05/08/2011

Where are they now?


Yaron Galai talks to Hatty Stafford Charles about cautious VCs, good timing and the potential of the Forward button.

By Hatty Stafford Charles, Communications Director at AngelNews

Yaron Galai has always had a fascination for the browser Forward button; “The Back button is pretty simple, you’re browsing, you can go back and look in a different direction but the Forward button is almost never active. On the other hand, the web is full of interesting stuff and there is nothing to help you discover the next thing to go to and spend time on. I wanted to power up that Forward button and take people to good content.”

His initial passion was invention and after a seven-year stint in the Israeli Navy, he studied product design at the Holon Institute of Technology, but before graduating he had already started his first business as a web designer. Over three years he accumulated around 40 clients and it was an invaluable way to learn about every aspect of HTML, hosting, SEO and so on, along with the design of the client’s page. This was in 1996/7 when the internet was still in its infancy and Yaron was one of many individuals working as sole traders who were pioneers of the internet we know today.

However, it was from a design point of view that he was working in the industry and it was that element which fascinated him; how websites work, connect and are used rather than how they look at a superficial level and he cites the community website craigslist as an example of a well-designed website which does what its users require in an effective and straightforward way. As a long-term project, Yaron’s web design company was only ever going to be a lifestyle business and he needed to consider what to do next if he did not want to be stuck working for clients for the rest of his career.

Having an idea was not a problem, he says “I always have way too many ideas, ideas are abundant, but it’s a question of deciding which idea I want to spend the next ten or twelve years with.” After a false start founding a company which then went in a direction Yaron was not interested in, he founded Quigo which drew on the original “Forward Button” concept which had fascinated him for so long.

Whilst Yaron was considering his ideas, a friend of a friend introduced him to Oded Itzhak who was also looking at search and navigation within the web. Although they were not, in fact, exploring ideas in exact tandem, they were able to work together and develop their concepts within Quigo. The only difficulty was the timing. The business was started in April 2000 – one week after the stock market crashed and at a time when dot coms, search engines and the internet generally were considered absolutely toxic by investors at every level as well as excessively capital hungry. Although early investment by Angels (including Yaron’s father) crept along slowly – at one point they raised a $16k round just to cover costs – they did have a handful of dedicated investors and, at the cost of equity and rights, they were able to keep going. They steered the company towards an advertising model but by 2001/2, that was considered to be even worse. In all, they spent four years knocking on VC’s doors before finally raising their A round of funding.

Yaron remained confident of his proposition throughout all of this however. At the time, search engines could not effectively trawl databases to produce search results that actually worked. Yaron was struck by the Amazon claim “a book catalogue of over 2m books” and yet, if you typed “Harry Potter” into a search engine, Amazon's Harry Potter page would not be listed in the results at all. It was a “glaring hole” that needed to be filled, but it was hard to convince VCs that plugging the gap could generate revenue. Looking back at the experience, Yaron believes that they were trying to do too much and with a lot of technology. Now, more than ever, he believes that start-ups need to concentrate on doing one, possibly very niche, thing and doing it exceptionally well.

Ironically, just as they finally got their A Round completed, the Disney Corporation suddenly appeared over the horizon wanting to invest. The A Round had raised $6m and Disney was offering to match this. Given the shoestring that Quigo had been operating on for four years (through Angels they had raised about $1.5m in dribs and drabs), this sudden influx of capital seemed excessive but Disney were insistent and the B Round closed just one month after the A Round. Three years later they completed a final mezzanine round and then sold to AOL in 2007 for a reported $340m.

The timing of the sale turned out to be very fortuitous; on that very day, Google’s share price reached an all time high, in the context of several months of massive consolidation in which $11bn was spent on acquisitions of ad networks. Additionally, Yaron had noticed a rapidly increasing decline in spending by mortgage and credit card companies which was the precursor to the revelations of 2008. The timing was not strategic however, in fact the timing was out of his hands. There had already been other occasions when a sale was proposed but for one reason or another had not happened and when the AOL offer came up, Yaron continued to focus on the company until the deal was certain. As he says “they say that companies don’t sell, they are acquired and I’m a big believer in that.”

The current project is Outbrain which Yaron started with old Navy friend Ori Lahav as CTO and which has just launched in the UK. The concept returns again to the Forward button. He still felt that good content was not being shared even with the huge amount of content and data now available. Early investment was by Yaron and one of the original Quigo Angels at $100k. A subsequent seed round was aimed at friends, family and other Angels for $500k but a couple of VCs (Lightspeed in California and Gemini in Isreal) turned up at the last minute to invest a further $400k. A year later the VCs returned for the A Round of $5m and 18 months after that came the B Round with Isreali VC Carmel leading. The C Round has just been completed with the same three VCs. All of which points to a very different experience to that of fundraising for Quigo. Yaron credits not only to his success as an entrepreneur but what he calls the “crispiness” of the proposition; he feels the business model is clear and easy to sell.

This turns back to his strong view that entrepreneurs get bogged down in too wide a range of products and features when they should focus on doing one thing really well. The temptation to do multiple things will not be backed by the resources available, indeed, “you probably won’t have the resources to do one thing really well, so you need extreme focus on one product and do that better than anyone else in the world.”

Yaron has invested in about a dozen other companies as an Angel himself, but has stepped back for a while because he is unable to give the commitment he would like beyond the financial and Outbrain is more than a full time job. As he says, Angels fall into two categories; those who are interested in investing capital and those who, like him, are successful entrepreneurs and who occupy an additional mentoring role. To do this well is a full time job in itself, but he does provide advice to, he estimates, one start up per week on an ad hoc basis although, inevitably, the issues are fairly constant and he is easily able to point them in the right direction.

Of all his experiences of VCs, one incident sticks in Yaron’s mind as being particularly useful. He met somewhere between 60 and 80 VCs in the first four years of Quigo without success, but a partner at one, Gideon Marks, of Garage.com said “I’m not going to invest but do you want feedback on your company and your presentation?” Yaron says that those 90 minutes of advice was an incredible experience which helped tremendously. “After that meeting, I thought to myself, if I am ever in a similar position with an entrepreneur, I would like to provide advice like that.”

www.outbrain.com

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