DV: At Index, we invest in technology and life science companies from early through to the growth stage of their development. We're global in our outlook and investment philosophy, and this geographic diversity is one thing that makes us different. Many other VCs only invest in companies that are 'in their own backyards,' but we work with entrepreneurs and businesses spread around the world in addition to our many portfolio investments across Europe, over 25% of our portfolio is US based and 10% in Israel. The real value of this is that it puts us in a great position to help our companies expand geographically when they are ready.
We also have a great group of partners who bring very different areas of expertise to the table people who are leaders in their fields and know about a huge variety of sectors including consumer internet, IT infrastructure, enterprise software, semiconductors, clean tech and communications.
I generally focus on our growth fund, so I tend to look at later stage companies that have established themselves as leaders in their field and need help taking their business to the next level. But regardless of the stage of the company, the things we look for in CEOs and entrepreneurs are consistent. In a nutshell, we're looking for great leaders; people with a lot of ambition who think big and are able to motivate others to do the same. This type of person is able to recruit the best talent in the industry to join his or her company, which is vitally important, and also able to help the team they assemble navigate through the ups and downs that any business will face over the course of its lifetime. Great leaders have a vision that they are able to clearly articulate and convince other people to buy into.
What's your view on demand-side platforms (DSPs)? Just another ad network? Or possible a new, huge opportunity?
Personally, I'm a little dubious about the real potential for demand-side platforms. I do think that there is room for a demand-based company today, because the way ad networks are currently set up leaves room for someone to better organize the inventory. This isn't as relevant for bigger publishers who don't need anyone to aggregate demand, but does play a role with the smaller, long tail publishers. So there is space for these types of companies, but I would not bet on it being a huge market. Over time, I think the industry will make fundamental, structural changes to become more optimized and efficient, and this will get rid of the need for extra players.
There has been recent criticism about how the venture capital community can unnecessarily involve itself in the day-to-day, operational aspects of their investments - when they often don't have ops experience. How do you respond?
Regardless of a VC's level of operational experience, I've been in the ad industry for 10 years for example, the goal with portfolio companies should always be to concentrate on the areas where you can add the most value. I've found that VC firms can be most helpful with recruiting top talent to portfolio companies and opening doors to help the company make business deals or form partnerships. We shouldn't be trying to take over the day to day management of a company - that's what the CEO is for. But, based on our extended networks, we are in a great position to help our portfolio companies with introductions to key team members or a partner that could end up having a huge impact on the business.
What's going to happen to ad networks that are arbitraging and just living off of arbitrage? Is there still a future for them?
I see this as an issue with the entire value chain not just the ad networks. The question should not be how a company can get a slice of the pie, which is what a lot of people are focused on now, but how they can make the entire pie bigger. The businesses that I've seen that are able to add significant value to the industry, publishers and advertisers, are based on truly different technology, and I think this is the key. New technology can fundamentally impact how something in the value chain works, adding 20-50% more value, which is a real step change. We've seen this with some of our portfolio companies, like Criteo and OpenX.
Businesses that are trying to take their own little piece of the pie are going to have a difficult time. The industry is going to see a huge wave of consolidation and the ones who have the best technology, which are adding real value, will win. There are too many people in the middle right now. This also sets up a great opportunity for new leaders to emerge. If new companies are able to go public and assert their position in the industry, they will be the ones to drive this consolidation not just Google, Yahoo and MSN. I see a lot of this movement happening in the next two years and think it will lead to less fragmentation overall.
How is the funding climate looking today? Are you seeing improvement?
On the funding side, there is still money available for great businesses. On the company side, however, the difficult market has put pressure on businesses that might otherwise have done well. These companies will have a hard time raising money. When the overall industry is expected to decline for the first time ever, there are fewer success stories. But the good news is that it becomes more obvious who the winners will be - there isn't as much unnecessary noise. In this climate, you have to truly be doing something different to be successful it can¹t just be more of the same.
Do you have any other thoughts about the industry?
We're expecting a relatively better year in 2010, but think that it's going to remain a very challenging environment. The strong will survive, but I would expect to see some of the mid-level players get weeded out.
We've also seen Google step up this year in areas outside of search. They are doing a great job using technology to track money from the network and add real value. This is going to force other players in the industry to try and keep pace. You really have to think about how to bring more technology into your network if you want to try and compete with Google.