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How Very un-Israeli The excitement and exhaustion were almost palpable. Asher Bennet and Shaul Mazor had an idea most Israeli venture capitalists would never back. They took a small, profitable Web contracting business, poured their cash flow into development, and obtained venture capital backing to turn their company into a Web-based service business they hope to sell world-wide.
The fact that a small Israeli company planning to sell service and content on the Web obtained funding at all, was largely due to the partners� grasp of Web business, their choice of market and their approach to venture capital investment.
Bennet was previously an expert at securing bank credit lines. "I wasn't that good at repaying the money back", he grins. His company, I-scraper.com, recently secured a relatively large seed investment from Israel Seed Partners, so his bankers need not worry. Israel Seed's third fund bought about a third of I-scraper by investing close on a million dollars as seed capital, at an after money valuation of $2.85 million.
I-Scraper is a very useful tool for architects, engineers, contractors, consultants and whoever else engages in major building projects. It is a Web-based archive, calendar and project management tool for the thousands of plans that must be replaced, modified or updated in the course of a major building project. The company has a few customers among Israel�s major construction firms, is currently undergoing rapid expansion in Britain, and plans to broach the U.S. market in the very near future. Its business model is based on monthly rental fees from the large companies that manage major construction projects. It offers its services free of charge for the first three months, and has already signed up quite a few companies that have agreed to pay its fees for the three or more years needed to complete a major project.
This company is different. It had real customers, placing repeat orders, before it started to look for seed capital. The company briefly considered growing organically in the Israel market and then moving abroad. "But that would be a waste of time," Mazor says. "The market is ripe, just now (for I-Scraper's service.) We needed cash, experience and contacts� but we started trying to sell in London before we had any investment".
The two young men share the approach favoured by the new generation of Israeli high-tech entrepreneurs. Their focus on the investment cycle by-passes the pitfalls that lie in wait for first-time Israeli entrepreneurs. They seem quite sure that it is better to own a small stake in a really large company than to insist on control of a small operation.
The entrepreneurs didn't shop around too much for venture capital funding. They conducted, they say, "some discussions" with a certain fund, but then switched to Israel Seed Partners. The deal was closed within three weeks, without much argument over the term sheet.
They tell of an entrepreneur who was so obstinate about his company's valuation that he lost his window of opportunity. They did, however, conduct their own form of due diligence on the fund, and asked other entrepreneurs, who had worked with Israel Seed, for their feedback on the relationship.
To be sure, the company is now at the honeymoon stage of its VC investment cycle. It is expanding rapidly, has opened an office in Britain and plans to open another the U.S. very soon. A great deal of money is being expended every month on expansion. If the company secures the custom of certain large, well-known leading firms it is eyeing, the honeymoon may continue. Otherwise, some rethinking will need to be done.
Prospects, however, seem fair. Bennet and Mazor picked a major industry on which the Internet has so far had a relatively marginal impact, saw how the Web could simplify and reduce the cost of the complicated task of managing a major building project, and, by listening very carefully to their customers, created an easy-to-use tool.
Nearly all Israeli high-tech start-ups have technological barriers against competition. I-Scraper's technology looks slick and easy and highly professional. The founders say their main barrier against competition is quality of service. This means listening very carefully to what customers want, and providing it, together with good support. This sounds so un-Israeli, one might think they read it in a magazine. Yet they have already convinced major customers in Israel's technologically highly conservative building industry that their product will save time and money. In that sense at least, Israel may prove to have been a good starting place.
Potential investors may also be attracted by the possibility of something similar to viral marketing. Hundreds of different professionals are involved in major construction projects. Where the prime contractor uses I-Scraper, each of these professionals gains exposure to the service as a far easier way to modify, update and exchange plans. The architect or engineer's bottom line also benefits, since it takes time and money to send each new plan to the plotter. These professionals work on other projects, and the word, Bennet notes, gets around.
The next stage, in Europe and the U.S., will be far more difficult. The company must learn the ins and outs of the construction industry in each country in order to set the viral effect in motion. Growth must be rapid, because of the basic nature of the Web and VC investment, and because there are already two competitors on the horizon. But the construction industry is conservative, and works in slow cycles; and its professionals and managers are not all comfortable with information technology.
The solution is obviously to hire the right people, who are familiar with the industry. Bennet is spending a great deal of time on the road doing that. "I know my limitations. I have no problem with bringing in a CEO". Like Moshe Elgressy in First Access, Bennet is part of the new generation of Israeli founders that is moving closer to the American start-up model, under which it is perfectly acceptable for a founder not to have what it takes to manage a rapidly growing company.
If Israel Seed's investment in I-Scraper succeeds, and the company passes the kind of milestones that will make it eligible for the further rounds of financing it will obviously need, the company will change completely. It probably will not be based in Tirat Hacarmel, and most of its employees won't speak Hebrew. Having started out in Israel, it will have moved to its market. It will be something new, that other entrepreneurs will want to copy.
The Israeli bias against investing in content and service companies might be shrewd in the short term because tools are needed out there in the global information market. And tools are what people here know how to make. But in the long, or even the medium term, this is a short-sighted policy because it disregards the basic fact that the Internet and other tools are rapidly turning the global market into a service economy.
Americans understand this intuitively, which is why Internet content and service companies have reached such absurd valuations on Wall Street. The younger generation of Israeli entrepreneurs also understands this. All that remains is for the investment community, generally consisting of an older generation, to catch on.
Published by Israel's Business Arena May 6, 1999
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