The Sad End to Better Place
So now it’s all over save for the crying.
After six roller-coastery years, Better Place announced today that it was going into liquidation. This announcement surprised exactly no one. After all, the company has been circling the drain for at least the past two years, with heavy losses and little revenue. Still, it is a sad ending to what started out as a very promising story.
In its early years Better Place was held up as one of the symbols of the Israeli high-tech economy and the country’s penchant for out-of-the-box thinking.
In 2007, Shai Agassi, the Israeli wunderkind entrepreneur who had risen to almost the highest ranks of SAP, founded the company. Agassi had a real big-picture idea: Take the traditional paradigm of car ownership (I own or rent a car and I fill it up with gas) and shift it to a service model akin to cellular phones.
Agassi believed this model would prove attractive to drivers, and could then help lead the way to more mass adoption of electric vehicles.
It certainly started off promisingly. Agassi raised hundreds of millions from top investors, including a substantial investment by the Israel Corporation. The company opened up operations in Israel and Denmark along with pilot projects in a variety of other countries.
Back in the late aughts, Better Place was often used as an example of the kind of creative out-of-the-box thinking that characterizes Israel’s high-tech industry. Israeli President Shimon Peres often touted Agassi as a Cleantech visionary. In addition, Better Place served as an example of an Israeli company willing to think big, something that very few startups here ever do.
Shai Agassi
Unfortunately reality proved decidedly less shiny. The company repeatedly delayed the rollout of its service and deployment of its charging stations. The management structure was bloated, more suited to a global multinational like SAP rather than a startup with a few hundred employees. Sales were disappointing.
And as a result, the company posted heavy losses of more than $800M while reportedly having sold only 900 cars in Israel. The company’s Board of Directors removed Agassi in 2012 and the company started to spiral downward quickly.
So, now Better Place’s remaining workers are being sent home, while those consumers who bought into the company’s vision are stuck with cars that they may or may not be able to power in a few months’ time. (The company has promised to do everything it can to continue providing service to existing users, but nothing is clear cut when a company goes into liquidation).
In retrospect its failure was one of business model. For all its innovation in changing the way we pay for our cars, Better Place was still trying to a mass market transportation solution. In this it went head-to-head with the alternative of traditional gas-powered cars. In order to succeed, it needed to provide quality of service at least reasonably comparable to regular cars. And here the company failed on most fronts.
The biggest issue was the ability of driver to get from Point A to Point B. As someone described it on the radio this morning, owning a Better Place car meant living with constant low-level anxiety that the battery would run out of power without a charging station in sight.
While the company managed to set up a reasonable number of charging stations inside the big cities, it only managed to roll out the bare minimum number of battery-changing stations between cities. This despite Israel’s relatively small size, which was one of the reasons it was supposed to have been a good test case country. To make matters worse, these battery stations tended to not be located on the major roads, which made inter-city driving a bigger pain. A greater investment in infrastructure might have made a difference here.
But infrastructure wasn’t the only problem. Better Place only offered a single model of Renault sedan, but its price point was comparable to similar-sized gasoline-powered sedans.
In short, the company offered consumers no compelling reason to choose Better Place other than the opportunity to take part in a big green energy experiment. While this was fine for a small minority, it wasn’t anything close enough to start getting mass adoption.
It’s interesting to compare the failure of Better Place with the apparent success of Tesla. Like Better Place, Tesla offers electric cars. Unlike Better Place, Tesla sells a product instead of a solution. It has succeeded because it offers a high-end vehicle whose users are so passionate about the car itself that they are willing to put up with the relative lack of infrastructure.
Had Better Place invested more resources in either improving its infrastructure, or working with suppliers and the government to offer additional models at a lower (subsidized) price point than regular cars, things might have turned out differently.
All of which is a real shame. Mainly because for those of us who like the idea of electric cars and would like to see a greater adoption, the Better Place model seems like the better bet. It’ll be interesting to see if another company will rise up to take on a similar-scoped project
On Company Turnarounds and Working from Home
The big HR news in the last couple of weeks has, of course, centered around Yahoo and the new changes in remote employees.
The issue in brief: Marissa Mayer, who took over as CEO last summer issued a memo two weeks ago detailing major HR changes in the way people work. As part of the new rules, Yahoo workers who previously worked from home will no longer be allowed to do so, and employees are strongly encouraged to stay in the office.
The reasoning behind the new changes is to foster a new sense of cooperation and mission orientation, and to increase the kinds of serendipitous innovation and productivity that comes when people physically interact in an office space.
There has been lots of reaction in the Web world to all this. On the one hand are those who criticize Mayer both because they argue that telecommuting is good for productivity and question the impact this decision will have on working parents (especially mothers).
Those supporting Mayer on the other hand point to the fact that she is trying to turn Yahoo around after more than a decade of stagnation and that sometimes big changes like this are needed. Mayer apparently based her decision after looking at employee VPN usage data and concluded that the workers-from-home were not as productive as they could have been.
I’ve been thinking quite a bit about this subject and finally came to the conclusion that Mayer is probably more right than wrong. Personally, I have nothing against the idea of telecommuting. I find that when I work the occasional day from home, I’m at least as focused and productive as I am in the office. However, I like having the office environment and being able to bounce ideas off co-workers. So, while work-from-home arrangements can be great for some people, it isn’t the be-all and end-all and has a lot of challenges, especially when a company is struggling.
A bit of personal history here. About 10 years ago I worked for a mid-tech company whose core business was hardware but were also developing complementary Web-based products. This was a veteran company, which had been around for about 20 years at that point, and one which was fairly set in its ways.
Years of inertia had led to some unusual management structures, such as the fact that the company’s three original founders were still there, each one holding a co-CEO role. Also, the fact that the development team was split between Israel and the US. The actual developers were in Israel and the Director of Development worked from her home in the States. (She had started out in the Israel office, but relocated when her husband got a teaching job at a local university.) As product manager, I was the primary interface between the two.
This was not, to say the least, a great arrangement. One of the key challenges of working in a team located in different places is the need for great amounts of communication. Besides the fact that the Director Dev was seven hours behind us, for reasons of cost savings she chose to communicate with us mainly over IM. IM can work fine for some communications purposes. Ongoing discussions about what needs to be developed are not in this category.
In addition, the work-at-home setup exacerbated a lot of management style quirks that probably would have been easy to resolve if everyone was physically working together.
Now, from her perspective telecommuting was great, as she could continue to work in her position. From the perspective of management, they could retain what they considered a valuable employee (at least in the eyes of one of the co-CEOs who I suspect did not want to lose face with the others by letting her go).
From the productivity perspective of the development group as a whole, the whole thing was sub-optimal. The company is still around in kind of a walking-dead mode, still about the same size it was back then and showing no signs of progressing anywhere.
Now I’m not comparing this company to Yahoo, but there are things that are worth bearing in mind. When a company is in a protracted slump, sometimes you have to take radical action to re-energize it. If I was in charge of turning my old company around, the first things I would have done would be to get rid of the three co-CEOs and give one person the job and to completely reconsider the work-at-home policy.
I’m fully rooting for Marissa Mayer in this endeavor. Yahoo was one of the first great Internet companies and could still be so again. And if it means shaking things up, then by all means shake things up. I would only hope that once Yahoo starts regaining altitude that the blanket ban on telecommunications will get lifted in favor of a per-case reconsideration. And that this reconsideration does not get applied to the Directors of Development.
VC Fundraising in Israel - 2012
Continuing our look at the current state of the high-tech ecosystem in Israel, IVC/KPMG released their latest survey of VC fundraising. The survey found that in 2012, Israeli VC funds raised $607M which is down by 30% from 2011 (and back in the area where things were in 2004).
12 funds managed to raise capital (both closing funds and first closings). The bulk of the capital raising came from Sequoia, Pitango, and Magma (a combined $450M). In addition, four new VC funds managed to raise money.
The IVC report estimates that the amount available for investment by Israeli VC funds totals $2.1B at the beginning of 2013. However, only $484M of this amount is available for first-round investments. (The rest is reserved for follow-ons).
A Local Capital Squeeze?
IN 2012 Three local funds managed to close their rounds:
- Sequoia V - $200M
- Pitango VI - $150M
- Magma III - $100M
(Of the three, Pitango’s was technically a first closing, as Pitango VI is actually targeted to be a $250M fund.)
There has been a lot of talk in the industry about an emerging VC capital crunch. Several veteran Israeli funds such as Gemini, Genesis, and Israel Cleantech are actively in the process of raising funds. In addition, there’s a lot of chatter inside the community that says many of the other funds here are actively fundraising, but doing so in stealth. It’s unclear how many will succeed, and how many will make do with smaller funds.
Given the general underperformance of VC funds over the last decade, it doesn’t seem that the industry will go back to its levels of 1999-2000, or even where it was six or eight years ago when local VCs raised closer to $1B in new funding each year.
New Kids on the Block
The other interesting story is the rise of the so-called “mini-VCs”. In 2012, six such micro-funds raised a total of $83M. Unlike the major VCs, the micros tend to be more sector-specific such as lool who focus on early stage Internet companies or Glilot Capital who are focused on the security sector.
What Does this Mean for Startups?
- There is less money available from the traditional VCs for new investments. There is also a general shift in VC interest away from Consumer Web and back into Enterprise Software. Over the past 6 months, there has been roughly twice as much first round investment in Enterprise Software as Internet
- On the other hand, if you are the kind of company that is looking for a smaller investment then there are a number of new players in the space.
Therefore, I think we’ll be seeing more of a sorting-out as mobile app and consumer plays increasingly get funded by angels and micros while the bigger VCs focus on companies doing heavier technologies for first rounds and possibly B2C things for later rounds.
Israeli Startup Funding 2012 by the Numbers
A few weeks ago I analyzed the state of Israeli high-tech exits in 2012, which as noted was incredibly successful for investors. Recently, IVC and KPMG released their annual report looking at the other side of the high-tech funnel, namely the number of high-tech investments over the same time period.
Some key facts:
- In 2012, 575 Israeli startups raised money from investors, both local and foreign. This is up roughly 5% from 545 companies who raised money in 2011. Of these, 157 were seed-stage companies.
- The total dollar amount raised was $1.92B, which is 10% less than the $2.14B raised in 2011.
- VC-backed deals (i.e. deals in which at least one VC fund participated) amounted to $1.37B, which is down 22% from the $1.76B in VC-backed deals in 2011. Of these, Israeli VC funds contributed around $516M, down 19% from $638M in 2011.
- Breaking it down by sectors we find Life Sciences companies raised the most money ($497M) or 26% of total investments. This is up from 16% from 2011. Software and Communications investments were down a bit, Internet and Semiconductor investments mostly held steady, and there was a fairly significant drop in Cleantech.
So, what can we say about these numbers?
Seed Stage Investments
Probably the most interesting story to emerge here is the rise in seed-stage companies getting funding. In 2012, there were 55% more seed-stage deals than in 2011. The jump here reflects a number of trends going on in tech in general and in Israel locally.
Generally speaking, it is becoming easier and cheaper to build startups. This is due to constant improvement in open source software development tools coupled with cloud platforms for deployment and storage. As a result of all this, entrepreneurs can more easily take their ideas and get them to the POC or alpha stage before approaching investors, which increases their chances of getting funding.
At the same time, Israel has seen a large increase in the number of alternatives to VC funding. Over the past two years a large number of micro-VCs, incubators, “super-angels” and startup accelerators (including the one we established at the Microsoft R&D Center) have begun to operate. These players both increase the amount of money available to seed stage companies and, in the case of accelerators, help create a better class of seed-stage companies. All of this increases the chance of getting funding.
I suspect that we will see a continuation of this trend in 2013.
The Role of Local VCs
A second interesting trend is the decrease in funding dollars coming from Israeli VCs. (For the purposes of discussion, this includes international VCs such as Sequoia and Greylock who have dedicated Israel funds.)
According to the numbers, Israeli VCs invested 19% less in 2012 than they did in 2011 in total dollar terms. This could cause some concern, coming as it does when there has been a lot of discussion about how many of the local Israeli VCs will be able to raise their next fund.
However, I’m not sure this is the right way of looking at it. If you look at Israeli VC funding as a percentage of the total money invested in Israel in 2012, then Israeli funds are actually increased their share (38% vs 36% in 2011), and have kept in line with their relative share in 2009 and 2010.
Bottom line, while there is room to question where the local VC industry is going. It’s a bit soon to start crying gevalt.
Funding vs. Exits
One final note is the interplay of funding and exits. In my last post on the subject, I looked at the startup exits in 2012, and briefly discussed the sector breakdown. To some degree, in a well-balanced tech ecosystem you would expect to see a rough correlation between the sectors getting the investments and the sectors bringing the exit.
If you compare the sectorial breakdown of exits vs. financing you get the following chart:
In Israel’s case, this holds true about half the time, especially for Life Sciences, Communications, and Semiconductor startups. However, in 2012, the Software sector provided much greater exit value compared to the amount of investment. And the opposite is true for Internet (4% of exits vs. 21% of investments) and Cleantech (0.2% of exits vs. 5% of investments) startups.
I don’t want to draw too-strong conclusions from this breakdown, but it does reinforce the notion that the Israeli technology industry continues to be strongest in the traditional sectors it has always been strongest. The upcoming sectors (especially Internet), while incredibly vibrant, still continue to struggle to prove themselves.
