This week, Startup Grind TLV hosted Viola Group and Viola Ventures Co-founder Shlomo Dovrat. Shlomo is a veteran of the Israeli Tech and Venture Capital scene, starting his career over 30 years ago as a bold and driven entrepreneur. He took his first company public in the NASDAQ when he was just 26 years old, and took his second company public (Technomatix, now part of Siemens) when he was 34. His third and fourth company (Mint Technologies and Decalog), in which he was an investor, were both sold to Sungard a few years later, so by the age of 40, Shlomo found himself financially independent, but “jobless”, which spurred the creation of Viola Group, Israel’s leading technology-focused investment group with over $3 billion assets under management.
Here are some of the highlights from the interview:
What sort of vision do you need to have as an entrepreneur?
According to Shlomo, the first question you need to ask yourself if you decide to become an entrepreneur is “Why?”
For Shlomo, being an entrepreneur is all about wanting to make an impact and change the world, because if your only motivation for being an entrepreneur is to “make a quick buck”, there are far more rational ways to do that than to embark on the path of entrepreneurship.
“Being an entrepreneur is hard. It’s a tough journey and an emotional roller-coaster, so you have to be resilient, you have to be passionate, and you have to have a vision that’s transformational.”
“For me entrepreneurship is not about creating another product or another feature or adding incremental value. It’s about looking at a market and totally transforming it. When you look at companies like Uber, Airbnb and Facebook – they didn’t just create a great product, they transformed an entire industry. I like people who have that kind of vision.”
The “vision” is such an important part of entrepreneurship, according to Shlomo, that when he’s getting ready to decide whether or not to invest in someone, he challenges them with a scenario: Presuming that they “make it big” one day and achieve a successful IPO, if a leading publication should do a big feature story about them – what would the headline of the story be?
If their answer is around money or “huge returns” etc., then he’s not likely to invest in their startup, but if the answer is about making a difference and changing the world, then that’s the sort of thing that Shlomo likes, and he usually refers to two founders in Viola Ventures’ portfolio to illustrate this point: One is Yaron Galai, Co-founder and CEO of Outbrain, whose answer was “to change the way that content is consumed online” and the second is Tomer Bar-Zeev, Co-founder and CEO of ironSource, who replied “a company that dominates the app economy”. Both were strong answers that were indicative of the passion and vision of the entrepreneurs behind them, according to Shlomo, and in hindsight he was right. Both entrepreneurs went on to lead companies that now earn hundreds of millions of dollars, but they gave their visionary answers right at the beginning of their journey, and these are the types of entrepreneurs that Shlomo likes to back.
How do you know if you have a good idea for a startup?
Shlomo admits that he doesn’t have a “crystal ball” that can predict which idea will be the next big thing (“otherwise I probably wouldn’t be sitting here right now talking to you guys”, he jokes) – but he does have some insightful tips. In particular, Shlomo has observed that many great opportunities have presented themselves in the past when there was a significant platform change in the world, like when the PC or the smartphone were invented. And although it is unlikely that the vast majority of entrepreneurs will ever come up with transformational ideas of that magnitude, every time these massive changes occur in our world, they present many secondary opportunities.
“The introduction of smartphones, for example, gave birth to an entire app economy, with 1.5 billion apps online. It created an environment that made over-the-top video possible, as well as tremendous user-productivity in enterprise, and it’s still early days for the mobile platform.”
Another area that’s given rise to an abundance of secondary opportunities is the sharing economy, which Shlomo believes is a platform and a business model that is changing the world. Viola Ventures made a seed investment recently in a startup called Splacer, for example, which is creating “an Airbnb for events”. The platform allows event organizers who are tired of using the same old venues, to source new and unique spaces provided by anyone or any business that’s happy to make their space available for others to hold events in.
In terms of “what constitutes a great idea for a startup”, Shlomo also likes ideas that address mundane areas of our lives, and IoT (Internet of Things) is another area that Shlomo feels is ripe for some great startups ideas.
What does it take to create a successful company?
Shlomo explains his idea of a great company using a mantra that he calls “The Three P’s”: Passion, People, and Professionalism.
Being an entrepreneur is hard, yet if you are successful, it’s one of the most wonderful things you can experience, he says. That’s why entrepreneurs have to be true believers, and they have to be obsessed with making the dream happen.
“It’s not a rational decision to give up so much of your life for a dream that probably won’t be successful. So if you’re not passionate about it, if you’re not willing to go through that sacrifice, you might as well not even start.”
And passion isn’t just a requirement from the founder, says Shlomo. The whole team needs to be just as passionate. One “tell” about the level of passion in the team is apparent even as early as the pitch presentation to VCs, for example. If during the pitch, while the founder is up there presenting his butt off, the rest of the team members are fiddling on their phones or yawning, that’s a good indication that there’s a lack of passion in that particular startup.
When it comes to people, Shlomo says that you don’t just need “good” people – you need outstanding people.
“You need unbelievable, exceptional people. You need people who are better than you are.”
And it’s not just about the quality of the people, but the ability of those people to work as a team, to create transparency, to establish values, and to take the time to listen not only to each other but more importantly, to their customers.
“If you listen to your customer, understand where the value lies for them and make sure that you’re building your business with that in mind, then you’ll be far more likely to succeed.”
One of the biggest factors in the success of a startup is the team behind it. “I’ve seen terrible ideas transform into great companies because they had great teams, and many of the successful companies ended up with a product that was different from what they had in mind at the beginning. Exceptional teams build exceptional companies even if their first ideas suck.”
Shlomo feels strongly that in entrepreneurship, no detail is too small to think about. Obviously there’s a point where too much attention to detail starts to become unproductive so there’s a limit to the level of effort you should go to, but to be a successful entrepreneur, you have to be cognizant about what you have to do in order to nail it – whatever “it” might be.
The relentless pursuit of excellence is a core point of differentiation between great companies and “OK” companies.
To illustrate this point, Shlomo gives another example that’s related to the startup pitch to VCs. “When entrepreneurs come and presents to us at Viola Ventures; if the fonts in the presentation are not identical, or if the numbers don’t fully add up, or if there’s a mistake in the bio or in spelling, then they have a huge uphill battle with me, not because it’s really important that the fonts are the same, but because if even at this critical stage of raising money for their startup they don’t bother checking that their presentation is flawless, then they probably don’t have what it takes to be a real entrepreneur. I believe that attention even to the smallest of details is an important part of the company’s culture and what drives people to embrace the idea of excellence.
How do you decide whether to invest in something or not?
Most investors would say that they have a sensible, rational set of criteria by which they judge a potential investment, and that they conduct an in-depth analysis and all the due diligence you’d expect, “and we do that here at Viola Ventures too,” says Shlomo. “But at the end of the day, the majority of the decision is based on a gut feeling.”
As someone who has been visiting Silicon Valley for many years (sometimes up to 10 times a year), Shlomo knows many of the biggest names in the Valley personally, and can attest to the fact that many of them make investments purely based on intuition.
“I’ve seen great investors, who are very poor analysts, and I’ve seen great analysts who are very poor investors, and what makes the difference between a good or a bad investment, is that gut feeling,” says Shlomo. But going with your gut feeling doesn’t give you the freedom (as an investor) not to do the work.
“Go with your gut, but always remain sceptical and always double-check your instinct. Even if you think that someone is a great entrepreneur or that they have a unique product, you should still do the reference checks because you might find that your impression was wrong, and you must also do the competitive analysis because you may discover competitors you didn’t know about.”
The mark of a truly great venture fund, according to Shlomo, is if there’s a collective gut feeling, and a good, strong partnership. At Viola Ventures, for example, which he co-founded with Avi Zeevi, Shlomo readily admits that he doesn’t have “all” the wisdom when it comes to every investment, and he’s happy to be challenged when the consensus differs from his own opinion, and this collective wisdom is one of Viola Ventures’s greatest strengths.
What types of companies does Viola Ventures like to invest in?
Shlomo explains that investors in Venture Capital funds (also known as Limited Partners, or LPs) expect exceptional returns for their investment. “They park their money with us for many years, and for that, they expect a return of at least 3X Net. That means that on a $200 million fund, we have to return at least $750 million.”
For this reason, Viola Ventures’s strategy is to aim for startups that can potentially become massive, category leading companies for the fund (or as he calls them, “home runs”), and it’s a strategy that has seen our fund, which represents around 2% of Israel’s venture market, amass in their portfolio about half of the Top 10 companies in Calcalist’s list of Top 50 companies.
These types of “home run” companies usually possess the following characteristics:
1. Founders who have grand, transformational visions and who are passionate about their idea.
2. Exceptional “competitive moats” (a term coined by Warren Buffet that refers to an “unfair advantage” that protects the company’s long-term profits and market share from potential competitors) and have potential to become category leading companies
3. Low risk from potentially larger competitors not only within their own market but also in adjacent markets whose “giant” players could potentially make a play to take over the adjacent market as well.
4. Scalable business model.
“Most of our successful entrepreneurs are first-time entrepreneurs. We’re not necessarily looking for experience (although we also like second-time entrepreneurs who are still passionate, and we have a few of those in our portfolio as well). We’re looking for people who know how to execute, which usually manifests as an understanding of the market and of what constitutes the minimum viable product, and we’re looking for entrepreneurs who know how to listen.”
“When it comes to investing, we prefer to fail rather than not take the risk.”
What tips can you give entrepreneurs when pitching their startup to Viola Ventures?
1. Be brief. VCs have a short attention span (because they sit through so many pitches) so what you say in the first 10-15 minutes of the pitch is pivotal. To capture and retain our attention, you should aim to get your main points across right away: What is it that you want to do? What is unique about your technology or your idea? What value will your product bring to customers? How do you intent to measure your product’s performance? What is your business model?
2. Some VCs don’t like this tip, but I do: Don’t be afraid to come with a big vision (it’s fine to break it down into a short and long-term vision). Many entrepreneurs are reluctant to describe a vision that’s too grand, because they’re afraid that the VCs will think they’re deluded. But I’m not one of those VCs.
3. Be clear about your go-to-market strategy. People tend to talk too much about the “How” (to build their product), when they should be talking about the “What”, about the value to the users, and about how you want to sell it. Skip the “How” part. The only reason we might ask you about the “how” is either because we think it’s going to take you ages to develop it, or because we’re concerned that it’s too easy, which means that anyone else could do it too. But as far as you’re concerned, don’t spend too much time on the “how”.
What factor contributes most to the success of a company?
Aside from the team, which is a crucial ingredient for the success of a startup, Shlomo believes that the most important factor is the value that the product brings to the user. For example in the case of a consumer product, it needs to be addictive, and if it’s an enterprise product, it needs to be strategic for the client.
Too many companies develop a “nice to have” product, not a “must have” product. For a company to really succeed, the value proposition needs to be absolutely compelling.