Social Responsibility: The Tech Industry's Next Frontier
Credit Suisse Thursday, 05 May 2016.
Shlomo Dovrat, pioneering entrepreneur and general partner of Israeli VC Carmel Ventures, believes that the tech industry is in good financial shape. But the industry must do more to fulfill its social responsibilities, he argues.
Shlomo Dovrat, 56, is at once both an exemplar of and an outlier – perhaps the foremost example – in Israel's tech industry. His stellar track record as an entrepreneur and investor started when he co-founded software company Oshap Technologies at 26, steering it to a NASDAQ IPO and its eventual acquisition by SunGard for 220 million dollars. Dovrat had further entrepreneurial successes before he set up venture capital firm Carmel Ventures in 2000. Carmel, with 800 million dollars in assets under management, concentrates on Israeli and Israeli-related early stage companies. Several of its early investments, like Outbrain, Payoneer and ironSource, subsequently grew into companies with 100 million dollars or more in revenue per year.
But Dovrat is just as interested in the role that the tech industry can play in building a more inclusive society. He speaks freely about the role played by state institutions in his personal development. At a time when entrepreneurs and investors are taking an increasingly insular approach to wealth creation, Dovrat champions the role of the tech community in strengthening society. Public-minded activity includes an active role in IVN, a venture philanthropy network supporting social businesses in the fields of regional economic development and education. He was also the head of a high profile national taskforce on the advancement of education in Israel. A decade on, many of the Dovrat Commission's recommendations have become an integral aspect of Israeli educational policy.
Affable and forthcoming, when we meet in Carmel Ventures' well-appointed offices on the outskirts of Tel Aviv, Dovrat shared his thoughts on innovation, investment and fears of an incipient tech valuation bubble. But, not surprisingly, the conversation led to a consideration of tech's role in strengthening society. "I think the tech industry still lives in a bubble, and does not assume the full social role it can and should play," he said.
Venture capital investment in Israel is projected to reach a record high in Israel this year, about 4 billion dollars. But some people say there might be a bubble.
There are inflated values in the market right now, but I don't think this is specific to Israel. I think it is more about late-stage and growth-stage technology financing in the US. In Israel, growth valuation is far lower. If there is a correction, Israel will be affected, but not dramatically.
Unlike other bubbles we've had in the tech sector, it's more to do with value than fundamentals. People aren't investing in stupid ideas or building businesses that have no merit. I think great companies are being built. It's a question of, I think, what's the value? When I hear that IPOs, in about 25 percent of the cases are down from the previous private round, I'm worried. When I hear that private valuations are higher than public valuations, I'm worried. But again, this is more a US phenomenon.
Coming back to Israel, we went from 2.5 billion dollars to 4.2 billion dollars over the past three years in venture investments. However, the amount of money invested in early-stage companies, at the seed and A-round stages, has remained quite stable. What Israel (is seeing) now – and it is something I am very passionate about – is a shift from creating. Israel has always been great at creating great products, but now we are building great businesses. Larger companies, more significant companies, so there are more opportunities for growth.
Carmel Ventures is disproportionately successful in relation to its size. What principles do you focus on in considering investment opportunities?
We believe that the only way to achieve the type of returns (we want) is [the mindset] that we are competing against the top tier funds in the US, not just other funds in Israel. We view the venture market as being global in terms of returns and in terms of investments in our companies. The only way to achieve this type of return is by creating a significant category of leaders – unicorns. Companies that could one day be worth a billion dollars.
The only way to do this is to develop one, two, even three hopefully very large successes. We are willing to take higher risks, we're willing to be bold, to go early. We prefer to invest a lot of money and a lot of time in fewer companies, and we have been reasonably successful with companies like Outbrain and ironSource and Payoneer.
But beyond this, we want to invest in companies [with the potential to] transform the world. We are looking for entrepreneurs that are trying to make an impact and completely transform the industry. We are looking for the entrepreneurs that want to make a difference. This isn't just out business strategy, it's also our passion.
I consider myself a social entrepreneur, not just a business entrepreneur.
- Shlomo Dovrat
You started off as an entrepreneur at a young age and with what seems like a lot of personal confidence. How does this mindset come about?
When I went into the army, I discovered a world of technology, and I fell in love with it. One doesn't think of the army as a place that encourages entrepreneurship. But actually one of the interesting things about the culture of Unit 8200 is that we were encouraged to take risks. I always say that the difference between societies where entrepreneurship is strong and those where it is not is that failure is an option, I had a meeting today with a very senior person from Europe, and I told him that the problem in Europe today is that people are more afraid of failure than they are eager to succeed. And when that is true, then there's no entrepreneurship, there's no innovation.
When I was 20, I found myself running multi-million dollar software projects that were critical for the country. I was given that type of responsibility at a very young age. I created, invented, a lot of these projects. Some were stupid, some were very good, and [after leaving the army] I knew I wanted to do my own things, be independent. Because that's how I was trained. I wanted to make an impact. I looked for challenges, I got to work with some of the most brilliant people that exist. You draw a lot of confidence from this type of person. So I've always been something of an entrepreneur. But I consider myself a social entrepreneur, not just a business entrepreneur.
I'm particularly interested in the connection between the opportunities you have benefited from, education and technical expertise, and your subsequent career trajectory. It feels that these experiences gave you both the confidence and the know-how to set you on your path as an entrepreneur.
I'm fascinated, obsessed, even, by education. Everyone speaks about the economic role of education, how it enables social mobility, enables people to realize their full potential. This is important, of course. But I also think that education is very important in terms of a country developing an ethos. Public education, which I'm a big believer in, is a very important value statement by the country. I spoke publicly about this, and became more and more interested in education reform around the world. When the government invited me to head the task force, at first I didn't want to, but then I felt that there was a real commitment from the government to actually listen.
Ten years on I would say that 60 percent of the recommendations have been implemented. The professionalism of teachers in Israel has improved dramatically, as has the level of school management. We now have free kindergarten level education, which wasn't the case before. I think there's still lots of work to do, even though public education has improved, and I'm still trying to help.
I also think that education is very important in terms of a country developing an ethos.
- Shlomo Dovrat
You have a demonstrable commitment to social responsibility. I'm interested in your thoughts about the role that the tech industry can play in fostering social change in Israel.
In many ways, the tech industry presents as a positive model for society. Open, mobile, no discrimination. It's not an old industry with barriers that prevent people from realizing their talent. However, the success of the tech industry has, in a way, increased social gaps in Israel. The difference between the Israeli tech industry and the rest of the country is so great that we live in a dual economy.
To be fair, the government has made a huge contribution to the development of the Israeli tech industry. But representing Israel as a vibrant, great, stable economy is a misleading representation of the country as a whole because of this dual economic structure. I think what we need is an environment that supports economic growth. We need less regulation, less bureaucracy, more of what the government did to support the tech industry.
Israel, as a whole, would benefit from some of the ingredients of the tech economy – innovation, entrepreneurship, quick adaptation. I'd like to see these adopted in local industry, housing, the agriculture sector. But also, the tech industry needs to be more vocal, more active in the civic conversation. It needs to be a more active participant in the dialogue about how this country should be managed, not least by being a role model for better social integration.
Written by Akin Ajayi for Credit Suisse
- Tags: 2016, Akin Ajayi, blog, Carmel Ventures, Credit Suisse, early stage companies, entrepreneurcountry, entrepreneurs, featured, global, investments, IPOs, ironSource, Israel, Israeli Venture Network, IVN, Oshap Technologies, Outbrain, Payoneer, private valuations, public valuations, seed investment, Shlomo Dovrat, social responsibility, SunGard, tech industry, uniccorns, VC
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