Today is a remarkable milestone for the Israeli tech industry. ironSource is the largest-ever Israeli tech IPO and marks a new highlight in what has become a phenomenal wave of Israeli tech IPOs and unicorns.
Israel is now firmly recognized as a leading global tech innovation center where a new generation of Israeli tech-based businesses are emerging as sizable global corporations disrupting significant industries.
For us at Viola and for me personally this is a very special day.
Yes – it is potentially the largest return ever for an Israeli VC, but this milestone represents much more than that. Watching ironSource founders ring the bell at NYSE will be a new personal highlight for me!
What is so unique about this story?
In order to understand that I want to start with a bit of history about this unique partnership – Our investment in ironSource started when we backed Volonet (led by Tamir Carmi, Arnon Harish and Nethanel Shadmi).
After a rocky start (another story to be told one day) the company started to gain momentum but then was approached by ironSource, which was bootstrapped by Tomer Bar-Zeev and the Milrad brothers (Itay, Eyal and Roi) who wanted to acquire Volonet.
My first meeting with Tomer was to discuss the potential combination. This marked my first experience with what’s come to be known as “Tomer’s magic” (which now so many people are familiar with ). The energy, their mastering of the technologies and more importantly every aspect of the business side. They were relentlessly focused on growth but also on profits, as they were self-funded and Tomer was still living at the second floor of his parents’ house.
While we were not thrilled about the desktop market, which they were pursuing at the time, this was a team that had the vision, the verve, and the vitality to make big things happen.
It was clear we need to be part of the ride…
The successful partnership between Volonet and ironSrouce teams foreshadowed great things to come – an amazing DNA of partnership, openness, and the ability to transform acquired founder-led companies into an integral part of ironSource.
The only problem? Tomer and the team did not really want to necessarily build a large company and certainly were not interested to have a VC on their board. Convincing them to do so took a special effort and a unique structure which included a large unusual additional bet by Viola.
Just a few days after we signed the term sheet but before the investment was closed, Tomer rang to tell me that ironSource had just been approached by a large US competitor with a purchase offer at a value that was double the valuation we agreed on.
This was a very tempting offer for a bootstrapped company and financially would be a game changer for the founders. It seemed like a no-brainer and as our term sheet was non-binding, I assumed they would sell, and we will not get to invest.
The call continued, and as Tomer consulted with me about the details and the dynamics of the offer, I was struck by how he kept speaking of “we,” while I kept saying “you.” This wasn’t lost on Tomer, who asked me at a certain point why I kept referring to the deal in terms of “you”. I told him I assume they will go ahead and as the term sheet was non-binding, we will not be part of it.
His reaction? “You are crazy! I don’t care if it is binding or not; we shook hands, and you are my partner now. Worst case, you will not invest and just get the profits.”
That wasn’t all. “By the way,” Tomer added, “I also want you to come with me to negotiate as I have never done this, and you have done it so many times.”
This answer taught me so much about Tomer’s unique ethics. The partnership and deep and close friendship that developed between us over the years was launched with that simple fair and straightforward answer.
So, there we found ourselves together on a sleepless flight from Tel Aviv to New York, followed by a very long night at the bar of the Standard hotel in New York.
I was on a mission of a lifetime: to convince Tomer not to sell and build together a large company.
We talked about the risks, the challenging market we were in, the dynamics of a market dominated by giants and the personal situations of the founders, but more than anything I tried to share with him why building a large company is so rewarding… this was my passion when I Co-founded Viola and this continues to be my lighthouse. I was convinced this team will make it and was happy to walk away from a very nice and amazingly quick returns for our fund but, as we always believed in Viola, it is the entrepreneurs decision and we back any decision they take!
Just a few hours later, the founders made the decision and we walked into the meeting with a simple message: ironSource wasn’t for sale.
We held the line even after the company increased the offer significantly. We came back to Israel, executed the investment (at the original valuation!) and began a journey united by a shared mission of building together a large company.
Ronen Nir (GP at Viola) and I were the only outside board members for a long time.
In the picture: ironSource founders with me and Ronen Nir (Viola) who was also on the board
There are many lessons that can be learned from this amazing success (yes – including many mistakes along the way) but let me highlight three main takeaways:
1. Team and culture
2. Business model innovation
3. Growth strategy
Team and Culture
The unique culture that Tomer and his partners built is unlike anything I have ever seen. In fact, over the years, I tried to bring more structure and more outside blood, but the founders, rightfully, insisted on doing it the ironSource way. The entire C level are founders.
The culture is based on trust, openness, and excellence in everything they do. To the outsider, it may seem casual and chaotic but the ironSource team is as focused and as disciplined in everything they do as much as any executive team. Everything is measured, and clear KPIs and budgets are followed. They challenge everybody with very aggressive goals and demand the highest level of execution. They are brilliant technologists (the Milrad brothers are the real secret sauce here) and the ability to connect technology and business is truly remarkable.
Business model Innovation
We at Viola are huge believers that business model innovation is as important, and even sometimes more important, than technology innovation. Over the last decade we saw tech companies move from selling technology (Enterprise Software, Capex) to selling the use of the technology (Subscription, SaaS). Today, many companies are selling technology-powered services (Uber or Netflix) and the innovation in business models doesn’t stop there.
ironSource’s commitment to business model innovation was evident in its move to the mobile app economy, which proved pivotal to their development of a value-based business model.
Ironsource is offering a comprehensive and growing business platform for content owners and help them acquire new users, increase their revenues, and even help them with the publishing. They do that in a fully aligned model where the more money their customers make the more the company makes. This unique alignment enables a true win-win and infinite scalability and growth for Ironsource.
The numbers speak for themselves, and the one financial KPI that I believe makes ironSource a truly unique company is their net dollar retention – In Q1, it was a remarkable 176%!
Our business is all about growth.
This is the single factor that affects more than anything the value of the companies we invest in. Growth must be healthy (yes – profits are important!) but must be scalable and never be bound by TAM, by your ability to execute or by competitive threats. We always look for defendable leading positions (Moats), in a large TAM, with highly scalable and profitable operating model.
When we invested in ironSource, they built a nice profitable business of tens of millions in the desktop space, but it was clearly limited in TAM, threatened by the dominance of the tech giants and very volatile.
I’ve long believed that to break into hundreds of millions in profitable business, a multi-product, multi-market approach is key.
The ironSource founders took this to a new level. At a certain point we focused on the mobile app economy as a more attractive, dynamic, and larger market, and the ironSource team in their own unique way set a very aggressive goal to become a global leader in a market they were just entering. Then, by combining homegrown new product initiatives and by making bold acquisitions of complimentary founder-led companies, they were able to create this fast-growing, highly profitable global leader in the app economy. They moved quickly and used the most advanced technologies but also perfected every aspect from Big Data and AI to graphic design, user experience, financial metrics, and beyond.
The combination of aspirational and bold goals, large TAM, meticulous execution and both in-house and complimentary outside talent is an amazing formula for creating Decacorns!
On a personal note –
One of the best compliments I have ever received in my career as an investor was when Tomer called me “Co-founder”.
It’s been amazing and gratifying to have had a front-row seat to ironSource’s success and to develop the unique partnership and friendship with Tomer and the founders team.
But as we always said at ironSource, after reaching another great milestone – this is just the beginning!
I am confident the public investors who are now joining this amazing ride will enjoy much more success in the years to come.