, in my opinion, to pay attention to developing a product and going to market and not to what is known as the financing roadmap, which is to answer a series of questions about the financial path an entrepreneur will have to take. Let me be specific: Let’s say you just raised X million dollars. Where will this take you? How much will you raise in the next round? What metrics will you use to measure the company’s performance when you are ready to raise the next round? Which investor do you want to raise funds from, from Sequoia or an Israeli micro-investor, and what valuation will you be at?
They also need to learn from people with experience that if they come with too high a valuation, then what will happen is the good investors will turn them down without explicitly saying so and they will close the round with lower quality investors. Later, when it is time for the next round, they won’t be able to raise funds without a down round or flat round which makes everything within the company, between entrepreneurs and investors and between entrepreneurs and themselves, much more stressful.
Another question I ask is let’s say you’ve raised $5 million at a $10 million valuation: That is $15 million post and tomorrow someone comes along and offers you $60 million for the whole company. Do you take it or not?
These are questions meant to assess whether a person understands the risk-venture axis and where he stands on it precisely.
Someone who raises $15 million post and sells the company for $30 million, I want nothing to do with him because he will run away at the first opportunity.
But someone who waves his hand and says, “Of course not, it will be worth billions,” that’s also something I don’t want anything to do with, because either he’s messed up in the head, or he is trying to guess what I want to hear, which is the worst. I am not looking for this or that multiplier. It’s more intuitive than that. Usually they are both sitting there and I don’t remove either from the room. Rather, I just say to the entrepreneur, assume your friend wasn’t here, because of course there is an internal dynamic between them.
Entrepreneurs have to at least try to understand the path of future funding rounds. The really smart entrepreneurs get there in the end. Of the 50-80 queries I get every month, I choose maybe 5 or 6 entrepreneurs and if one of them tells me he is coming to raise such and such an amount in the first round and then at double the valuation in the second round, then I ask him why did you come to me? What I’m interested in is not doubling my money in two rounds after I took the initial risk. In my private investments I never negotiated over a valuation, because there is no objective measure and the entrepreneur has a deep emotional investment in the number. The important thing is to understand the path of future fundraising.
It all stays in the family
Due to the rarity of interviews that Gilon gives the Israeli and foreign press, very few people know the story of his journey from Poland to Israel. Therefore, we decided to ask him, as he asks the entrepreneurs he meets, a bit about his family, his friends and his past.
“In Israel, my father was a bureaucrat, but in Poland he was a senior director of the Yiddish theater. Once a month he received a pair of nylon stockings from his sister in New York and he would sell them on the black market and this would double his salary. In a good winter, when he was feeling rich, he would buy a single orange and feed it to the child.
“We made aliyah to Israel, [then] we lived in Holon. I took science and math elective courses in school, and from there I went on to the Technion, and entered the air force following my degree. I met my wife through a set-up. My mother, who was a nurse, gave me the phone number of one of her patients and she nagged me about it for 8 months until I finally called her. That’s how we met. It turns out that listening to your mother is sometimes a good idea,” he noted.
Gilon’s family never strayed far from the world of entrepreneurship and technology, “Although my wife, Yael, is not in the technology field (she’s a lawyer), the conversations in our home were always about technology. It’s only natural that our children went into the fields of innovation and entrepreneurship, primarily life sciences and education, because they wanted to contribute to society.”
He speaks about his children with pride. “Michal, the eldest, studied computer science and law and got her MBA at MIT. She joined the media lab at IDC-Herzliya. Together with Dr. Oren Zuckerman, she established the innovation and entrepreneurship track in their Global MBA program. Today she and her husband, Itai Yanai, are in Boston for his sabbatical year. She is working at the center for innovation and entrepreneurship at MIT. Itai, a professor at the Technion, is making great strides in his study of the human genome and he is on sabbatical at the Broad Institute and at Harvard. Itai and Michal have three children.
“Amit, my son, has two degrees in marketing communications and worked for 10 years in senior positions in successful startups and for the past two years he has been investing in Internet companies while also being involved and helping the companies.
His wife, Neta, an organizational psychologist by training, is the COO of Playtika. Neta and Amit also have three children.
“Tami, the youngest daughter, teamed up with Dr. Eyal Orion to launch a medical startup, a device used to ensure continuous blood flow during dialysis. The device of Tami’s company, where she is the CEO, is already in initial clinical trials that have been successful. Tami’s partner, Or, is a TV and film editor and has so far produced several successful TV series.
Speaking of multiple generations, you’ve been an investor for many years and you have seen many types of entrepreneurs. Do you see any difference between generation X entrepreneurs and generation Y entrepreneurs?
The unicorns, the ones I mentioned to you, are very special, each in their own way. Those founders are not influenced by age, season, era or the French revolution. Because the ones who really stand out, like Shlomo Kramer (whom I don’t know) and Avigdor Willenz, Yaron Galai – they’re special. And I think that has nothing to do with their age or generation. But they are the top of the top.
If we look at the second tier of today’s entrepreneurs, I can say that they are better. They are more aware of where they’re going. They’re more familiar with the terminology in the field, how things are done, what to do. They know the rules of the game, but the game is different. 15-20 years ago, it was enough for the entrepreneur to nab a few big contracts from Cisco or Lucent to get his company going. Today the market is a lot tougher because there already is a Cisco, Amazon, eBay and Facebook and it’s very hard to come up with something new. If you come up with something new, it’s a niche with a small market.
In my opinion, the quality of investors has also risen for two reasons. The first is that investors have learned from the past, and the second is natural selection: The bad ones were ejected. Even if it takes 10-15 years to be punished in this field, in the end you get punished.
Tell us about the companies you feel a huge sense of regret that you didn’t invest in?
Two guys who were in army intelligence launched Passave. I’m a huge fan of the 8100 intelligence unit. I filed IPOs and sold a lot of companies started by people from that unit.
Victor Vaisleib and Ariel Maislos approached me. I really wanted to invest because this is my field, but Victor struck me as too nice. He wasn’t mean-spirited enough to be a good CEO, so I didn’t invest. It was a mistake.
Overall, I’ve had 66 write offs and four mistakes like that one, so there’s no question I am number one in Israel concerning the number of mistakes. (He laughs).
(After the interview took place, Gilon told us that he ended up investing in Vaisleib’s new company.)
One last question on a positive note: who in your view is the best Israeli investor?
He’s not in Israel, but he’s a Hebrew speaker. Oren Zeev is the best Israeli investor.