The Google-Waze aftermath: The good, the bad and the ugly

2
644
gwaze
Photo: Screenshot from Google’s blog

However you look at the Waze-Google deal, it seems like a Win/Win for everyone involved (except for maybe the users).  But while everyone is celebrating the largest mobile acquisition in history, and all the millions of dollars that are now filling the pockets of investors, entrepreneurs, employees and of course, the Israeli economy – it’s also important to understand the implications of the $1.1B dollar deal on the startup ecosystem, which includes both entrepreneurs and investors in Israel and abroad.

The good

At the beginning of their journey, the founding team of Waze would go from meeting to meeting, pitching potential investors and venture capital firms, and one after the other, the majority (except for Vertex and Magma of course) told them they were not interested. Even investors in the company up until last year thought it would be impossible to build a billion dollar consumer company in Israel. Even CEO, Noam Bardin, at one point moved his office to the United States. Yesterday proved just how wrong they were.

As entrepreneurs, the next time you meet an investor, remember now that there’s someone who did it. If anyone ever tells you that you can’t build a billion dollar consumer company in Israel because Israel doesn’t know marketing, you can wave this huge exit in front of them, an exit that’s a bit younger than 15 years old and that didn’t have Yossi Vardi to save the day.

The bad

At this point, people would say, ‘Fine, but I’m not interested in who said ‘No’ to Waze, I’m interested in who said ‘Yes’ to them. All those investors who said ‘No’ are now watching those who did invest, and are eating their hearts out.’

As a good friend told me yesterday, the Waze – Google deal will become a kind of a Yom Kippur for Israeli funds and investors. This deal is going to stimulate a country wide introspection by the Israeli investment community, where they will seriously revisit their basic assumptions about what makes for a good investment, and what is indeed possible, when previously thought not to be. Eyal Gura, a serial entrepreneur and now a partner in the Israeli venture capital fund Pitango, wrote yesterday on Twitter that one of the first questions investors would ask when it came to assessing the Israeli consumer startup community was, ‘Give me one meaningful Israeli exit for Consumer, besides for ICQ?’, or ‘It’s very nice to have you beta users in Israel, but it’s not a market where you can really examine consumer behavior.’

Starting today, and at least for the near future, it will be much harder for investors to flat out say ‘No’, or ‘You can’t.’

And why is that bad, you ask? For the very simple reason that the investor community’s basic assumptions were not ‘wrong’. But they, unfortunately, caused the investors to go into hibernation in recent years, preventing them from investing in companies that had all the attributes of success, and could have succeeded, even given these basic assumptions.

So when you read the positive commentary of the senior members of the Israeli venture capital community, and when you hear that the Israeli media has already crowned this to be ‘Israel’s high-tech deal of the decade ‘, you might need to take a moment and catch your bearings after you realize the industry just made a collective 180.

The ugly

The true impact of the deal will have a little bit of good and bad mixed together. Luckily, Waze is not a photo sharing app, so it’s unlikely that hordes of startups will be running to try and copy their application right away. However, similar to the Facebook – Instagram deal, Waze – Google has no clear cut financial benefit in real terms, and could cause the development masses to rush on off again, seeking to develop startups without a well thought out business model, thinking that revenue in the form of millions of users will ensure revenue of the dollars and cents kind, later on down the road.

It’s important to remember that in the case of Waze, they had a monetization model from day one, only it was ‘invisible’ and was not meant to bring the company revenue right away. Real-time mapping took a company like Apple, close to a billion dollars an over a year to develop. Waze has free real-time mapping, created by its users. They basically saved themselves $1B dollars plus the time-to-market. This was a stroke of genius by Waze, so it’s a bit different from the Instagram deal, where the world is still a bit unsure as to how they bring any monetization benefit to Facebook.

On the other hand, all those investors – who are still trying to understand how a successful Israeli Consumer company slipped through their fingers and sold for over a billion dollars, and are now afraid of missing out on the next big opportunity – will return to the market and throw a whole lot of money at projects that do not really deserve it.

The past two years we have seen the same phenomenon here in Israel, as has been taking place in the Valley, that of the Series A Crunch. The same phenomenon was not represented so much in the decline of first round institutional investment (Round A), but a significant number of rash investments could be seen in Seed and Pre-Seed stages, a situation that saw many companies open up shop, only to get stuck when it came time to raise their next round of funding.

After two years of these early stage wastes, we are now seeing the beginning of a ‘relaxation’ process amongst Seed investors, and talented entrepreneurs are feeling the pinch. Whether it’s from spending enough to lose enough for them to begin to understand, or if funds are deciding to go back to doing what they know how to do right, the amount of money flowing to early stage investments in general, and Consumer style investments in particular, have begun to fall and return to normal levels.

Leaving aside the impact that the Waze-Google deal will have on established investors, there is also the significant influence it will have on ‘new’ investors who will be tempted to get into the game after this exit. Unlike the experienced investors, these individuals will have no problem throwing money at undeserving companies in search of the next Waze, inflating the early stage startup market once again – and so goes the cyclical evolution of the Israeli startup eco-system.

 

2 COMMENTS

  1. Thoughtful analysis. Appreciate looking beyond the smoke and flames Yaniv!
    I wonder if the Israeli startup eco-system can now really start balancing b2b and b2c investments, and become the east coast meet west coast it can be.

LEAVE A REPLY

Please enter your comment!
Please enter your name here