Software Companies as an Investment Asset Class

Among many of the venture capital trends and focuses of the past 12 years, we are beginning to see the winding down of originality and real innovation in the realm of consumer facing Internet companies, and a significant move towards investments and true innovation in B2B and B2B2C software. Here at SG VC, the partners have witnessed and actively capitalized on this shift by investing in companies from one of the world’s best hubs of software and technological innovation: Israel.

January 1, 2014

Among many of the venture capital trends and focuses of the past 12 years, we are beginning to see the winding down of originality and real innovation in the realm of consumer facing Internet companies, and a significant move towards investments and true innovation in B2B and B2B2C software. Here at SG VC, the partners have witnessed and actively capitalized on this shift by investing in companies from one of the world’s best hubs of software and technological innovation: Israel.

Irrespective of the specific product or industry (financial services, telehealth, payment processing, etc.), software companies that have their R&D in Israel, and business development, sales and marketing in the United States, have many attractive factors for investors. The companies often have lower and more realistic early valuations compared to their US and EU equivalents, lower costs for engineers and office space in Israel, and a wealth of top level engineers coming from leading universities such as the Technion, Weizmann Institute, Tel Aviv University as well as elite military units such as IDF’s Unit 8200.

Why Software?
The National Venture Capital and PricewaterhouseCoopers’ MoneyTree report1 shows that Software is still the leader in Venture Capital by number of deals, valuations, and exits, and 2nd in amounts raised (behind Biotechnology). CrunchBase.com, the free database of technology companies, people and investors (think Wikipedia for venture capital), produces a free monthly report2 that shows over 590+ rounds in software and +$3BN in amounts raised YTD 2013. Note that this is publicly reported information; the number of rounds and amounts in reality are much higher. Also consider that post IPO performance of software companies from 2012 has been exceptional with investors making on average 90% returns post IPOs. This focus on software companies is further verified by the fact that the ecosystem of investors clearly includes some of the biggest players: Sequoia, Andreessen Horowitz, Google Ventures, Accel Partners, Greylock, Kleiner Perkins, as well as many other early stage investors such as Start Fund, Formation 8, and Founders Fund.

Get in Early at an Attractive Valuation
Obviously, one wants to find these software companies in early rounds where valuations are reasonable, established investors have already made commitments, and the burn rates are in line with growth and business plans. In the early stages, some of our Israeli companies were burning less than $30k/mo. with full offices in Israel, business offices and representatives in the U.S., server hosting, and a team of engineers. Compare that to a San Francisco–based company we were presented with in 2012 that burned well over $0.5MM a month at a Pre-Series A position and had yet to even formulate the idea of a future revenue model.

The Proof: Sample Of Recent Israeli Software Company Exits
A star example is Waze. Founded in 2007 in Israel, with current offices in Raanana and Palo Alto, Waze raised $67MM and was acquired by Google in June, 2013 for $996MM. Open up your Google Maps on your mobile devices; see those crowd-sourced traffic indicators? That’s Waze in action!

Outbrain, the article and content recommender you can see on sites like CNN, Reuters, and Bloomberg, was founded in 2006 by Yaron Galai (his Quigo was sold to AOL for $363MM in 2007) and headquartered in Netanya (with U.S. business offices in NY). Outbrain has attracted large VCs like Carmel, Lightspeed, and Rhodium (note two are also Israeli-based VCs), as well as top tier international funds. The company has recently risen $35MM in Series E bringing the total to $99MM.

Even more is Onavo, founded in 2010 in Tel Aviv and was recently purchased by Facebook for $150MM in October 2013. The company took outside investments of only $13MM, with their last round in January 2012.
Wix debuted November 6, 2013, on the NASDAQ at a value of $750MM2.  Founded in 2006, Wix has 346 employees in its offices in Israeli, and 59 in its business offices in the US. Before its IPO, Wix had only raised $58.5MM up to its Series D Round in March 20114.

There are many other examples of early stage companies with little to no revenue that have been acquired for hundreds of millions of dollars. These include Xtreme-IO (acquired by EMC in May 2012), Anobit (Apple, January 2012), and Intucell (Cisco, February 2013). Technology is a core driver of innovation for top Silicon Valley companies and Israel has it in spades.

In each of these examples one can see attractive opportunities. These companies are at an early stage, raising modest amounts of outside capital, and they are exiting at 10x multiples on the amounts raised. In addition, they are getting the attention and being acquired by some of the biggest players in Silicon Valley and going public on American exchanges. In summary, the partners at SG VC view investing in Israeli software companies as a solid direction to any investment portfolio.

About  SG
SG VC is a venture capital firm that focuses on Series A with Series B & C follow-on investments. Company requirements include: defensible IP, a roadmap to profitability, seasoned entrepreneurs, and a strong ecosystem of investors and strategic partners. The firm’s industry focus is in B2B and B2B2C facing software companies that specialize in areas such as SaaS, financial technology, real estate, e-commerce, and digital media. Since its formation in January 2012, SG VC has made 36 investments with half the investments in companies with R&D in Israel and/or Israeli founders with U.S. business offices, and half in Silicon Valley and Southern California–based companies.

Some of the portfolio’s top Israeli-based companies include: Tipalti, a global mass-payment processing software; DudaMobile, the leader in SMB mobile sites and web services company; Interlude, the digital media company that makes completely customizable interactive videos; and Loop Commerce, a software company aimed at revolutionizing the e-commerce gifting experience for mass online retailers.

A selection of the firm’s Silicon Valley and Southern California-based companies include: Addepar, the revolutionary RIA and Fund management software; SideCar, advancing the ride-sharing industry; reQall, the context-aware and pro-active assistant application; Homelight, the client and real estate agent matching software; and RentMetrics, the new source for real-time national rental data and pricing.

Since SG VC Fund I’s capital came entirely from the partners, it enabled us to spend the past two years carefully establishing our network of co-investors and refining the Fund’s thesis. We have turned this experience into our competitive advantage with Fund I’s co-investors now including: Sequoia, Andreessen Horowitz, Google Ventures, Genesis, Intel Capital, Formation 8, Union Square, Oren’s Capital, 500 Startups, Start Fund, Founders Fund, and Innovation Endeavors.

By December 31, 2013, the Fund will have closed its 40th investment, and then we plan to open up Fund II to outside investors and raise $50MM in the 2nd Quarter of 2014. We’ve received significant interest from our multi-family office network and already have over $10MM committed. Fund II will continue on the momentum of our proven and stellar companies from Fund I and capitalize on future opportunities.

1 www.pwcmoneytree.com
2 http://info.crunchbase.com/about/crunchbase-data-exports/
3 John Koetsier, Venture Beat. 11/6/2013. http://venturebeat.com/2013/11/06/website-builder-wix-raises-127m-in-largest-ever-ipo-for-israeli-firm/
4  http://www.crunchbase.com/company/outbrain
http://www.crunchbase.com/company/onavo
http://www.crunchbase.com/company/waze
http://www.crunchbase.com/company/wix

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