Modi Rosen, who is co-founder and managing partner at Magma Venture Partners in Tel Aviv, Israel sat down with Venturing Capitalist to discuss VC, startups and more. As one of the founding members of Israel’s VC industry, Modi has invested numerous successful companies including Waze (acquired by Google), and onavo (bought by Facebook).
He has worked as an adviser to companies such as Siemens and ECI and he sits on the boards of many companies such as Hola! Inc., TabTale, Appsflyer and many others. See his complete bio and how to contact him on Magma’s website.
Ilan Regenbaum: Once again, thank you for having me. I guess I’ll start off by asking about one of the bigger companies that you guys have seen success with, Waze. One of the big things about Waze was, apparently, they turned down offers from Apple and Facebook and they accepted an offer from Google.
Based on this, when a company gets an offer, how do they know that it is the right offer? I’m sure the first time any company says to you, “Oh yeah, we turned down Facebook,” as an investor your heart must skip a beat for a second.
Modi Rosen: I guess when you sell a company – when you decide to sell a company, or when you decide not to sell a company – it has to do with business realism. About what is the value – the current value and the potential value – of the underlying assets. It tends to do with the size of the market – the addressable market – your competitive position, the management, the aspirations of the management. And you have to put all these considerations together and melt it into a decision whether you want to sell or not. Over the years I’ve learned that if you have good business sense you can develop a pretty good sense of whether the offer that you are getting makes sense or if it doesn’t.
Ilan: While we’re on the topic of Waze, one thing that I heard that caused them to accept the offer with Google, was that Google allowed them to keep their main operations here [in Israel]. As of late there has been some discussion about the “Exit Nation.” Israel not being so much the “Start-up Nation” anymore, but seeing a lot more companies leaving Israel, through exits, acqui-hires, and the like. We saw LynxImaging recently that exited for almost $25m. While that was a great exit, it could very well have been an acqui-hire for Apple, and they will likely absorb the company and relocate it.
So what is your feeling towards companies selling out too early, not growing big enough [in Israel], and perhaps taking jobs away from Israel?
Modi: I’m not sure that selling a company means that you take jobs from Israel because many times companies buy and maintain the operations here and that’s actually how many multinationals got to Israel in the first place. It started with an M&A and then they liked it and they grew the operation and it became a very big center for them. So the issue of taking jobs is not clear. In most cases they leave the operations in Israel.
The other issue is selling too early. I think that happens. On the other hand there are also many cases where people sold too late. I don’t have the data and the statistics to decide which is more frequent. But it has to do with business realism – about what is the value or potential value in the underlying assets.
Ilan: You’re seeing a lot of start-ups that do come up with great ideas or that have great founders but their revenue model isn’t too obvious, at least at the beginning. As a VC and also as an entrepreneur, how should each side deal with that? Because even if the founder’s great, the idea is great, but they’re not going to make any money – unless they get bought out – how does each side [investor and startup] deal with that?
Modi: So it really depends very much on the domain. There are domains that you have to be able to tell very early how to make money and there are domains where you are able to delay that issue to a later stage. But in those cases where you should not deal early with making money or the revenue models you should look at other parameters that will give you a proximity to the intrinsic value of the product.
Ilan: Looking to something like Yo [for example]
Modi: Yeah, this is something that – to me – the intrinsic value is not completely clear and I’m not sure that I would invest in that if it came over. But it didn’t come so I didn’t have to think it through.
Ilan: And on the broader picture, what do you see as the next big sector/industry?
Modi: So for us, in the last two or three years, what has been very big is cloud – primarily public clouds. Cyber was very big. We touched on storage. Of course, mobile. User-generated content. We even did our first BitCoin-related investment. In general, I think the whole area of BitCoin is a disruptive domain that we create a lot of value but still there is a lot of risk and uncertainty in which direction.
Ilan: I saw you were investing in Argus Cyber Security… With IoT and connected/driverless cars – do you see one day Rothschild Blvd [in Tel Aviv] being full of a bunch of self-driving Teslas or [some sort of] next generation BetterPlace?
Modi: I don’t think the next generation of BetterPlace, but I think self-driven cars or autonomous cars are not very far away. I’ve read some predictions that it will happen before the end of the decade. And that’s only five years from now. I think it’s quite possible. I think that – knowing and understanding the technology – I think most of, if not all of, the enabling technologies are already available. It’s more now a matter of regulation and integrating it into the cars. If you look at the necessary enabling technologies, they are available. And I think it’s obviously going to be a huge revolution in our lifestyle.
Ilan: I agree and am looking forward to some Minority Report-esq driverless cars.
Modi: I think that the whole model of car ownership is going to change. It’s in the process already of changing. With Ubers and GetTaxi and the likes, it’s already in the process of changing.
Ilan: Israel has been mostly focused on companies here that are looking to expand to the US with most of the co-investment comes from the US. But, countries like China, Japan, and India looking towards Israel. Where do you see that trend going?
Modi: Obviously Asia is becoming much, much more important. That’s clear. Still, the US is the #1 market. It’s also the most advanced market. Capital-wise, also, it’s the most sophisticated market. So yeah, the US is driving the industry. But Asia is becoming [something] for them.
Ilan: Do you see any companies that are around right now that you think can be the next CheckPoint in Israel (ie. a large homegrown multinational)?
Modi: I think that we will see a substantially growing number of large companies. Definitely in valuation. We will see more and more companies that will pass the one billion dollar valuation. That is driven a lot by the fact that the size of the tech markets are so big – much bigger than ten years ago. The technology markets are so large, we will see many Israeli, billion-plus companies, in terms of valuation.
Ilan: With so many billion dollar valuations, do you think that they may be, in part, due to a bubble?
Modi: Generally speaking, I don’t think that we are in a bubble. I think valuations are driven by the size of the tech market – which are much larger. There is something that is going on with interest-rates that has to do with the macroeconomics of the world. The fact that interest-rates are so low drives up any asset class. But that doesn’t have to do with tech. In the tech sector itself, I don’t think that there is a bubble.
Ilan: To close off, is there any piece of advice or tips that you’ve gleaned throughout your life that help you make it through the day and make decisions and got you to where you are today?
Modi: Multiple things, obviously. I think, in order to succeed as an entrepreneur, you need a lot of persistence and a very long-term vision of what you are doing. And you need to dare. You have to dare. In Hebrew the word is l’ha’iz. In English, it’s that you have to do things that are to take the risk. And that’s obviously very tricky because those that fail, fail because they took too much risk. So it’s a balance. But without daring, you will not be successful.
Ilan: So I guess, it’s only fitting that, in Hebrew, venture capital is hon sikkun, ie. “danger-capital”.
But other than that, is there anything that you’d like to add about the industry as a whole, VC, crowd-funding?
Modi: I think in general, the tech industry, market research says, they operate the world and I think he’s right. And tech is eating the rest of the economy. So you better be in the part of the economy that is eating and not getting eaten. So you’ve got to play in the technology world today. Technology is everywhere. Computation power is so strong that it is changing every industry. So much [more] accessible, so much available, every industry is being changed with technology today. Not a single one is not. And within the tech world, I am very optimistic about the role of Israel. Because we have entrepreneurial spirit and I think Israeli companies will do very good in this environment.
Ilan: One more to follow up on that. What about the portion of the country that isn’t tech? How is that going to change? We won’t need as many people doing manual jobs. For example, with driverless cars we won’t need taxi drivers [and so forth].
Modi: Technology has always replaced humans and labor. It is not a new phenomenon. What’s new is to replace labor in a much faster pace. That means that people have to adapt. People have to be much more flexible. People have to be much quicker. Because, if you look fifty years ago, the environment was much more stable, everything was much slower. I just saw a piece of data that Eli Lilly, the great pharmaceutical company, took seventy years for Eli Lilly to get to one hundred million dollars in sales. Today, we have companies that get to those numbers in a matter of three, four years from inception. There are companies that get to a billion dollars in sales in a matter of four, five years. So we are living in a hyper-changing environment. Those who will be successful, are those who will change fast. Learn fast and change fast. And that has to do with every aspect of life. With your job, with everything. You have to be very flexible. It’s obviously very challenging and it will be very rewarding for those who will be able to adapt.
Ilan: Well, thank you so much.
Modi: My pleasure.