PRINT THIS PAGE Bubble, bubble, toil and trouble
27/02/2008. Source:IVCJ (Israel Venture Capital & Private Equity Journal). Isabel Maxwell
In this IVCJ article, Isabel Maxwell profiles Sam Somech in her continuing series on investment and high-tech personalities. Reflecting on Web 2.0 and on the fear of many that a new Internet bubble was on the horizon, I contacted a master Internet entrepreneur – Sam Somech – who himself recently invested in 2.0 enterprises and is a world expert on middleware messaging technologies.
Somech was president, CTO and co- founder of NASDAQ-traded Level 8; a founder and CEO of Data Voice Systems, where he developed the concept of transactional messaging that became the foundation of IBM’s MQ series; and the CEO of Itemfeld, sold in November, 2006 to Informatica for $55 million. Somech is known as a formidable and experienced entrepreneur and an active operational angel investor with his new eXeed Technology investment fund. I got quickly to the point, asking about the biggest challenges faced by enterprise 2.0 companies in translating their business models into profitable revenue streams. He came back instantly: “The challenge is going to be how to make money from Web 2.0 technologies that are either open source or will be offered by companies like Google or Yahoo at very little cost. Niche verticals are probably the answer.”
Along those lines, Somech recently invested in Dapper, a classic Web 2.0 company that he says, “satisfies the integration of Web content into anything that I would like to create. It will mashup my Web site with other content and integrate any corporate data with Internet data.” Dapper’s mission is to allow anyone to easily build an application programming interface (API). It allows the use of Web-based content in every way imaginable. And by use, Somech means going beyond just reading or viewing a Web page. For instance, you may want to create an RSS feed or take a site’s content and put it on a map, receive an email alert when your site’s Alexa’s ranking goes below 5000, or create a mashup of your favorite band’s tour dates and a camping location reservation Web site. Dapper helps you do it.
For Somech, “the [Dapper] technology is something fundamental that is required for the Web, so it has added value in its core technology.” The question beyond that, he says, is “can the company become a money-making operation?” And that, of course, is the rub of any investment, not only investment in 2.0 companies.
Somech has his own way to lower investment risk and grow Web 2.0 companies and even other companies. He describes a new type of fund that, he says, is a way for him “to get involved in investing, but also actively manage companies that I invest in myself.” Somech and his two partners actively chair each of the companies they invest in. They don’t do random investing, and they have daily involvement in their companies. He considers the bubble issue – “I think there is some bubble, but it’s far more realistic than what happened in the ‘bubble time.’ The earlier bubble was very unclear on how one would earn money. There was no trace of reality. Today, there is more grounding, and investors are very careful in evaluating a company’s potential down the road. The issue is how long down the road will that happen? It is not similar to what happened in 2000.”
In the area of blogging and social networks, “The dream,” Somech dryly intones, “is that there will be yet another FaceBook around the corner because of some minor technology edge or something like that, or even something that is fundamental, but that is only speculation now. I actually think that people are more careful now. They understand that even if they have some better technology, it’s still going to be very difficult.”
Somech reflects back on what happened at Level 8: “In the hype of that time, Level 8 got an offer of $1 billion. There was no fundamental way that a company that had $80 million in sales could be worth $1 billion. There was no reality there! It went public less than a year after it was founded; its market cap was $80 million. The company was offered $200 million and then $1 billion, both of which were rejected.”
Somech appears very cheerful about competition in general and the future of the Web. He comments about the gorilla of them all, Google, in a helpful way. “In general, Google is a good phenomenon that inspires the world to innovate faster” – and certainly he is not letting any grass grow under his feet, bubble or no bubble.
To conclude, about bubbles and non-bubbles, there will always be a bit of one when you have companies being funded by VCs and angels at hefty valuations without strong fundamentals. So, the moral of the tale for 2007 is whether you are an investor or entrepreneur, companies that are created to fill a real market need and can score consistent revenues, will win out over big unproven ideas from bright young things, no matter how passionate and innovative they may be.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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