Can Israel Achieve WhatsApp-scale Exits?

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Two of the largest exits in Israel have involved the sale of companies that developed mobile phone applications. Waze, the traffic navigation app company, was sold to Google for about a billion dollars, while Israeli-run Viber, which provides cellular phone-based voice and messaging services and has a development center here, was sold to a Japanese company for about $900 million.

Both deals were big, but they weren't even close to the $19 billion sale of WhatsApp to Facebook. That deal begs the question: could an Israeli company fetch a similar sum?

“Entrepreneurs in Israel take the same path that the WhatsApp founders took. Being a foreign entrepreneur in the United States and managing there despite the difficulties is no different from the stories of Israeli entrepreneurs,” said Gili Raanan, an Israel-based partner at Sequoia Capital, the American venture capital firm that was the first investor in WhatsApp. “Sometimes it ends in a $19 billion exit, though usually less.”

“If we look at the investment structure at WhatsApp, first of all, there needs to be a genuine partnership with the entrepreneurs,” Raanan continued. “Sequoia invested at such an early stage that it was impossible to know if it was a company worth $19 billion or nothing. It knew that they were amazing entrepreneurs and that they wanted to be [the fund’s] partners. That’s the basis of our work.”

Sequoia had invested in other companies that were ultimately sold to Facebook, including the Israeli firms Snaptu and Onavo. “The nature of the investment in WhatsApp was very similar to how we invest in Israel. We go in at an early stage and provide the first money the company gets,” Raanan explained. “Even if it’s an application with a long way ahead before it becomes a popular service, we help it grow and become a mainstream service. Ultimately we have excellent contacts with the purchasers, in this case Facebook and in other cases Google or Cisco, for example, to take full advantage of the opportunity.”

Room in the market?

The recent success of mobile application companies in Israel and abroad could spark a wave of new startups, but is there room for them?

“In my opinion, it’s not too late to build a company in the mobile sector,” Raanan replied, saying that while there is still room for innovation in the field, startup entrepreneurs need to create “the best service in the world for something.”

Izhar Shay, an Israel-based partner at the American firm Canaan Partners, which invests in Israel, warns that the prospects for new applications have declined, because there is already a slew of competition. “Only a dozen of them a year are successful and attain significant value. So there will be more applications and fewer successes,” he said.

Asked whether venture capital funds have the capacity to predict which startups will be successful, Shay admits there is no pat formula. One could not have predicted, he said, that Candy Crush, the Facebook- and cellular phone-based game, or Viber or WhatsApp would have achieved what they did.

And did the sale of Viber affect the purchase price for WhatsApp a short time later?

Said Eden Shochat, a partner in the Tel-Aviv-based Aleph Fund: “The purchase of Viber, which really eliminated a competitor from the market, was supposed to lower the value of WhatsApp. In practice, what happened, if anything at all, was that it boosted the price of WhatsApp because Viber was no longer a relevant target. WhatsApp could tell Facebook, ‘If you buy us, you’ll control the entire market.’”

WhatsApp and Facebook (illustration)Credit: Reuters
Izhar ShayCredit: Tomer Appelbaum
Gili Raanan.Credit: David Bachar

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