Gadi Behar
Questions for Gadi Behar
August / September 2006
Volume 4 Number 4
Every entrepreneur needs an angel. In Silicon Valley, angel investors have earned their place alongside venture capitalists as the grease on the wheels of a startup. They provide seed capital to companies at the earliest stages, finding and funding companies and entrepreneurs before the venture capitalists will touch them. Gadi Behar, an Israeli-born real estate investor, is the managing director of Silicom Ventures. Since he founded the group in his living room in 1999, it has become one of the largest angel groups in the United States. The group has poured the money of its wealthy members into more than 50 companies across the globe. Among its hits are WebAppoint, which was acquired by Microsoft, and InterVideo, one of the best IPOs of 2003. This year, the company created a venture fund to invest alongside the angel members. It has three full-time staff members, four part-timers, and it taps its members for advice. Dean Takahashi spoke with Behar for Innovation.
Tell me about Silicom Ventures and how it got started.
BEHAR: It started in the bubble. All my friends had started new start-ups. Everybody had a new idea. You remember the bubble. Everybody was excited. I invited a few friends to my house to see what they have and what we should invest in. And to brainstorm. Slowly it grew up to become one of the largest angel and venture capitalist investor groups in the valley. What we do at Silicom Ventures is an investment group. We invest in emerging technologies, breakthrough technologies. We also invest in later stages for a good return on investment. We have investors who care about technology and about ROI.
Can you describe the difference between an angel and a venture capitalist?
Yes. A venture capitalist usually needs more time for due diligence. That's the main difference between angels and venture capitalists. They really need two to three months before they invest. They have other people's money. Angels invest their own money and they can invest the next day or the same day. Today we have a startup here and we decided to invest in it already. It's fast money. We have already done due diligence. But venture capitalists have deep pockets. In the second round and third round of funding, angels usually don't participate. But venture capitalists do. It used to be that venture capitalists were very active with the organization of a startup. We find now that angels are very active. This is their own money. They try to help. They know the technologies. They have the connections. You put so many smart people together in one room, you get a good result. That's what we have. Teamwork is really great. Some of the angels sometimes join the companies one way or another.
Talk about your own background and how you became an angel.
My background was business-oriented. Anything with good money, good return on investment. Just prior to starting the group, I was investing in real estate. With the bubble, I shifted to high tech. My strongest area was the business side. Most of my friends were in technology. Originally, I am from Israel and I've been here 27 years. I did pretty well in residential real estate. You can profit five times over if you know when to buy and when to sell. Wait for the right moment, purchase at the right price. I was always a networking guy. Silicom Ventures organizes events in different countries. Last year, we had events in Netherlands, Mexico and Ireland. We have become international.
Why do you do the events?
It's a networking occasion. We get entrepreneurs from different countries. It's a global, small world. We have investors from Israel, the Netherlands, Canary Islands and elsewhere. We take all the good companies. We don't care where they come from. We take these to investors and ask them if they would like to invest.
When you formed in 1999, how many members did you have?
That very first day, we had eight people. Pretty soon, we had 30 people in my living room. It was too crowded. I didn't have a choice and we had to go outside. We have 300 paying and registered members. There are another 400 associates with some kind of relationship with Silicom Ventures.
Who can join? Do they have to bring in ideas?
They don't have to. But when somebody applies, we look at that. They need to give feedback or be involved in companies. Then they have to be a qualified investor. That's a regulation of the Securities and Exchange Commission. We like more active investors. It's not for everybody. It's for people who are very active.
How often do the members bring ideas for companies?
We get about 200 companies a month pitching to us. We meet once a month with the whole group, and usually we pick 10 out of the 200 companies to bring to the group. They will then pick one or two to fund. We have screening meetings on a daily basis.
What is the flow like now compared to the bubble?
The bubble was crazy, but we were not as large as we are today. We did get many, but people didn't know about us as much as today. Today we have a larger deal flow. We were smaller then. There are still a lot of deals out there. After the bubble burst, they went to sleep. Now they are waking up. They change the name of the company and the business plan. They are coming back again. Search technologies are coming back, especially after Google. If you look at eBay, Amazon, they are dotcoms. So in my opinion, dotcoms are coming back and coming big.
What else is on the hot list?
A lot of medical companies. Nanotechnology. Fuel cells. Alternative energy. We had an event on it recently. This is really very hot. The price of gasoline is going up. Some say it will get to $4 or $5 a gallon. If it goes that far, it will be a crisis here. They have to find alternatives. Any alternative would be a good investment. An emerging technology will be a good investment.
How did the group survive the post-bubble bust?
What happened was, after the bubble burst, people were cautious. The venture capitalists would not invest. We did more educational things. We had speakers. We had forums. Then we would get involved with companies. It was harder to raise money. It has become a little bit easier. It's coming back like it was before. Some people were sitting on the fence, including the VCs. But they were always curious what was going on. There are better valuations. The terms were better. When someone is running out of money, they grant better terms. So even when there is a bad economy, you can do good deals.
There was a period when the venture capitalists were taking a lot more share and the angels were getting diluted? They would get crushed in later rounds.
Dilution is the problem that almost every angel will face. Angels got smarter. They try to co-invest with the VCs. We invest in beginning rounds with the VCs included. Another way to do it is to get a lower valuation and make sure the share is spread out. There is always a war going on over who gets what share between VCs and angels. But if there are no angels, there will be no opportunities. As a result, they are being careful.
Have you seen many government-related deals?
Yes, we see scientists from NASA, Los Alamos National Laboratory and others. There are lots of emerging technologies related to national security and homeland security. There is a lot of nanotechnology. That's still more futuristic to investors who want to see ROI in a few years. They argue that it is not. But I have also seen technology from the Israeli government, which invests actively in incubators over there.
How do the government-related companies get their commercial experience?
They do need different management. Working in government is different from working in the for-profit world. Definitely they need good marketing and good leaders. They have to see how to get a technology that can get results in a short time. Most people don't want to see a return in 20 years. They want it in three to five years.
What is the area where more of the money is going into?
We invested in a couple of medical firms, from Stanford. An ultrasound company, Sensat, was acquired by General Motors a year ago. Medical equipment. Last month we invested in a security company for laptops. They still need help in protecting them. Fuel cells—€”we are just now looking but have no investment there.
How many investments do you make in a year?
I would say six to eight. Back when we started, it wasn't as formal. We do have a venture fund that invests alongside the angels now.
Is there competition among angel groups?
There are fewer now. Many did not survive. Band of Angels is one that did. We do work together. Sometimes if you join forces, you can start a company without a VC. They can drain a lot of resources from a company with due diligence. Some companies can boot strap. Angel groups can invest $800,000 to $1 million each.
What's the worst pitch you've ever gotten?
I'll never forget. A guy was talking for one hour. And no one knew if he had hardware or software. We had no idea what this guy was talking about. We learned our lesson so presentations are only five minutes. If you can't deliver a pitch in five minutes, you can't do it in one hour. We had another professor. We had one good marketing guy. In two minutes he convinced people to invest. It's how you put your value proposition on the table. Why should someone switch to a technology? Most people forget about this. They find a solution but don't have a problem. Most people should find a problem and build a solution for it.
How do you decide when to invest?
We sometimes have more information than a VC. Our members may be doing the due diligence for the VC. They have money and they take longer to invest. We do have a lot of information. We try to find one person in the same space and check all the competition. We see those people have already done it a few times. We have validation from customers and that can be very important. Sometimes they do technology without even checking with customers. They may work a year or two. That wastes money. You have to move fast. If you don't someone else will be there.
Dean Takahashi is a reporter for the San Jose Mercury News.
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