Ehud Levy first met representatives of Waze in 2008. “We were the first to give them a term sheet,” recalls Levy, a managing partner at Vertex Venture Capital. That turned out to be a wise decision. Investors who injected between $5 million and $6 million dollars into the mobile navigation startup early on got about $130 million in cash last week when Waze was bought by Google for over a billion dollars.
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Two Israeli funds, Vertex and Magma, were among the first to identify the potential of Waze and demonstrated skill in leading the company to a giant exit. The phenomenal success of Waze may be a shot in the arm to the Israeli venture capital industry, which has been characterized in recent years by a dwindling injection of capital.
Local institutional investors are well aware of the venture capital option, but they have never considered it a significant channel. According to the Israel Securities Authority, local institutional investors have been directing less than 0.3% of their assets to venture capital investments. The Phoenix, Clal Bituah, Harel, Discount Bank and Hebrew University all invested relatively insignificant sums of the money they manage, into Vertex and Magma and have now received a fine return.
“The large exposure this deal has created has caused a lot of large organizations to realize that good things are happening in Israel," says Levy. "They have seen how strategic investors are earning very well here and I am certain the Waze deal will help the whole industry, and not only Vertex Venture.
“If more financial investors from abroad take an interest in the local funds, and more local institutional investors put money into them, it will be easier for the local startups to raise capital. In addition, it will be easier for them to make strategic agreements with giant corporations.”
What are the impediments that are stopping Israeli institutional investors from putting money into local venture capital funds? “It’s a matter of prevailing mood. The Israeli institutional investors prefer to put money into tradable assets. They are in no rush to take risks," says Levy. "But beyond that, there is no doubt that the Israeli venture capital industry didn’t provide the goods during the past 10 years. The yields the funds produced did not come up to expectations.”
Could it be that this is short-range thinking on your part?
“It isn’t necessarily short-range thinking but rather risk-aversion. It’s easier to assess the value of an asset in which the inherent potential losses or gains are limited. It is harder to deal with an investment in which the return could be large – but so could the loss. However, I do think the perception is changing. I hope the Waze deal will prompt more investors to put money into venture capital."
Best time to invest
Levy notes that in the world of venture capital there are cycles that fluctuate between an excess of money and a shortage of money. "When there is too much money, like there was during and after the dot-com bubble, everyone loses. No one continues to put money into the field and then a shortage of capital develops. We are now in a low period, which is the best time to invest.”
He notes that Vertex is in the process of forming a new venture fund. “We began raising the money a few months ago. I assume that within a few months we will reach our first closing.” The Finance Ministry is also aware of the need to increase the amount of local capital that the Israeli institutional investors are putting into venture capital funds. The "Relative Advantage" program, initiated in 2010 by industry veteran Haim Shani during his tenure as Finance Ministry director general, provides a safety net for institutional investors by protecting up to 25% of their investment. The target of the program was to provide investments totaling NIS 800 million, of which the institutional investors undertook to invest NIS 450 million. By the time the program wound up at the end of 2012, the institutional investors fell short, having channeled only NIS 360 million into the Israeli funds.
While Israeli venture capital types are buoyed by the Waze deal, the institutional investors are not rushing to change their strategies.
“One deal doesn’t change an investment policy," says a senior figure in a local institutional investment organization that puts money into Israeli venture capital funds.
"When you look at the past 10 to 15 years, the venture capital funds haven’t given the yields expected of them. In many cases they did not bring in positive yields and in general they gave a low yield as compared to the global benchmark.”
So what were Levy’s considerations when he decided to invest in Waze way before it had a product?
“I’ve been in the mobile world for many years. I realized that location-based services (LBS) are about to take off and I was looking for investments in the area,” he explains. “The Waze people came with a vision for the creation of a significant asset. In addition to a community of users, they built maps. There are few giant corporations that have such a valuable asset and Waze showed an inexpensive way of creating such an asset," says Levy. "I realized that its product addresses a huge and growing market, that it builds strategic assets worth a lot of money to large Internet companies and that its service is usable on an everyday basis. Beyond that, the team of developers made an excellent impression on me," he says with the sweet taste of hindsight.