Israel Economy for Start Ups – Signs of Improvement

I attended an entrepreneur’s conference last week in Herzlya at the offices of Sun Microsystems. At the meeting we heard from one VC, Blumberg Capital, who specializes in seed round investments of internet companies.
The partner of the firm who spoke, Bruce Tarragin, said that they were closing a deal in Tel Aviv now, and had already closed another deal earlier this quarter.

The Capital Market Bulls Return
There had been several months, since last October, with virtually no dealflow that was actually leading to investment. Now, there seems to be a reawakening of the capital markets. The negative sentiment of the market has been replaced with a feeling that we have already reached bottom, and now there are good ideas out there that are worthy of investment.
Are VCs too pricey?
There was a separate thread to this meeting that perhaps internet startups had precluded the need for capital investment in today’s age. Now, with the relatively cheap servers and cloud computers available, coupled with veteran entrepreneurs who have weathered many storms, there are internet ideas that can be launched with virtually no capital.
Mr. Tarragin pondered if VCs would eventually have to change their model to enable smaller ventures to participate in their capital programs. Typically, a VC will offer capital to a start up along with a seat on the board and a regular routine of hand-holding. This interaction drains the resources of the VC and reduces their ability to seek out new deals. Therefore, the traditional VC model was to buy a chunk of a new company for an investment of at least 3-5 million dollars. Nowadays, an internet company can get off the ground with very little, and often can get to prototype/beta to market with self-funding of the founders. New startups often cannot justify an investment of such great magnitude, and VCs are having to find creative ways to pad the projected budget to make the investment look attractive and still show a ROI based on projections.

It’s All About Who You Know
Mr. Tarragin also mentioned that his firm sees many thousands of business plans being sent to them yearly. They usually meet with only a couple hundred in person. The best chance of getting a meeting with the VC and a chance to show off your idea is by having someone the VC knows and trusts submit your executive summary or refer you to them.
The deal Blumberg is closing on now was refered to them by the founders of Check Point, a company they invested in early, and one of the most successful Israel hi-tech stories.
He said that the business plans VCs are finding most interesting these days are the ones that have a revenue model based on actual sales, such as software licensing, SAAS, and not exclusively relying on banner ad-based sales. [ed. I suppose they would have passed on Facebook and Twitter…].