Startups, VenCap, & Chutzpah

BRIAN SANTO: I’m Brian Santo, EE Times editor-in-chief. You’re listening to EE Times On Air, and this is your Weekly Briefing for the week ending October 16th.

 

In this episode…

 

We interview Uri Adoni, who has been the CEO of MSN Israel, a partner in one of the most prominent venture capital funds in Israel, and is the author of the new book, “The Unstoppable Startup: Mastering Israel’s Secret Rules of Chutzpah.” We talk about why startups succeed or fail, why some countries are better at supporting startups than others, and (of course) what “chutzpah” actually means.

 

Industry has always been about specializing. Someone invents a motor, and the next thing you know you have different companies specializing in different kinds of motors. Some for cars, some for household appliances, some for passenger jets, still others for steppers and robotics… and so on.

 

It was probably no different after the invention of beer thousands of years ago, and it was certainly no different after the invention of the integrated circuit only a few decades ago.

 

What does seem different about industry in recent decades is the way that business functions are also being broken down into specialties. There are companies that handle just payroll, others that handle just human resources, many that provide IT support. One of the more interesting specialties that has developed is venture capital.

 

Once upon a time, an inventor might have gone to a banker to borrow money, or his cousin, or perhaps might have incorporated and tried to raise money in the stock market. But now there’s an entire industry of financiers dedicated to supporting high-tech startups and shepherding them to some next level – perhaps to independence through an initial public offering (an IPO) or perhaps a sale to a larger corporation.

 

The business of startups and venture capital can be arcane, and that’s why we were pleased to hear about a new book that provides some insight into the process. It’s called, “The Unstoppable Startup: Mastering Israel’s Secret Rules of Chutzpah.” That’s a title that promises a bit of enlightenment.

 

The author of the book is Uri Adoni. Adoni led a combat unit in the Israeli Defense Forces (the IDF), and you’ll hear why that’s significant later in our discussion. He was the CEO of MSN Israel from 2001 to 2006, and after that he joined Jerusalem Venture Partners, which is recognized globally for its successful track record, working mostly in a country – Israel – that has a notable track record for startup success. As of last year, Adoni’s been managing director at ManaTech, which describes itself as “a platform for urban revitalization and community building.” The operation is currently working in Miami.

 

I was also attracted by the subtitle of “The Unstoppable Startup”: Mastering Israel’s Secret Rules of Chutzpah because a) who doesn’t want to learn secret rules? and b) chutzpah is an interesting concept unto itself. It’s a quality Adoni says is integral to the success of Israeli startups. But we’ll get to that in a moment, too.

 

First, I wanted to get Adoni’s opinion of what makes a startup successful. I asked him for an example of a startup that he’d been involved with that succeeded, and also an example of one that failed.

 

URI ADONI: I think that, as a venture capitalist, definitely I think every venture capitalist has their own kind of successes and failures, and that’s part of the business. I think you can probably learn more from the failures than the successes, but from the successes you can get some insights as well.

 

I would say one example is a kind of a recent one, so it’s kind of relevant in a way. It’s a company called Aspective. What they did is, they developed this technology that enables us to understand what the text is saying. It’s an NLP, natural language processing technology, with artificial intelligence, machine learning. So all the buzzwords were there. But actually, the technology, not just buzzwords. And it was a very powerful technology, which the team and us, we weren’t sure what exactly what we should do with them. There were a few options.

 

Eventually we decided to focus on the reviews market, so to speak, or segment, because what you have today with reviews, is whether it’s reviews of products or hotels or any other review, games, you have thousands if not tens of thousands of reviews, and you can’t really follow what’s relevant for you. So you get the star, and you get three and a half, four stars, five… very, very primitive, I would say. But there’s a lot of interesting data that is relevant for you as a user to get out of these reviews.

 

We said, Okay, let’s think of this. They took millions and millions of reviews out of the internet, which are free. And they started analyzing them. And two things that are really interesting came up. One is that because you use the people reviews, you can actually have some kind of targeted review per feature. For example, let’s say you are looking for a vacuum cleaner for your pet’s hair. Nobody knows which is the best vacuum cleaner for pet hair, because nobody tested it I guess or whatever. But if you hear thousands of people say, “This is a great product for my pet’s hair,” you’ve got this insight that you wanted. And that could be on any feature, for any product, in a click of a button.

 

If you want a trolley to run on the beach, you don’t know what that is, but the crowd knows. And if you know how to kind of get all this data and all these reviews, you can actually search by feature, not necessarily just by the product.

 

So that was kind of a breakthrough in a way, and we started kind of analyzing hundreds of thousands of products.

 

By the way, one of the industries that is still kind of very review-dependant is the hotel industry and travel, but hotels specifically. And then you would see people that you didn’t imaging would exist, but a lot of people write reviews about the pillows in hotels. Apparently, it’s an important topic, because people sometimes choose their hotel by whether it’s a soft pillow or a hard pillow, or you can choose pillows, or whatever. But you cannot find that anywhere.

 

So anyway, we’ve done that. If you want a good hotel for an anniversary or whatever. You could actually get the reviews by topic, and it was really interesting to see the data that came out of there. And they started working and they had some nice proof of concept. I think the best proof of concept they did was, they did this AV testing. With their technology, without their technology, and the conversion rate with their technology was much higher. So it actually created real business to the e-commerce or the other sites.

 

And then probably a year ago, something like that, there were a few large American corporations that were interested. I cannot name all of them, but I can say that eventually it was sold to Walmart, because Walmart really appreciated the fact that you can actually choose the right product and get these insights from the crowd that you cannot get any other way.

 

So that was a nice success of a company. And by the way, it wasn’t a smooth ride. There were bumps on the way and there were challenges on the way. It was a rollercoaster like any startup. It sounds like a nice story, but funding wasn’t easy in the beginning. It was challenging even though it had a nice end to it. But it obviously wasn’t a smooth ride. I don’t think any startup is, by the way.

 

BRIAN SANTO: So perseverance is a good quality.

 

URI ADONI: Oh, it’s a must. It’s a must. And we can talk about that later, but I think it’s not just perseverance, it’s the passion you have for your product. This passion will make you survive this crazy rollercoaster. So definitely perseverance and passion are important.

 

A company that didn’t make is a company… again, on paper it was almost a safe bet. It was a company that was in an advertising space. What they did is, they offered to publishers to get the advertisers to their website. And have them bid (it was a few years back) on their banners or on their inventory. By bidding, it would increase the amount that they get for the banner or for the inventory of the site.

 

So the startup built this really smart machine, and it tested it on a few publishers. But then something interesting happened. It worked! The technology worked. So you could do the bid, you could actually increase… and they showed that they increased by, I don’t know, ten to 20 percent if I recall correctly, the prices.

 

BRIAN SANTO: That’s good!

 

URI ADONI: Yeah! You don’t do anything for that, you just place the inventory in their machine. And so what they found out is that the technology worked, but when it started to scale, they said, Okay, the technology works. The model works. The proposition is straightforward: Get our line of coding in your advertising kind of inventory, and you’ll get more money. You cannot get more straightforward than that.

 

But they found out that the scaling was a big issue, because where were all sorts of things. I would say two main things: One, a lot of the publishers were very skeptical. So they will allocate only a small portion of their inventory. So they will give them 10% on the inventory. That’s not large enough to scale and show that the proposition actually works. The other thing that they found out is that the large publishers are very, very protected with their inventory, and so they needed to go on the mid-long tail. And then the mid-long tail, you have to really… the cost of an acquisition of a new publisher — in terms of the time spent and the explanation and the tech support — the economics didn’t work.

 

So even though you had a really good proposition with a technology that works fine and it proved itself, the company couldn’t scale. And eventually it didn’t happen.

 

So I think that part of the lesson, so to speak, that even though… and I also write about it in the book about the MVP, the minimal viable product, that you want to go and check. That’s probably the first step. But it’s by no means an insurance for success, because the scaling is just as challenging as creating the product. So I think that startups should definitely… at least I took it as a very strong lesson… that even though something may work on a small scale, it doesn’t necessarily guarantee that it will work on a large scale.

 

BRIAN SANTO: So what that says to me (and I think this is a behavior everybody’s seen with venture capitalists, with vencap companies) is that you really need to spread your bets. It’s good to have a fairly wide portfolio, because you know some are going to win, some are going to lose. You can’t really predict necessarily which are going to be which, right?

 

URI ADONI: Yeah. The younger the company, the harder it is to know where it’s going or whether it will succeed or not. This is actually the strategy of any VC to build a portfolio of companies. Some will win, some will not.

 

As the fund progresses, you should be able to kind of mark the good companies, the B companies, and then the C companies, so to speak.

 

BRIAN SANTO: I think that leads us into the subject of your book, part of which is advice for startups and how to talk to VCs. Is that part of it?

 

URI ADONI: Yes. It’s definitely part of it. But it’s not just how to talk to VCs. It’s also part of your mindset. And when you have the right mindset, it goes through the meeting. So it’s not just… It’s part of that.

 

I’m not a big believer of putting on a show. It doesn’t work. Most venture capitalists can see through it. So it has to be kind of real and genuine. But I would say that usually what venture capitalists (at least me and my team) were looking for was basically three main things, but within these things there are a few subtopics.

 

So it’s about the team, it’s about the market, and it’s about the product.

 

Now, when you look at the team, obviously you want some kind of background that is relevant. You would like there to be some kind of diversification, so maybe one comes from a management, somebody’s coming from technology. You don’t want them to all be technology or all to be managers, etc. But this is kind of the obvious.

 

I think that what sometimes the entrepreneur is not aware of is that we are highly considering passion when we look at them. How do they pitch their startup? How truly passionate they are. And again, it’s something that’s very hard to put on an act. You can measure it, but you can feel it. It’s like American Idol. You don’t know why this person is good and the other one not, you just feel it.

 

Venture capitalists are not just about all Excel sheets and numbers. It’s a lot about having a musical ear to what’s happening in the room. So I think that passion is definitely an important thing.

 

The other thing we look at is the interaction between the team. So sometimes you see people of two or three, and then you see the CEO shuts everybody out and he or she takes over and says, I’ll lead it, and he or she gives all the answers, etc. If the CTO tries to say something, they would say, We don’t like that. So one of the things you want to see is chemistry between them. If you challenge them in the meeting, how do they react to that as a team? Not necessarily whether they got the answer right or not. So that’s another thing that we look at.

 

Another element that sometimes is underestimated is what I call sense of urgency. In some cases, you see entrepreneurs that are kind of relaxed or too relaxed. They’re, Oh, yeah, we have time. Yeah, that will take us another six months. And you don’t have that luxury. You need to run fast and accelerate and run even faster. Because whether you’re aware of it or not, somebody’s building a very, very similar product or proposition to what you’re building, and you need to beat them to the market. If there is already a market category, you need to make sure you come as fast as possible in order to challenge the category you want to challenge. Because somebody else will do it, if not you.

 

So you really need a sense of urgency. And again, it’s not something that you ask about. You feel it. You see their plan, you see their product roadmap, you see their budget, how fast they want to go to market. You see their go-to-market strategy. How fast do you want to go to channels or expand to the U.S. or other markets that they want to go to? So I think the sense of urgency is also something that we look for.

 

You mentioned chutzpah, and part of the book is about that. Chutzpah has a positive side and a negative side. So I would say we want to see the positive side of chutzpah that they have. And that is some kind of a mindset that they truly believe that they can challenge the status quo. That they can change the market that they’re operating in, or that they can create a new category that they want to open. But they really need to believe in it and have the chutzpah to say, “I can actually build it. And I know Google can do that or Microsoft or Apple. I can do it better than them.” And again, it has to be grounded. It’s not just a fantasy: “Yeah, I can build something better than that.” But in many cases, you can. Because you have come with the technology and with an algorithm or with some kind of a very smart solution that the big guys or the other players in the market wouldn’t come with. This is why where are so many exits. Because eventually they buy these technologies or these companies that didn’t manage to develop themselves.

 

Even though you have a lot of capital behind these large corporations, etc., the pace at which they move is much slower. They also have limitations because they are focused on their core business, and what you’re doing can be not necessarily core business but they still want it. So are several reasons why startups can actually build a product or proposition and challenge existing solutions. And this chutzpah is a mindset that, again, you want to see within the team and the founding team.

 

The second thing I mentioned is the market. It’s kind of straightforward, but I think whether it’s a growing market or declining market, whether it’s too cluttered, etc., I think the main thing about the market that’s interesting for venture capitalists is whether you have the potential to become a category leader. If there are too many startups already there, too many companies, well funded, the chance of you being number one if there are already five or six players that are competing is slim. So you may want to change you proposition, you want to maybe go to another vertical or use it in a different way.

 

Having said that, maybe it’s a new category and there’s like two or three players and you’re one of them, definitely by all means you should run fast and get the funding and try to conquer the scale.

 

The other case is where you can kind of invent the category, so to speak. You can say, I’m inventing something new. Given the example I gave earlier, they kind of invented the in-depth reviews market, so to speak. Nobody’s doing that, so you can actually take leadership on that. The potential should be there. Obviously not all the potential is being materialized and realized. Some don’t make it for all sorts of reasons. But you definitely want to have some kind of leadership potential.

 

The third element is the product itself. What is it in the product that can enable you to beat the market and challenge the existing solutions, whether it’s the technology, the algorithms, maybe it’s a completely new business model. So what is it behind it that makes it different and that kind of gives you an edge? It can be an edge in terms of price, it can be an edge in terms of time. So you’re ahead of the market in, whatever, 12 months. But you should have edge. If you’re a “me, too” to somebody that’s doing the same, it’s less attractive.

 

BRIAN SANTO: Another part of your book is looking at startup culture. You mentioned that Israel has a startup culture, and it’s been true. Israel has been phenomenal at forming and encouraging just a long string of very successful startups.

 

You mentioned six pillars. I could list them really quick.

 

URI ADONI: Sure.

 

BRIAN SANTO: You have mentioned availability of funding, having multi-nationals, government support, academic support, and an entrepreneurial culture. I believe that’s all of them.

 

URI ADONI: And talent.

 

BRIAN SANTO: Did I get them all?

 

URI ADONI: You missed one.

 

BRIAN SANTO: And talent.

 

URI ADONI: Very important one.

 

BRIAN SANTO: In your estimation, where are some of the areas where you see that? It might be a country, it might be a state. I don’t know.

 

URI ADONI: When you look at the pillars of ecosystems, it’s not enough to have the pillars. They should interact with themselves as well.

 

By the way, just to give a quick clarification, when I talk about talent, it’s not just about technological talent. It’s also about entrepreneurial talent. Because everybody thinks, Do they have good engineers? It’s not enough. You need to have good entrepreneurs.

 

When talking about funding, it’s mainly multi-stage funding. It’s not enough to have only seed stage, because then the companies wouldn’t have follow-on investment, etc. So you want to have some kind of a multi-stage funding ecosystem.

 

Regarding multi-nationals, again, it’s not just the presence of multi-nationals, it’s also the interactions with them. What do they need? They can co-invest with you, they can tell you where they are going in two, three, four years and what are the technologies that they would be looking for, etc.

 

Government support is important because you have all sort of risk that is associated with this business, and you want the government to somehow support whether it’s the investors, the multi-nationals to attract them through tax incentives or what have you. So the government definitely has an important role.

 

And the academia also shouldn’t be isolated. So some in academia have really good ideas, but they aren’t really I would say industry-friendly enough to turn these IPs into companies and into startups. So again, the academia should work very closely with investors, for example, so they can extract these IPs into startups and make companies out of them.

 

By the way, the largest exit that came out of Israel was a $15 billion exit of Mobileye, which was an IP created in the Hebrew University. So definitely you can create some significant companies out of that.

 

And then the culture is also important. The culture is how you treat risk, how you treat failure, whether you have, again, this mindset of chutzpah we talked about. All these things are important because there are some countries where you have, for example, people are very talented but if your first startup failed, you’re doomed for life.

 

If you look at the person as a failure, that’s the wrong thing. You should look at failure as an event. Yeah, the company didn’t make it. It’s not that the person is a failure now for good.

 

By the way, statistics show that people who, on their second startup, actually the chances of success are much higher because they’ve already gone through some of the schools.

 

BRIAN SANTO: Now you’re not encouraging anybody to fail first on purpose.

 

URI ADONI: No. You shouldn’t quit because of that. And definitely the surroundings, whether it’s the investors or the colleagues or the family. They shouldn’t doom you for that. You tried. A lot of the reason why startups fail, it’s not up the startup. It’s what happening in the market, what’s happening with competitors, what’s happening with the trends. You don’t have control over that. Treating failure in the right manner is very important.

 

Again, to have this idea that you can challenge the authority. You mentioned the culture of the startup, not an ecosystem. In Israel, it’s very common. We actually encourage that. It’s common to challenge everybody. The CEO doesn’t have all the answers. The Board doesn’t have all the answers. If you’re a good product guy or girl and you have a good idea or you think where the company’s going is not the right way, by all means you should step up and say something. And you’re encouraged to do that.

 

One of the companies we had at the time, we recruited an American CEO. It was a really interesting process because in the first two weeks, he called me after two weeks and said, “Listen…” We had an operation in Israel and in the U.S. He said, “Listen, I’m not sure I can actually do this work.” And I said, “Why?” And he said, “When I tell my American employees to do something, they go and do it. And when I tell my Israeli employees to do something, they start arguing with me and saying I’m wrong and I should do it differently.” He didn’t know how to address it. So I told him, “Let’s do that. Try to embrace that. Try to listen to what they’re saying. Once you make a decision, they will follow you. But before you make the decision, encourage this dynamic, encourage this create talk and let the people talk. Let them argue between themselves. Let them challenge you. That’s fine.” And then he was transformed. He really fell in love with that. Because after that he said, “What do you mean I’m right? Tell me why I’m wrong.” He kept asking them to challenge him because he really liked that. It was really a healthy process. Obviously you need to do it in the right way.

 

But that’s part of a good culture within a company. The management doesn’t necessarily have all the answers, and the managers don’t necessarily have all the good ideas. You should listen to the people, you should let them challenge you. Probably the best people to come up with what the market needs are the sales guys or women who are on the sales team. Because they know the market and they should tell you what the market is saying, and they would know better than in some cases the management or the Board. So it’s good to have this kind of open dynamic within a company.

 

BRIAN SANTO: It makes some intuitive sense. If you’re going to hire talent — whether it’s in marketing or engineering or management — use it!

 

URI ADONI: Exactly. That’s exactly it. And people within a startup, they feel it’s theirs. It’s very different than working for a large corporation where, yeah, you identify with the brand and the company and all that, but it’s not yours. If you’re a startup with 40 or 50 employees, it really feels that it’s your own company. Obviously you have equity in the company, but it comes from caring for the company. It’s not that they want to harm anybody, they really want it to succeed. And you should listen to them. They’re not always right, obviously. Nobody’s always right. But at least I think the culture should be one that you actually have the stage given and the microphone to everybody, not just the people who call the shots at the end of the day.

 

BRIAN SANTO: We’ve been talking for a while about all aspects of venture capitalism, about startups, about startup culture, success and failure. Is there any advice from your book or that you have that we haven’t asked about that you think would be important for our listeners? A bunch of engineers and entrepreneurs.

 

URI ADONI: There is one chapter about completing the mission. This is actually the root, I would say. It’s coming from the IDF, the Israel Defense Forces. One of the interesting things in the IDF is that when you imagine an army, you say, Okay, everybody has to follow orders or whatever. That’s an army. So you need to follow orders, but that’s not the most important thing in the IDF. What you are being trained for — I was the commander of a combat unit for quite a few years — and what you’re being trained for is actually not necessarily to follow the orders, but more importantly is to complete your mission. In order to complete your mission, you can do anything. You should improvise, you can change the plan, you can do whatever it takes. You’re the commander in the field. You know what’s going on. And you need to make sure that you complete the mission. We don’t care how. You’re actually being trained for that.

 

For example, when you go on a drill — like, let’s say a five-day drill — so you have a plan and a drill instructor, etc. for five days. And then like after three hours into the drill, they say, Okay, new input. You cannot do it at night because of weather. You have to do it in the day. So your ammunition is gone; a few soldiers were wounded and they need to be out of your company or whatever or your unit. And now deal with it. What do you do? How do you react to that? How do you still complete your mission? I think this kind of mindset of mission completion is very powerful, especially when you bring it to startups. Because they you have this, I will do anything in order to complete the mission. It’s within all the layers or the departments of the company.

 

So I think that if you kind of adopt a mission-completion doctrine, it doesn’t have to be a military thing. Just again, it’s a mindset. When you say, This is my mission, this is what I need to do — and the mission could be a mission for the next day or it could be a mission for the next month or for the quarter or for the company — but when you have this mission and you know to define the mission to your colleagues, employees, management, that’s a very kind of powerful mindset that will, again, enable you to overcome the hurdles and the challenges that any startup has.

 

BRIAN SANTO: I have one last question.

 

URI ADONI: Sure.

 

BRIAN SANTO: I read your bio. You’re familiar with Microsoft, right?

 

URI ADONI: Yes.

 

BRIAN SANTO: Yeah, you used to work for them.

 

URI ADONI: Right.

 

BRIAN SANTO: The founding myth. IBM was looking for some software. Their supplier kind of dissed them a little bit. They turned around to this young kid, Bill Gates, and they said, “Can you give us this?” And he said, “Sure. No problem.” And then he had to turn around and go get it.

 

URI ADONI: Right.

 

BRIAN SANTO: I lived in New York for a long time. To me, that’s what I think of as a classic chutzpah story. Can you get away with that these days?

 

URI ADONI: To some extent. I think that today you can if you can do it quick. Then you can. So if know that you have a great team and they ask for something, let’s say your product is 80% there or your solution is… and they ask for a tweak. But you can say, “You know what? Give me a week and I’ll bring you that.” You can definitely get away with it. Or you can say, “I have it,” and then just you get a meeting and you build it in ten days. So you can do it I think in short intervals. I wouldn’t recommend a startup to cheat or lie or deceive or whatever and say something that is completely untrue. Integrity is very important. The corners don’t have to always be that sharp, but I think that you can get away with it to a certain extent, and you should be very careful to judge when it is that you can actually pull it off or when to say, “You know what? I can, but I will need some more time, and I would also appreciate it if you can…” You can actually say, “I would appreciate your brief or to be some kind of design partner to help us build this solution. I have the infrastructure, but on this application I would really appreciate your input for that so we can actually build it in the right way.” So you can actually leverage it in some cases to your advantage.

 

So I would say, the quick answer is yes, with a question mark. Be careful when you do it. Don’t push it too much.

 

BRIAN SANTO: Uri, thank you so much for your time. Good luck with the book.

 

URI ADONI: Thank you. It was a pleasure.

 

BRIAN SANTO: That was Uri Adoni, author of, “The Unstoppable Startup,” which went on sale on September 8. The book details specific challenges found in each stage in the early life of a startup, and offers advice on how to meet each of those challenges. It includes interviews with entrepreneurs such as the CEO of Wayze and the CEO of CyberArk, among others. There’s a link to the book on this podcast episode’s web page.