Prudent risk management as vital as ever

In no way does the following necessarily reflect the Goldrock view, nor constitute any advice whatsoever, investment or otherwise; the purpose of this posting is to remind ourselves how devastating losses are; and maintain a disproportionate impact on ones' portfolio; and the ensuing gains required to recover from losses. Significantly, as the magnitude of the loss increases, the required recovery gain increases EXPONENTIALLY.

As 2013 draws to a close, few would have predicted this time last year that the S&P would be finishing the year some 30% higher than it started the year. Those who were indeed fortunate enough to fully participate in the stock market rally will be rubbing their hands in glee. But what does 2014 bring about? The trend is your friend, right? Well yes ….. until it isn’t. There is high temptation to follow the momentum of 2013 and jump headfirst in the stock market.

Markets tend to be somewhat "mean reverting" over time. The good times don’t last for ever, and consummately neither do the bad times. In the good times, or what is commonly known as an equity bull market, simple buy and hold strategies would perform very nicely indeed. You would fully participate in market up-ticks. However, during a bear market, you would perform woefully, and would be at the peril of the market.

On the flip side, prudent active management allows one to use diversification, investment selection and skill to limit the downside, whilst giving up some of the upside. In bull markets, you will undoubtedly underperform, however, should be able to sleep better at night, knowing that in a downturn, when the market plunges, your portfolio ought to suffer far less.

That’s the theory. How does it play out in practice?

Lets assume the market drops by 30%. And then recovers 43%. An investor who starts out with 1,000 will decline to 700 and then recover back up to 1,000. An investor fully in the market, would have returned nothing. An investor though who constructs his portfolio that should limit the downside risk whilst participating in some upside would have made a positive gain over the same cycle. Lets assume his portfolio is constructed with a beta of about 0.5. He would expect to participate in about half the markets upside, and half the markets downside. Under the exact same scenario, where the market drops by 30% and recovers 43%, this investor's portfolio would expect to drop 15% and then recover 21.5%. His portfolio ought to decline to 850 and then recover to 1,033. So whilst the market portfolio experienced lots of volatility, twists, turns and excitement, but ultimately returned nothing, our astute investor would have made a small gain.  Due to compounding, his gain grows exponentially over various market cycles.

That’s a nice theory. Does it hold up in practice though?

At the beginning of 2000, the S&P 500 was at 1469. Fast forward to October 2002, and the index stood at 777, some 47% lower. Moving on 5 years and a performance of 101%, the S&P stood at 1565. On to March 2009, the market low was at 666, a loss of 57%. Currently, a bit less than 5 years after that low, we are at 1830, a gain of 174%. Over the 13 year period, a buy and hold investor would have been up 24%. Lets return to our astute investor, who has constructed his portfolio with a beta of 0.5. He would expect performance to the tune of -23.5%, +50.5%, -28.5% and +87%. Overall, his 1,000 would have declined to 765, risen to 1,151, declined to 823 and then risen to 1539. His cumulative performance would be 54%. So whilst there would have been periods, often long ones at that whereby the market (and the buy and hold investor) would have performed considerably better, in the bigger picture and over the longer term his portfolio would outperform considerably.

Remember, this is due to the disproportionate impact of losses in relation to the gains required to recover from a loss. As the losses increase, the required gain SIMPLY to reach break-even also increases, EXPONENTIALLY. As the table shows, if the market goes down 40%, then the buy and hold market investor requires 67% gain, just to recover his losses and break even. The other investor, only recovers a 25% gain to recover his loss. If the market goes down 50%, then the buy and hold market investor requires 100% gain, just to recover his losses and break even. The other investor, only requires a 33% gain to recover his loss.

Whilst the temptation to plunge into the market remains as strong as ever, prudent risk management is vital! 

The End of the Road for Dankner? 

I feel sure that yesterday will be marked as a milestone in the business and economic history of Israel. There is much talk among the chattering classes and politicos that regulation and politicians should save us from "tycoons."

Whilst the process has taken two years, and certainly banks and institutional shareholders have not always acted with speed and wisdom, the market and the legal process have made the difference in the battle to control IDB and its many subsidiaries.

This is great news for Israel on many fronts, but I would like to pick four highlights:

1) As mentioned above the market has removed Dankner from his control position at the head of the IDB pyramid. Nothing personal Dankner bet and lost. The excellent operating companies down the stack will survive and depending on the skill of the new owners, may even thrive. If they do not, they too will be removed!

2) We have 2 new names as major players on the business scene in Israel. One foreign coming with a long track record of success bringing his capital to Israel for the first time, and one local, who has mostly plowed foreign fields up to now.

3) Pyramid structures and uber-leverage is (IMHO) not the way to create a thriving economy. Building businesses through hard work and sensible financing is. If this allows the subsidiary businesses to thrive as more independent entities, then the entire economy will benefit, probably attracting additional new capital along the way.

4) The intervention of "smart" capital (Jeremy Blank and York) was one of the key catalysts for the radical change of direction at IDB. I hope that this will represent a new era of intelligent activism within the market!

Finally, I will end with a quote from Dankner himself from 2009 - Here is what he had to say when he was king of the country, four years ago,  in "Globes":

"I take care to ensure that IDB has large amounts of cash, and that we exploit business opportunities in moderation, cautiously, conservatively, and gradually. Despite the many business opportunities, we retain in our hands large cash reserves. I see them as an insurance policy. The strategy is to be prepared for changing situations that are hard to foresee."

http://www.globes.co.il/serveen/globes/docview.views.asp?did=1000902511&fid=4163

Our friend Matt Craig-Greene at Pivot Partners sent us the results of a new survey they conducted on private equity communications.

It revealed some fascinating facts about how private equity firms communicate out to the world.

• 88% of business owners have difficulty finding useful, relevant information on private equity funds  
• Over half of PE firm websites scored an "F" on Pivot Partners' Transparency Test
• 86% of Limited Partners think that private equity has a poor reputation with the general public

Clearly the PE industry needs to be spending more time working out how to communicate better.

If anyone has specific comments about our Goldrock Capital website, please let me know. I'm at darren@goldrockcap.com

To see the full survey click here.

Infolinks is the number 1 contextual advertising company

It feels good when a third party recognizes one of your investments as the best.

A firm named topseos.com is an online producer of independent reviews and ratings. The listings of the top online marketing channels are released monthly to assist businesses in connecting with contextual advertising channels which feature a history of effective services. Thousands of online marketing channels are put to the test while only the absolute best channels are showcased in the listings.

The 5 best contextual advertising companies have been revealed by topseos.com for the month of August 2013. The rankings are revised each month in order to account for the latest developments and achievements of competing contextual advertising companies in areas most commonly associated with successful contextual advertising services. The five areas of evaluation used to determine the best companies include targeting, diversity of network, size of network, publisher controls, and reporting methods.

The 5 top contextual advertising companies for August 2013 are:
1. Infolinks
2. Vibrant Media
3. Kontera
4. ResultLinks
5. Trafficvance

To view the rankings of the best contextual advertising services visit:
http://contextual-advertising.topseosrankings.com/best-contextual-links-networks

Congratulations to the Infolinks team!

Hatzalah - the first response ambulance volunteer network: the healthcare social network

There was an inspirational speech given by Eli Beer on TED telling the story of the founding of United Hatzalah and its subsequent success from a first response and social perspective. Here is the video.

Hatzalah is a volunteer organization that provides first response ambulance style services.

Eli Beer describes his experience as a 17 year old EMT in an ambulance and their failure to save lives during medical emergencies, largely due to heavy urban traffic not allowing the ambulance vans to access the scenes in a timely fashion.

Eli realized that there are many capable people located close to emergency sites at any given time, but they simply do not have knowledge of the situation and they do not necessarily have equipment required.

So Eli began to build the idea. First step was to provide the information to a volunteer network via emergency radio scanners and a communication system for the response team (beepers, to mobile phones, to mobile apps (now using Israeli company NowForce)). As the team grew, he was able to provide faster transport via scooters ("ambucycles"). Next, it included custom built mobile equipment. Quite amazing.

Hatzalah now has an average response time of 3 minutes, while the ambulances are 15-20 minutes!

Over breakfast with my wife this past Friday, we were discussing this story with awe. Later on during our date, we began talking about how Facebook works, Twitter and other social networks. (My wife is one of the last in the western world without Facebook, Twitter, etc.). I was explaining the news feed, groups, following people, comments, likes - and importantly the influence the social networks have had on the media in the western world.

We discussed some of the negative results of social media on the media in the western world - mainly the consumer demand for immediate 24-hour news flow, lowering standards of the professional media (like low standards of information sources and corroboration) and the emergence of people that spew vitriol with large social audiences with no accountability or consequences. And we talked about the amazing results of social media on the media within emerging and frontier countries - that essentially can bring the power back to the people and undermine totalitarian dictatorships by bypassing the oppression to proliferate free speech and free "press".

I reminisced about the event that pushed me to use my Twitter account on a constant basis - The Gaza War in January 2009. The reason why was based on the ability to follow certain non-media people that had first hand and immediate information on the happenings on a constant basis. Following the Gaza War, we all watched how the grass roots of the young population within Muslim countries (initially Iran in 2009) used social media - mainly Facebook and Twitter - to break the regime's stronghold over information flow that resulted in some dictatorships falling. Interestingly, here in Israel, during the conflict in Gaza last year, we saw Israeli Defense Forces heavily use Twitter and Facebook in various capacities in very effective ways.

And then I realized that Hatzalah is a similar story.

Social media answers a need for precise and timely information. And the need is insatiable. The progress went from messenger pigeons to Paul Revere to radio to TV to cable TV to internet to mobile to social networks. Social networks provide the platform for exponential proliferation of communication flow on an immediate, global scale. In other words, people want information NOW. How do you do it? Anyone can be an authority. Anyone can be a source. If you want information on a certain topic, region, person, etc., Twitter and Facebook have it. And you can then see what all of the people with the same interest as you say on those topics. Exponential. Game changing.

Hatzalah answers a need for precise and timely emergency response. And the need is insatiable. When someone is choking or has a heart attack, they need emergency service NOW. A few minutes is the difference between life and death. How do you do it? Anyone can be a response to an emergency. Anyone can save a life. They just need information, transportation, some equipment and training. This creates a "social" network of people across different locations at different times of the day. Don't rely on the incumbent service. Bring the power of the masses to answer the need.

On a personal note, I was in venture capital during the emergence of social networks as an investment category (2005+). I was personally not a believer in the sector as an investment opportunity. Perhaps due to my lack of faith in humanity on a large scale. I was proven wrong...and I am not referring to missing out financially, but rather from the human perspective. the social networking and sharing economy start ups have shifted the way society can operate.

People are not perfect, but Facebook has proven that people will be honest about themselves - profiles, pictures information and content is largely true. Prosper.com proved most people are honest and have self respect - to pay back loans, even without assets connected to the loan. And AirBNB is proving that most people are hospitable and respectful - with minimal crime, vandalism, etc.

And this Hatzalah story made me rehash my faith in humanity - building out a volunteer, non-compulsory social sharing society.

Kol hakavod to Eli Beer and all social entrepreneurs that bring power and faith down to the people - to rely on human compassion, honesty and respect.

Small Update on the Last Post on Waze - MobilEye

Just a quick update to some market data I cited in my last post discussing the Waze acquisition:

There is now a sixth company with a valuation that exceeds $1b - MobilEye.

It was reported in the New York Times that MobilEye raised $400 million at a $1.5 billion valuation before the investment.

I am awaiting details regarding the breakdown of buyout and capital into the company and the size of the business.

The name of the game in the automotive components industry is to be a standard part of the production line of a car. MobilEye built its business selling to the aftermarket, before garnering enough industry attention to sell its systems to be a part of the production, or prior to the delivery of a car to a new buyer. That took time, effort and patience. So good job to the management.

There are no venture capital funds invested in this company. The closest was Motorola's VC arm from the year 2000.

Good luck!

UPDATE:
All $400m was a secondary. no capital in.

Waze is a huge success for Israel on many levels - but it is not a business model for investors in Israel

Recently there was quite a BIG deal within the Israeli tech scene and VC market as well. Waze was acquired by Google for an estimated $1.1 billion! Waze was founded in 2008; and for those of you that don't know - provides a social mobile application that enables drivers to build and use real-time road intelligence on smartphones. Waze raised $67m since its founding. To put the acquisition dollar figure into context - this is the 5th Israeli tech company in over a decade that has reached a value of more than $1 billion. There was NDS (sold to Cisco for $5b), Mercury (sold to HP for $4.5b), M-Systems (sold to Sandisk for $1.7b) and Conduit (still private, but did secondaries at more than $1b valuation).

This is a giant success for a few key reasons:

1) The entrepreneurs - that started, led and built Waze in such a short period of time to such a large value. amazing!
2) The investors - early stage investing is based on picking market trends and people. They clearly hit a few bull's eyes on this one! Specifically, Magma and Vertex in Israel. These 2 funds invested about $10m and profited about $130m. Kleiner Perkins invested about $30m in a $250m value round about 2 years ago. They did well too, but it escapes me how they justified such a rich valuation of a pre-revenue developing social media consumer facing mobile app...even though they profited so nicely too!
3) The innovation - big data, meets social, meets consumer, meets mobile. a lot of hot trends all intersecting at the right point - mapping.
4) The state of Israel: taxes - I estimate $80m in tax dollars to the Israeli government. the papers reported about $280m, but that is a simple 25% capital gains calculation on the full purchase price. I estimate that at least two-thirds of the cap table will be tax free - since foreign investors do not pay tax and Israeli VCs (Vertex and Magma) have mostly foreign investors that will also not pay. only Israeli shareholders will pay. but still, very big.
5) The state of Israel: philanthropic impact - Many Israelis will become wealthy from this transaction, and I expect a lot of charitable giving from those people. In addition, Tmura received its largest check ever from this deal - $1.5m - which is allocated to social philanthropy in Israel. Huge.
6) The people of Israel: employment - Google is becoming a powerhouse of employment and tech influence in Israel. They have recently invested quite a lot in a new Tel Aviv research and development center; a hub of influence. And Waze will only help them expand that faster into mobile and big data. Also, people from Waze may leave with cash and start new stuff, employing more people, etc.

Let's try and understand where Google can see the value in Waze for such a large price.

a) Financials: Revenue of Waze was below $5m TTM (less than the Goldrock mandate for investing). So definitely it was not driven by a revenue multiple of some kind.
b) User value: Waze has 51 million users, with about 12 million in the US. Assume that each US user is about 3x non-US users (which is consistent in the ad world). The overall average is $22 a user - basically saying a US user is about $45 and non-US at about $15. These numbers are about half of Facebook's...but Facebook is a huge business and cash machine; and people live in Facebook (average close to an hour a day). So I would say Google significantly overpaid - if they paid for social users. On top of that, Google controls a massive amount of the internet, where consumers rely on Google for search, some use Google+, News, Docs and many other services. Therefore, I don't believe Google acquired Waze based on a social user acquisition (even though it may help Google+ troubles).
c) Technology / market leadership in mapping: besides for "fundamental"social network apps (Facebook and Twitter) and some major game titles - mapping is arguably the most important long term mobile app. There has been much press written on the difficulty of developing effective mapping for the mobile - with a focus on Apple's challenges and Facebook as well. I am sure Microsoft has tried too. Google has Google Maps and needs to maintain their market leadership versus the other tech giants within the mobile environment. This $1.1b could very well have been a strong defensive play to ensure it strength in this sought after mobile app segment. And in that context, $1.1b does not seem like too much if it does the job.

So again - great job Waze!

Can this be leveraged by the Israeli tech investment community as proof of the business model?

To this, I say "no" for a few simple reasons:
1) Deal size vs. business size - This is the 5th $1b+ acquisition in over a decade in the Israeli tech market. In addition, the other 4 companies were large multi-hundred million dollar revenue businesses at the time of those rich valuations. The values were linked to REAL business. Not here. Rare.
2) Reason for acquisition - For a giant like Google to acquire a pre-business tech company to maintain market leadership in a very specific technology segment is seldom repeatable.
3) Large values significantly shrink acquirer base - once companies reach significant valuations, like Waze did 2 years ago during a $250m valued venture capital investment round, the community of companies that have the capacity to acquire such a company shrinks dramatically. The companies that could have acquired Waze was few, and the main ones were all talking with them (Facebook, Apple and Google). Perhaps Microsoft could have entered the running, especially since they have a sizable Israel presence. But the chance of success shrinks, due to the reliability on an acquisition from one of very few options.
4) No IPO story - no business, not a platform. Just a really exciting and well positioned pre-revenue mobile app. So it is only an acquisition story for sure.

So for those reasons - no business yet, narrow requirement from an acquirer, few buyers and only an acquisition story - one should not invest in Israel and hope for the next Waze...but we do love when these deals happen!

Goldrock has a new investment - ClickTale!

We are delighted to inform you that our Fund has completed its seventh investment into Israeli growth company ClickTale, the innovator in the growing market of In-Page Analytics. Our Fund has invested together with a investor group that Goldrock represents, and alongside European technology investor Amadeus Capital Partners. The investment into the company will fund product development and accelerate ClickTale’s global growth.

While traditional web analytics track only page-to-page navigation, ClickTale records and analyzes the True-to-Life User Experience™ inside the page helping businesses achieve their online goals such as converting more site visitors into buyers or increasing engagement with si
te content. ClickTale’s premier product, ClickTale® Core, provides anonymous playback of user browsing sessions, aggregated heatmaps of in-page activity, as well as tools to increase form completion and optimize conversions.

Most companies recognize the importance of the user experience, but few have visibility into their users’ website activities.  A recent Baymard Institute review revealed that a full 67% of shopping carts are abandoned prior to checkout.  Since ClickTale provides full visibility by capturing the entire browsing session including every mouse move, click, hover and scroll, online marketing and ecommerce managers can finally discover and understand why customers abandon shopping carts, what errors they experience, and where poor user experience frustrates them.

While working with some of the world’s leading websites, ClickTale has created the Online Optimization Cycle™ to help them maximize the speed and effectiveness of site improvements. The Online Optimization Cycle is a best practice that combines traditional web analytics and A/B testing with ClickTale’s In-Page Analytics to iteratively improve the user experience resulting in better conversion rates, increased revenues and higher ROI from existing marketing activities.

Founded in 2006, ClickTale has more than 80,000 clients, including some of the world’s largest websites such as T-Mobile, CBS, and Lenovo.

David Ram will be joining the ClickTale board on Goldrock’s behalf.

This is an exciting addition to our portfolio. Mabruk!