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!

QualiTest acquires TCL

I wanted to congratulate our portfolio company QualiTest on acquiring the UK software testing company TCL.

A core part of the strategy for QualiTest is to become recognised as a major international player in the independent software testing market. 

With the acquisition of TCL not only have they added a great team in the UK with a longstanding reputation in the business, but also through TCL the company now has access to the Indian market. This is a big step on the way to being global, and much more importantly gives us the ability to offer a wider range of services and sourcing, what the CEO Ayal likes to call "right-sourcing."

A word on TCL. I have not been too near the coal face on this transaction (thanks to Ayal and Uri), but  I have spent time with Stewart, TCL's founder. TCL under his leadership is a great example of how to build a business with a very positive culture of focusing on the people as its greatest strength. As we combine TCL and QualiTest together I am sure that this culture will stand the merged company in very good stead!

Best of luck to all!!

For those interested in more detail, here is a link to the announcement - http://tinyurl.com/d5s7nhg

New CEO and Positioning Launch at Infolinks

Infolinks - a Goldrock portfolio company - has recently recruited a top notch CEO to take the company to the next level. His name is Dave Zinman and he is one of the founders of the ad server as the former GM of the display ads division at Yahoo! We are very excited to have him on board.

Dave has hit the ground running with new messaging to the market. Infolinks has subsequently launched its In3 platform (Infolinks Intent Intelligence) - to help website publishers better monetize their properties. The technology can best understand a visitor's intent and present the most relevant advertisements  In addition, since most internet users ignore traditional display ads today, Infolinks ad units are placed in areas that can attract the attention of the visitors without obtrusiveness.

And if you will be in New York for Ad:Tech next week, Infolinks will be there!

Good luck to the team.

Hat-tip To Our PNMsoft Friends

Nice job to be quoted in a recent Infosys blog: How Mobile are your Business Processes?

And here is the quote on PNMsoft - 
"Mobile and BPM being two different worlds each growing with promising possibilities for Business, they need to be complemented each other for innovative solutions. This demands significant upgrades in BPM software to leverage the power of mobile. A classic example to reflect this trend is PNMSoft's recent BPM Suite that comes up HotChange architecture with unparalleled mobile capabilities running on all devices. This new architecture has the ability to write once and run anywhere through the use of a mobile portal for tablets and smartphones with in-memory architecture that allows switching between cloud or on premise storage."

Well done to the team @PNMSoft - look forward to more recognition!

Sage Rumours and a Rising Share Price

After a long period of tracking the TechMark All Share Index, Sage has strongly outperformed recently. Those who know me know that I am not qualified to comment on the reason why shares go up or down, and indeed anytime I tried to make money out of this art I have failed!

Having said that, there are those smarter than me, that are connecting the rise with rumours (for the umpteenth time) that the company is the target for private equity or (less likely) strategic bidders.

Oil has now been added to the fire with a rumour coming from longtime Sage watcher @dahowlett that Sage is considering divesting its US business (hat-tip to @GeorgeO for spotting this). 

Assuming this rumour relates to the whole of the North American business, then we are talking about just under 30% of the business in P&L terms, with slightly less profitability than the European division as a whole, and substantially less than the UK, still the most important driver for profits (by far) for the group.

Why divest and why now?

Whilst it is always stated that Sage competes with Intuit in the US and is the #2 player, from a scale point of view this is an irrelevance. Even if you take out the consumer side of the Intuit business, their B2B side is orders of magnitude larger than Sage, with all the benefits that this brings (See Sage’s domination in the UK and the margins it achieves). Whatever Sage does in the US it will never dominate in the way that it does in some of its other markets. This means that growing the business Stateside will always be an uphill struggle and profitability has no chance of reaching the heights of the UK, perhaps not even the rest of the group.

By selling this part of the business Sage will be instantly liquid from a balance sheet point of view, allowing her two possibilities (and maybe even both). Return of capital to shareholders, never frowned upon in the City of London, and ammunition to be more bold in building a genuine growth strategy for the next decade (either organically or via M&A).

From a timing point of view we are well into the reign of Mr Burryer, who has the difficult job of leading Sage back into growth, without upsetting those folks in the City who love dividends and low risk. Aggressive acquisitions have been hard to come by, and organic growth at a group level is not responding (yet).

Notwithstanding the recent outperformance, over any other period Sage has not outperformed TechMark and whilst it has been a steady performer within the FTSE 100, one wonders whether this is purely on bid premium, rather than fundamentals. A divestment of this scale should increase Group profit margins, if only slightly!

In summary the case for divestment is more focus on market dominant and growth markets, ability to drive shareholder value, and ammunition for the management to go after a more aggressive strategy (which the company can probably afford). It will rightfully establish management credentials on their ability to make important and significant corporate decisions that drive long term shareholder value.

Why might it not happen?

Well firstly this may just be a rumour and therefore far from management’s mind. This is the way of rumours!

Sage have been making money (perhaps not enough) in the US for the best part of two decades. It will be an ENOURMOUS decision for the company and board to take. The make-up of the board is conservative and thus, makes it unlikely that they will encourage such a bold move (my opinion, apologies to the board if I am wrong!).

Sage will no longer be a global company. Have to say that this is the weakest argument I could find, as Sage is not a global company anyway. As I, and many others, have stated in the past, Sage is a very successful federation of companies with very little by way of global integration or synergy (R&D, Sales & Marketing etc).

The point here is that the global question is somewhat of a red herring given the analysis that the company is not global and therefore has nothing to lose by accepting that fact in a major US divestment.

Ironically public companies are affected by near term movements in share price (both up and down). Management do try their best not to take decisions based on this, but it is very hard to be completely divorced from this daily (and sometimes cruel) reality. Given the rally in the shares that we started this blog with, it may seem less “urgent” to take strategic (i.e. long term) decisions about the business.

On balance I think that the possibility of a deal of this kind should be considered, obviously subject to price, but also subject to one other consideration. What would the company do with the proceeds? Can the board and management pull-off the aim of driving growth and preparing Sage for the next decade\s? This is obviously not a question I can answer with authority, but if I were a shareholder I would be asking.

Finally, and as a postscript, whatever the reason for the rise in share price I am confident that it has taken Sage out of the price range of the potential private equity buyers. Doesn’t mean that they do not have their pencils sharpened, they will simply have to wait and see, with the rest of us, whether the company can put growth numbers together to justify a public company rating – we continue to wish them the best of luck!