David Blumberg, one of the most important venture capitalists in the Bay Area, understands Israeli startups. Before founding Blumberg Capital and managing international investments for firms such as the Bronfman Family Office, he launched business development for Check Point as one of its top four early executives. From this experience, a connection to Israel, and an early insight into the power of the startup nation, Blumberg Capital has invested in a number of Israeli startups, including recent financing for rising stars such as Fundbox, FeeX, Yotpo, and Fortscale. These investments were made under the careful eye of Alon Lifshitz and his professional team.
Blumberg Capital, started in 1991 and based in San Francisco, focuses on early stage startups in sectors such as financial technology, cyber security, IT, SaaS (Software-as-a-Service), and enterprise software. They have raised about $500 million and six of their portfolio companies have reached unicorn (or $1 billion) status, with two of their current portfolio businesses enjoying this title: Nutanix and Hootsuite.
However, neither of these companies is Israeli. And not many big companies in their portfolio are either. When we asked him if he thought that startups outside of Silicon Valley were undervalued, this is what he had to say to us, among other very sage advice for entrepreneurs pitching VC firms. Below is an edited transcript of our interview.
Moran Bar: Should Silicon Valley startups still be valued at higher prices in comparison to similar companies around the world?
David Blumberg: I think it’s pretty clear to everybody in the world that Silicon Valley or at least the United States has something very special going on in terms of innovation and startups. For most startups, that is the most amazing place in the world. From our point of view, what we can see and we’ve traveled a lot and we’ve met a lot of entrepreneurs, the second place closest to Silicon Valley in terms of its style, ethos, dynamism, its productivity of innovation is Israel. And so it’s natural for us to be here.
I want to challenge the first thing. I think that for each company that you have in Silicon Valley, you have a cheaper company in terms of valuation in other places around the world.
Are you positing that the world is pretty much evenly distributed in terms of good companies but they’re just more expensive because they’re better known? I would challenge it. I don’t think it’s true.
I would say that there are bright engineers everywhere. There are very talented people everywhere. But the ecosystems are not the same. The ecosystems for example in certain parts of Europe are just not as conducive to entrepreneurship as Silicon Valley is. Silicon Valley is more conducive than the rest of the United States. But that’s changing.
We’ve been doing a lot of deals recently outside of Silicon Valley. We have investments in Seattle, in Salt Lake City, in Austin, Texas, in LA, in other places sometimes because it’s lower cost, sometimes it’s less competitive for finding engineers, lower tax rate, many different reasons. But there is something about Silicon Valley in particular, another explanation about why we do so well as a U.S.-based venture firm investing in Israel. Silicon Valley and New York are two ecosystems that are crucial for most IT related companies. Yes there’s a whole ecosystem in China and maybe India and Japan, but generally the Western world and the Silicon Valley, New York nexus is crucial. And Israeli companies know that from birth.
I think there are smart engineers everywhere. But there’s more business managerial talent that’s had experience with fast growing companies in Silicon Valley than anywhere else. So the concentration of folks that can be VPs in a division of a fast-growing company and help you scale, they are more concentrated there.
Number two, is the funding is there. The VCs are there. If VCs are not there, with all do respect to Geektime and TechCrunch, those guys are there. It’s not because of the journalists. The journalists follow the money and entrepreneurs.
What advice would you give entrepreneurs preparing to pitch venture capitalists for funding?
I say there’s a 6T approach.
1. Start with with the “theme.” Tell us the problem you’re solving. Shimon Peres says the Jewish people, and Israelis in general, are the purveyors of dissatisfaction. We’re dissatisfied people — we want to improve things.
We’d say in it a positive way. We have a vision of Tikun Olam, to fix the world, improve the world, leave it a little better a place than you found it, is a nice way of saying it. We’re dissatisfied with things that aren’t perfect. We want to make things better. So entrepreneurs show us why this is a big problem and how they’re going to solve it.
Uri Levine – who we have invested in three times with FeeX, Zeek, and FairFly – they are all in services to the consumers. He says, the most important thing is finding the right problem. It is harder than finding the solution.
First thing you show us, what is that hard problem? Why is it a big problem and how do you solve it? That’s the “theme.”
2. Next is the “team.” Who is going to do it? Why are you the right folks that can do it? What’s your technological prowess, what’s your experience, what’s your persistence factor that stick to it-iveness?
The Israeli military training in elite intelligence units delivers unparalleled, outstanding training. In essence, it combines some of the best engineering and MBA schools in the U.S. because it comes at an early age combined with a sense of deep responsibility, seriousness, bonding, budget, timelines, responsibility and real output that is delivered.
I think that the training that you get in the military here is absolutely fantastic for training entrepreneurs, especially in the technology field.
3. Third is the “terrain,” and that’s the word that starts with ‘t’ but it means market. Show us the landscape, show us what’s going on in the trends in the industry, why you’re going to succeed vs. the competition, etc.
4. The fourth one is the “technology”– how does it work?
5. Then “timing.” How do you go to market? Is it direct sales or channel sales or through the web?
6. And then finally “terms.” How much money do you need and what other things are important to you in a relationship between an investor and an entrepreneur?
Finally, do you think we’re experiencing a bubble?
My area is early stage companies. We’re just not suffering from the same kind of thing. This bubble is concentrated in the later stage and it is nothing like the one that happened in 1999-2000. But this bubble is much less problematic. The NASDAQ reached a multiple of 175 in March 2000. Now we’re at 22. So it’s not comparable. There was more than $100 billion in venture capital deployed in 2000 whereas last year there was $58.8 billion in the U.S.
Some prices are inflated, yes. Some people who invested at a later stage are going to lose money because prices will come down. Am I worried about the whole industry going into a giant recession? No. I don’t think so. And here’s why.
In the 2000 recession, that was very much focused on the tech industry and it really did crash. The 2008 recession was really focused financial services and on real estate. Because of the mortgage crisis, the housing and furniture and those related markets really suffered.
This recession will probably be more generalized or related to something like China or geopolitical instability or interest rate problems of that nature. So I don’t see it here necessarily in the technology realm.
And the other thing is that technology sells in a very different way than commodities. Technology is cheaper and faster and better than what it’s outcompeting. Commodities are all the same. So technology businesses tend to grow through recessions. So I’m not as worried about it.
I don’t think it’s easy to raise a fund during a recession. But for venture capital funds, we think in five- to seven-year time frames and as long as we can survive through those, we are generally okay as a fund.
So I’m optimistic about the future of Silicon Valley, I’m optimistic about the future of Israel, and I’m optimistic about the connection between them growing stronger and I see some interesting trends. One is the interesting ability of Israel to deal more effectively in certain ways with interesting other great powers like China and Russia than the U.S. because Israel has more degrees of freedom. And I see all the world coming to Israel for cyber security.
Laura Rosbrow-Telem contributed editing to this article.