MARKETPLACE SHLOMO MAITAL

Angels over The White City has become one of the world’s most vibrant start-up ecosystems with angel investments playing an important role

“ANGELS OVER Berlin” was German di- scarce initial capital and needing wise An angel investor is someone who has rector Wim Wenders’ 1987 film about invis- advice. They are complementing, and to wealth and is willing, as an individual, to ible immortal angels who comfort distressed some extent replacing, venture capital, and invest it in a high-risk business start-up in re- Berliners. Today, in 2016, there are real an- are growing in importance, both in turn for shares. The latest trend is for angels gels over Tel Aviv. and abroad. Here is a brief guide to this to band together, to “network” as venture They are investors and they definitely help interesting growth industry. capitalists do, to exchange information and distressed start-up entrepreneurs seeking What is an angel investor? reduce risk, because three heads or 10 are

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better than one. other start-ups. They often live and work vest, but it is probably close to that of venture The name “angel” comes from Broadway, close to the start-ups in which they invest. capital. But, unlike venture capital, angels where it describes those who fund musicals In Israel, there are an estimated 500 an- invest smaller sums in far more start-ups. and plays, usually strapped for cash and gels and their number is growing. Of those In the past five years, according to the Is- seeking last-resort divine help. Often, angels 500, perhaps a third are among the “elite,” rael Venture Center database, angels have are entrepreneurs who made a fortune in an sought-after and professional. It is hard to invested in 1,600 start-ups. Most of those “exit” and recycle their profits in funding find hard data on the total money they in- probably would not have survived a day

THE JERUSALEM REPORT JANUARY 25, 2016 35 MARKETPLACE without the angels. with their money and pay off investors. than 60 times as many companies as VCs. An interesting angel innovation is This has contributed to the fact that Israel This is true in Israel, as well. iAngels, started by entrepreneurs Mor Assia has been unable to grow a single major sus- Who are Israel’s top angels? and Shelly Hod-Moyal in early 2014. They tained global company, from start-up size, Two names come to mind: Gidi Levy- guide small angel investments in start-ups, for more than two decades. In contrast, angel Weiss and Yossi Vardi. by experienced investors who share infor- investors have no five-to-seven year dead- There is wide agreement that Vardi is mation and insights. Russian billionaire Ro- line, and can thus build their start-up into the pioneer, or father, of angel investors in man Abramovich, the Jewish owner of the an independent company over a decade or Israel. Vardi, 73, has founded and invested English premier league soccer team Chel- more. in more than 86 hi-tech companies over the sea, has invested $2.25 million in iAngels. past 20 years. He founded his first start-up The US Center for Venture Research esti- THE COMMON THING 45 years ago and has been an angel investor mates that US angel investors pumped $24 since 1996. Vardi is also one of the funniest billion into 73,000 small businesses in 2014, BETWEEN BUSINESS and most insightful speakers, sought after all mostly in start-ups. Some 300,000 people over the world. have made an angel investment in the US. PLANS AND SAUSAGE Vardi, a Technion graduate, launched Ad- With four million Americans having net vanced Technology Ltd. in 1969, one of Isra- worth of $1 million or more, qualifying for IS THAT ONLY PEOPLE el’s first software houses and has served in angel status, those numbers will doubtless several high posts in government and indus- grow. WHO DON’T KNOW try. He invested in Mirabilis (in Latin, “won- Angel investment is booming in China, too. HOW THEY ARE MADE derful”) in 1996, started by his son Arik and The number of wealthy Chinese (those with three partners, offering the first instant mes- investable assets of $1.6 million or more) has ARE WILLING TO saging application. And wonderful it was! more than doubled since 2010. The recent Just 19 months later, Mirabilis, having Chinese stock market plunge, along with DIGEST THEM never earned a single dollar in revenue, was Prime Minister Li Keqiang’s call for “mass sold for more than $400 million to AOL, entrepreneurship,” has created a start-up an American mass-media company. Forbes stampede and a boom in angel investments. Second, time and savvy. I once led a group magazine observes that a whole generation Some 4,000 businesses are launched daily in of Israeli managers on a benchmarking trip of young Israelis sought to create similar China, or 1.6 million in 2014. With Chinese to Silicon Valley. We went to one of the lead- miracles. Vardi quips that this miraculous venture capital relatively underdeveloped, ing VC firms there and heard a brilliant pre- investment “made me blond and good-look- angel investments are filling the gap. sentation by a senior partner. ing like Ryan Gosling.” Since then, he re- Do angels make money? I asked him, how many start-ups he was counts, he has had another 25 exits. Despite the high risks, some do. A re- personally invested in? Thirty, he replied. search report shows American angels lost I made a quick calculation. Start-ups need I ASKED Vardi for his advice, his some or all their money in half their deals, to have board of directors meetings once a secret-sauce recipe, for successful angel in- when start-ups failed. But another study month because they must move rapidly. So vestment. His answers were rather surprising. showed that on average, angel investments this VC partner had to attend 30 board meet- Yossi Vardi, what is the key to being a returned more than double their investment ings a month, or one a day? Impossible. How great angel with gilded wings? within four years, and had a rate of return of much time could he allot to each of his start- Some of my investments have been idiot- about 22 percent. No wonder growing sums ups? Perhaps a few hours a week, if that. It is ic, some embarrassing… Some both idiotic of money are attracted to angel investing in not enough. and embarrassing. I do very early seed in- this era of near-zero interest rates. Angel investors, in contrast, can focus on vestments. So far I have invested in around Leading angel investor Gigi Levy-Weiss their start-up and give it individual hands-on 80 different companies. Some of them fared told the Tel Aviv business daily TheMark- attention, holding the hand of the entrepre- very nicely and had very glorious exits. My er that not all hi-tech investments pay off. neur. Often this is more important than the companies were sold to , Yahoo, “The top 10 venture capital [VC] firms in the actual dollar investment itself. AOL, eBay, Cisco, Sierra Wireless and some world make high returns,” he said, “but the A Harvard Business School study by Prof. of them went public. median VC firm is not profitable. The same Josh Lerner and colleagues shows that start- Some of them also failed equally glorious- calculation applies to angels.” up firms funded by angels are less likely to ly. I have a very impressive list of failures… How do angel investors differ from ven- fail than companies that rely on other forms I have passed on chances to invest in compa- ture capitalists? of initial financing, such as venture capital. nies that were valued at $5 million that then In several ways. First, and perhaps fore- “The bundle of inputs that angel investors sold for $1 billion! So there’s a whole mix of most, they are more patient. A venture cap- provide have a large and significant impact experience. But if you can’t stomach the risk, ital fund generally must close and return on the success and survival of start-up ven- this isn’t the game for you… profits to its investors in five to seven years. tures,” note the authors. “Angel investors have to come to grips with This makes VCs impatient. Often, start-ups Angel investments provide as much mon- the very unflattering reality that the com- are pressed by VC investors to agree to an ey as venture capital in the US, but since they mon thing between business plans and sau- “exit” (acquisition), so that VCs can also exit invest smaller initial sums they fund more sage is that only people who don’t know how

36 THE JERUSALEM REPORT JANUARY 25, 2016 they are made are willing to digest them, that some proof of viability.” issue. “Only 7.5 percent of start-up entre- there are more fools among the buyers than But he also poured some cold water on the preneurs in Israel are women,” she notes, among the sellers, that ideas are over-rated, “hand-holding” aspect of angels. “Regard- “and only three out of the 180 top angel that you are dealing with something which ing [management] help ‒ I don’t promise any investors are women.” In contrast, in 2015, resides in the brains of two or three peo- help. I promise a certain amount of funding nearly one angel in five in the US was fe- ple and, very often, it is not clear even to and stand by it. If I have a chance to help, I male, up from one in eight in 2012. them. In short, it is more a gambling than a gladly do it, but I am very keen not to raise Tel Aviv has become one of the world’s profession. expectations. I like to under-promise and most vibrant start-up ecosystems, ranking “The way to go about it is to approach the over-deliver.” fifth in the world, behind Silicon Valley, whole thing very unemotionally, very tech- New York, Los Angeles and Boston, with nically. If you fall in love with an idea or with IT WOULD BE WELL angel investments playing an important an entrepreneur, remember the old French role. I asked Vardi about how to create saying that love is blind. TO REMEMBER THAT such a tech hub. “My approach focuses on a high volatility, “How do you become a tech hub? You diversified portfolio ‒ invest equal sums in TEL AVIV COMPETES obviously need technology, money, ed- all your investees and hope for luck. If you ucation etc., but many places that have are lucky, you will lose your money on most WITH MANY OTHER these attributes don’t become a tech hub. investments, but if you make many times You need the culture of the young per- your investment on a few, it will cover for it. CITIES WORLDWIDE son – what do they dream of at night? “In order to sweeten the bitter taste of fail- TO ATTRACT BRAINS Working in hi-tech is no longer a job – ure a bit, invest in people who are nice ‒ at it’s part of their lifestyle. Start-ups are least when you lose money you will have AND TO FUND AND moving to city centers, taking laptops to the feeling that you helped someone who the coffee shops. deserved it. Focus on talent, talent, talent, SUSTAIN THEIR IDEAS These people are looking for cities that talent! And last, but not least, the first money are underground, cultural, chaotic. They invested is the most expensive money, since want cities to accommodate different its [equity stake] is diluted very fast [by fu- The number of Internet start-ups is people, genders, tastes, as they bring dif- ture investments]. Therefore, go with entre- growing. Angel funds are partly a cause, ferent DNA into the game and that’s very preneurs who are careful in spending money and, in part, an effect. Vardi notes, “Angel important – they want the cities to be very in the early phases.” investing is very suitable for early stage permissive,” Vardi says. He cites Berlin as Vardi has become famous for his “shtick” Internet investments, where in the last 10 an example. on Jewish mothers – Jewish mothers are re- years, funding requirements have shrunk Wim Wenders’ angels still hover over sponsible for the Israeli tech scene. Here is to an amazingly low level, and there are Berlin. Many young Israelis are drawn to how he put it to a reporter from Venture Vil- some good reasons why it happened. This Berlin’s magnetic energy, and Berlin at- lage, a website. is not the case in other industries where tracts fully two-thirds of all risk capital in- “What makes Israel the success it is in the initial larger amount of funds are needed, vested in Germany. While there are many tech scene today? Is it the army? Is it the tech like infrastructure investments.” angels in Tel Aviv, angels hover very visi- academies? All of these are contributing, but I was privileged to work, through the bly abroad over other cities, as well, seek- I think it is the spirit and upbringing of the Technion Institute of Management, with ing creative brains and novel, useful ideas, young people. Levy-Weiss, a former IDF pilot and, in my and drawing talent from everywhere. “If your mother is telling you all the time opinion, super-genius, when he headed It would be well to remember that Tel that you have to thrive and you have to be in- 888, an Israeli online gaming company. Aviv competes with many other cities dependent and you have to go and study, then Before that, he was a senior executive with worldwide to attract those brains and to this is the value system. The Jewish mothers software giant Amdocs. fund and sustain their ideas. We should do in Israel have a very effective way to manip- TheMarker lists Levy-Weiss as Israel’s everything possible to keep those brains, ulate their offspring – my mother used to tell No. 1 Angel. He is networked with 44 oth- and the ideas, jobs and wealth that flow me all the time that I’m an idiot and that all er angels and has made new investments from them, at home. my cousins are really smart, and I’ve spent in 67 start-ups, between 2005 and 2015. Postscript: On December 29, the Knesset all my life trying to prove her wrong. I am Like many angels, he invests primarily in Finance Committee approved an amend- still trying to prove it to her, even though she Internet start-ups. ment to the 2010 Angels Law, assuring an- died 15 years ago.” Recently, Levy-Weiss set up an accel- gel investors they will receive immediate Vardi told me that VCs and angels are erator in Silicon Valley. Israel itself has tax benefits. The Law itself provides tax “totally different things. Angel investors more than 80 such accelerators ‒ places relief only three years after the initial in- are willing to take much higher risks, en- where start-ups get mentoring, advice, of- vestment. Hence, it was ineffective. ■ ter much earlier, buy stock [in start-ups] fice space, some funding and learn to pitch on terms much more favorable to the en- their ideas to investors. The writer is senior research fellow at the trepreneurs than VCs, and VCs are usu- Writing about angels in TheMarker, In- S. Neaman Institute, Technion and blogs at ally willing to invest only when there is bal Orpaz draws attention to the gender www.timnovate.wordpress.com

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