Yonathan is an American and Israeli scientist and entrepreneur. He’s the founder of several high tech software companies including Zoom Info and Card Scan and many others. Just don’t take up all your time. And it’s considered one of the most successful entrepreneurs in Israel. And I want to thank you for coming over. A lot of people don’t know that, but he was also awarded the Defense Award of this Ministry of Defense for the State of Israel some while ago. So Daraba and thank you, appreciate it very much. 

As you can see from the first slide, there is a smart app academy and I’ll explain what it is. And there I give lectures about how to build companies. So first of all I introduce myself so you know a little bit of my history, the good, the bad and the ugly. I’m a graduate of the Technion. I have a master’s degree in computer science. I was on my way to do a PhD and become a professor, but a friend of mine convinced me to make the mistake and not continue in the academic life and said why don’t we start a company? I’ll explain later on. So I served in something that at a time when I served was a huge secret. Nobody was allowed to say the word Shmone Mataim. Even I walked with a tag of Helmut Khai Klali. 

But that was a long time ago. And there I got the. The first company I started was Roche Intelligence Systems and it was a software company venture backed. The venture capital behind it was Uzia Galil and Elrond. For those of you who study history, that’s really historical and the first VC in Israel. And it’s a very interesting company because there I spent about $11 million learning what not to do. So it was a very profound failure. And based on that failure I started to realize the problems. So what was the failure there? So we raised money and had a plan that showed how the company is going to grow like that. I’ve never, you know, I’ve yet to see a presentation by entrepreneurs to investors. They don’t have that chart, you know, it’s called the hockey stick chart. 

I start with no sales and then suddenly goes up in the sky. And then we started. It was a software company that developed tools for field service engineers of companies that produce very sophisticated pieces of equipment like ion implanters in the chip industry or MRI machines. And so to maintain those machines is very complicated. So we sold tools to the field service engineers of these organizations. We started the company in Israel. Then we built, as was the situation then, a company in The US that was the parent company and I transferred to the US in 1989. The company grew nicely. When I say grew nicely, it’s like every VC backed company. We hired many more people than we needed. So that’s what you do when you get money from investors is you hire people. 

So we had people, we also had revenues, but there was a problem. There was always more expenses than revenues. I see you nodding, right? So that’s always the problem. You had more expenses than revenues, which basically means that you are in a continuous process of raising money and adding more new VCs to the board and being in that vicious cycle. So one day I woke up and I said, this is ridiculous. We should be profitable. We had about four or five million dollars in revenues. If I just cut expenses, I will be profitable. So were three co founders and basically the three of them wanted to be the CEO, including me. I was the CEO and very good people, really. They became later on CEOs of other companies. But I decided that we should start cutting expenses. 

So I fired one of my co founders. That obviously irritated the other co founder. He went to the board and I was fired. So there is a reason why I tell you all of that. Okay? It’s not just to be cute because later on I realized that this mistake is standard, that founders always have co founders and invariably it doesn’t end well. And so that’s one of the issues that you see with many startup companies. But in any event, so I was out. I was living in the US at the time. I had a little kid, my wife was doing her PhD. And I said, okay, I’m going to start another company, but this time I’m going to do it right. And right was I swore that this company is going to be profitable. 

And this was a profound decision, which we’ll talk about it later on, because it really boils down to what is the purpose of a company? Is the purpose of a company to. To have an exit or. The purpose of a company is to become profitable. So the next company I built was called Card Scan. And that’s the only company I can tell you easily what it does. See, it’s really something physical. You can touch it. It is a business card scanner. You put a business card into it reads it and it analyzes it. And it was a huge success. We had a gazillion competitors. It was a piece of hardware and it was sold through retail channels. All the things that investors tell you not to do, hardware, retail, consumer electronics, everything bad can be in that company. 

And honestly, I did it without knowing anything. But I was very focused on becoming profitable all the time. And that was kind of the guiding principles of what were doing. And the company became profitable very quickly. And then I started another company as a spin off from Cardscan. Cardscan was profitable. You understand it. It generates money. Put it again in your head. Companies that generate money are successful companies. Companies that don’t generate money are at risk all the time. So what did I do with the money we generated? I started another company. We spun it off to the shareholders. So it was basically a mirror image. And Zoom Info, for those of you who don’t know, is now a public company worth about $4 billion. I have a big offices in Wanana, and I started it in the year 2000. 

And this time it was clear it has to be profitable. So it started in the year 2000. In 2002, it became profitable. Profitable means it generates cash. So we spun off another company out of it called Bezo, again doing the same thing, one company financing the next one. Bezo became profitable and in 2017, we sold it to LinkedIn, that was a big competitor for $175 million. I sold Card Scan in 2006. I sold Zoom info in 2018, mainly because at the time, we moved back to Israel in 2004, and I was managing the company, traveling back and forth, which was ridiculous. So we sold the company. Then when I was in Israel, I started another company called Ofster. We sold it to Elastic about a year ago. So then I started another effort, which is this Smart App Academy. 

And Smart App Academy, its purpose is to teach something bizarre called the profession of building successful companies. And I work in progress because like anything else that we do, you learn as you go. So this lecture is basically a lecture I give in the school. Now, what is a successful company? So one thing I already heard, profitable. But profitable is not enough. It has to be fast growing, because otherwise it’s not interesting. It’s, you know, it’s a store. It can be profitable, but it’s not very interesting. And the last point, which is really critical is it has to have a modest investment. So if you raise $100 million and you reach $10 million revenues, that means for every dollar you put in, you get 10 cents. And that’s not exactly a huge success. 

It’s much more interesting when you put $10 million and you generate 100 million in Zoom info. The investment was about $3 million. And when I left, it was generating $100 million in revenues and about $40 million in profits every year. So can be done. We also have workshops. And this is the most interesting thing, what we call the residency program. What does that mean? So you’re in school, right? And you’re going to study for two years how to become entrepreneurs and innovators and whatever. And when you come out, you’re probably geniuses, but let me bring you other examples. A doctor, okay, they study for six years and somebody on the dean’s list finished the six years. Would you ever go to that person? 

Most people would save their lives and only go to a hospital where this person spends four, five, six years there working with people who really understand what medicine is. Same goes with virtually every profession. You learn in law school, you study to be a lawyer, you go and you work in a law office. And not just that, you work in the law office. You specialize. You specialize in litigation or in real estate or in M&As or whatever it is. You specialize, you learn from the experts. There is one huge exception. Huge. So you’re a genius. You’re a shmone Matayam. You have a great algorithm. You go and you raise $20 million and you understand algorithms and you know how to write code. You have no clue how to build the company. That was my situation at Roche, literally. I developed the algorithm. 

It was a great expert system algorithm. And I had no clue what I was doing. And I spent $11 million learning what not to do. Most entrepreneurs I meet are in that same exact situation. Building a successful company is a profession and it’s very different than having an idea. Very different than having an idea. You have to think about who is going to buy your product, who’s going to, how do you reach them? If they never heard about you, they will never buy from you. Think about that very simple concept. If you never heard about that company, you are never going to buy their product just because you never heard about them. It has nothing to do with features. 

They have, how great their product is, if it doesn’t matter, okay, so you have to think about these very simple questions that most entrepreneurs will start thinking about them after they develop the product, raise money. They already have 20 people on their team. They spend half a million dollar a month and only then they say, wow, so who’s going to buy? So how do I reach them? Don’t laugh. It’s very sad. It cost a lot of money, but that’s the way it is. So we have here this program and we teach people how to do it. But before that, there is a reason why these concepts are here and it’s called the venture capital industry. So I would like to start because I know that some of you will have to prepare a presentation for investors, right? 

So I’m going to tell you what the investors will want and hopefully convince you that what they want is not what you want. Did you hear that? What they want and what you want might not be the same thing. So what do they want? Okay, so first and foremost, they want a great team, experience, rounded, all the functions work well together, all the usual stuff. But bear in mind, unless you have a group of friends that you already built another company with them, you don’t have that. So what do you do? You ask your uncle, do you have a person that can be my co founder? And he says I no, no. But my wife has a cousin who studied in the technion. He might be your cto. Right? That’s how it works. Remember I had another two co founders with me. 

So virtually that requirement of a great team is what forces many people to go and find co founders just so that they can impress investors. You need to target an important problem at a big market. Big market is measured in the billions, right? So you have to prove to them that your market is $10 billion or so. So I have a joke usually that I tell people, what does it mean to have a big market? I have a great idea for a very successful company because I realized that the Chinese really like rice. So what I’m going to do is just sell one kilo of rice to each Chinese once a year, you multiply it and you realize I’m going to be very rich by doing that. 

Now those of you who think about it immediately understand the problem is not the rice and not the Chinese. The problem is how do I get rice to every single Chinese once a year. The problem is marketing operations has nothing to do with the idea. Big markets have all of them the same problem. The bigger the market, the more complex it is to penetrate. It’s that simple. The smaller the market, the easier it is to penetrate because it’s usually much more uniform. They are a group, it’s easier to get to them. I’m trying to show you that virtually everything that VCs tell you that they want is contrary to making money. The complexity of doing what they want causes you to make things that are expensive. They want disruptive technology. 

So let’s talk a little bit about the successful companies you all know and look at their disruptive technology. Uber. How disruptive is their technology? Get Pengo. Anything disruptive about it? No. They use the most basic tools that you have, but they were smart about how to use them. Airbnb, Even worse. There’s no technology at all. Even Netflix, streaming and streaming. What made them successful is not the technology. When they talk about disruptive technology, usually the people who come with the disruptive technology are. I did. I’ll give you an example. Okay. IPhone. You hear me now? Okay, iPhone. So iPhone is a disruptive technology. Right. Started in 2007, I think. Was it the first handheld computer? No. Even Apple had another one called Neutron. That was about 20 years before that. So why was the iPhone successful where everything else before it? 

And there were a lot of computers. Okay, there was, yeah, but I’m talking about now something that you hold in your hand. There was the Palm Pilot. I don’t know. Whoever remember that. Before there was the BlackBerry. And so there were million of them, and they were all successful. They were like selling in the hundreds of thousands of units a year. But they didn’t have the same impact as the iPhone. So what was unique about the iPhone? Well, what was unique about the iPhone was the 3G. You look at me and say, what 3G? What does 3G has to do with iPhone? Well, 3G is the cellular technology that allows you to connect with the Internet at reasonable speeds. That’s all. Before that, you had a little computer that was isolated from the world, was just not interesting. 

You had your phone book and your calendar, and that was it. The moment it became connected to the Internet, the world opened. Just that the world opened. So I’m not taking anything from Steve Jobs. I think he’s a genius, and I literally think he’s a genius. But he was a genius at taking advantage of what I call enablers. The world opened the door for him and he walked in. That’s what he did. And he was very smart about the business model and all that stuff. I won’t go into that. But what I’m trying to tell you is that disruptive technology has nothing to do with success. First to market, you have to be first. No, don’t do that ever. Because the first the market discover all the problems and usually dies along the way. You just sit there and you watch card scan. 

I remember it like today I needed a technology called ocr Optical character recognition, because you want to read the business card, right? So I didn’t want to develop that technology. There were about 10 players in the market at the time developing OCR so I called them and I said, I want to license your technology. And? And they asked me what for, said I had a great idea. It’s called the Business card reader. The response usually changed from silence to laughter, literally. So I said, what’s wrong? Sorry. So the answer was, if it was silence, was, we are working on it, so we’re not going to license to you. And the other side, the laughter was, are you a number 10 or 20 who is already licensing our technology for that purpose? Why? 

Because suddenly the enablers were there was good OCR scanners became small and all of that stuff. So a lot of people came up with the same idea that I did. So I went to a trade show called Comdex at the time. And as I walked into that trade show, there was a huge booth with a machine exactly like mine. Kartskin, different name. So I called my co founder. He was basically a developer that I hired. And I say, dexter, listen, I have bad news. I see the product you’re working on right here on the counter. So there was a moment of silence, and he says, that’s not a problem. We’re not going to be the first. We’re going to be the best. Until today, I keep that mantra. If you don’t be the first, be the best. 

And when I say the best, I don’t mean have all the features in the world. It means customer support, it means marketing, it means pricing, it means a million things. That. That’s what we teach at Smarto. To be a successful entrepreneur is not any of the above that you see. And you need to be able to grow fast. You want to be able. That’s what VCs are looking for. Okay, so I’m still going over that. That is true. But the question is, how do you do that? If you do that by spending $100 million in order to sell 10 million, then you’re not doing it correctly. You need to have what I call growth engines. I won’t have time in this lecture to talk about growth engines, but that will be a major subject that we will cover in the next meetings. 

You need a profitable model before 2023, 2022. Even then, the answer was, don’t even talk about profitability. That’s blasphemy. You only have to talk about growth. What happened then is that suddenly VC stopped investing. And there are a lot of companies that are dead, dying or will die in the near future. And we’re actually working with some of them because they might have good ideas and so forth, but they don’t have money and they’re about to die. When people ask me, you know, why are you so much into this profitable companies. And I say a company is not a grown up until it pays for itself. Now I’m a little bit older than you, so I talk about kids who are in their 30s or 40s. 

So if you have a child who is 40 years old and you still have to feed them and pay rent for them, they’re not really grown ups. They’re not Even if they’re 22 and you still pay for everything they do, they’re not grown ups. So if you’re a company and you have to keep raising money in order to pay salaries, you’re ashamed. So how do they work usually? So you start with seed money around a. You raise more money every year or two years, you know, and you push the company to grow and then you have an exit. That’s usually what venture capital companies want. That’s what you do. You go to an IPO or you sell the company to another company which called an M and A. But there’s a word in here with an underscore that’s called an exit. 

And I will explain in a moment why VCs talk about an exit all the time. And here are their expectations, what they tell you. Well, we do 10 startups, five will shut down, three will return the investment or just about it, one will generate two to three times returns and one will be a huge exit that will cover all of our siems. Yeah, I see all of you nod your heads, right? That’s the story they tell everybody. And I will show you the numbers. So nine out of ten companies fail. Well, the reality is it’s much worse than nine out of ten. But okay, so the three of you succeed, all of you just failed. Okay, right. Because nine out of 10 fail. So you are a failure. You are a failure. You are a failure. You are a failure. You are a failure. 

You succeeded there. How does it feel? So this is our investors, okay? They pay the roulette. You play with your life, it’s your life. You work hard, your mother is proud of your wife supports you or your husband and you fail. It’s a horrible feeling. It’s really a horrible feeling regardless that it’s not your money, it’s. It’s a horrible feeling because your identity become tied to the company you created and you just failed. So think about it. Very bad outcome. And why fail if you can succeed? And what we are trying to do is teach the Profession of how to build a successful company. And it looks like nothing that you hear from a vc. Nothing like it. But I believe that the success rate, it’s not going to be 100%. Let’s not fool ourselves. 

But if we can get to two out of three, even one out of two, I would say that’s a huge success. So what’s the infinite game versus the finite game? So an infinite game is when you say, what I’m going to do is build something that will last forever. Just like your life, you’re not planning your life towards the exit, which is usually in a tomb. Right? So most of us look at our lives as something that will continue forever. Yeah, we know that there will be an exit, but we kind of ignore it. We all want to build a very successful world. And that’s the way you should look at your company. It’s an infinite game. You want to build a company that will be for life. What is a finite game? A finite game is very well defined. 

Football, basketball, baseball, 90 minutes, and one of you is going to be the winner, right? And there are very simple rules about who is the winner. So that’s a finite game. Clear rules, designated players, beginning and end, winners and losers. So what happens the day after you win? There’s the next game, right? And so you have to. You have to do it all over again, right? So an exit is a finite game. So I did exits. And. And I know what it means. So the day I sold ZoomInfo was 2018. I started it in 2000, so that was 18 years. And I had, I don’t know, 200, 300 people, I don’t remember. And it was a nice party and everything. And the following day, I was jobless. My email box was empty. Nobody called me. Nobody wanted to hear from me. 

Actually, I sold it. And so there was a new CEO and he made sure that my name was erased. If you look at Zoom Info today and you will see there is a founder of Zoom Info called Henry Schoch. And it’s not me. Why? Because he bought the company. He was the founder of another company and he worked hard to erase my name. So that’s the way it is. But that’s okay. My bank likes me. Okay, so what do you do with the Infinite gaiim? You need a worthy purpose. I call it the flag on the mountain. Again, this is my style of managing. Each one of us have their own style. But I always tell people, here’s the flag on the hill for SmartUp. It’s to teach the profession of building successful companies. Everybody that works with me knows that. 

To teach the profession of building successful companies, how do we do that? That changes all the time. I give lectures, I give courses. There is the residency program. I work with a lot of companies, I, I write lectures, I do a lot of things. But we never for a moment lose the flag on the hill. And every time we sit for a conversation about what are we going to do this week, next week, we always say, how does that fit with the target we want to be? What is the worthy purpose? When people ask me, why is that a worthy purpose? I say, you know how many billions of dollars are spent and wasted on 9 out of 10 companies? 

Have you ever thought about what we could have done if this money was invested in successful companies, in successful people, in energized people instead of people deflated? That’s a worthy purpose. It’s flexibility, independence, courage to make decisions. I’ll go fast because want to cover a lot of subjects and you have a trusting team. When you work long term and everybody knows what the flag on the hill is, it does create cohesion. People all understand they are going in the same direction. They might be going this way or that way or up or down, but they always look at the flag on the heel and they know that everybody else at the company is looking at the flag on the hill. So it gives you a common purpose that allows you to make good decisions. Because they are not personal decisions. 

They are not what’s best. For me, it’s always do we go along in the path that will take us to where we want to be. And remember that the flag on the hill is always moving up, okay? Because there’s never an exit. You just say, well, I want to teach this profession. So right now we are at one out of four is successful. Let’s do one out of three, let’s do one out of two. Let’s do everybody. You know, there’s always place to go and the journey is a game. It’s not a one time win. You have to remember that, okay? Because if you work like a dog and you hate every day you come to the office and you say, yeah, but in five years there will be an exit and I will be which then you wasted five years of your life. If every morning you come to the office, say, wow, what a great day, I’m going to do something that is useful, that is fun, that is interesting. Yeah, there might be an exit or not, I don’t care, but I enjoy every Day when I come to the office, as my co founder says, we came here to have fun. That’s her message every morning. She says, I came here to have fun. Okay, so we have fun. So to understand why venture capital wants something that you want something else, let me explain what venture capital wants. So we call them venture capital, but really they don’t have a capital. So venture capital firms actually don’t use their own money. They raise money from other investors. Who are the other investors? The other investors are huge pools of money like pension funds, insurance companies, and so forth. 

Okay, these companies have, I don’t know, $2 trillion they need to invest in. Usually they invest it in the banks interest and so forth, but they take about 1 to 2% of their assets and they say, we’re going to do ventures with it, we’re going to put it at risk, hoping to make a lot more money on that little risk that we’re taking. So that’s what they do. The venture fund, what we call the venture fund is actually a group of people who manage that money. They are financial advisors, let’s call them. They don’t use their own money. The legal structure is a limited partnership and a general partner doesn’t really matter. But these people really are managing the money. It’s not their money. They usually raise money every two years or so. And I’ll explain in a moment why. 

And what the venture fund does is it invests it in startups. So their job is to meet with a lot of entrepreneurs and startups and pick the winners, the ones that have the great team, disruptive technology, all the stuff I described before, and invest in them and basically play the roulette. They put the chips in. As one VC told me, this is a lousy job because I put a bet and I sit for six years or seven years and I have no control over whether it’s going to succeed or not. Says it’s out of my hand. I put a bet, and now I just have to see what happens. And he says it’s really very difficult to do. Now remember that VCs raise money from investors. Investors want to get their money back. They don’t want shares in companies. They don’t want disruptive technology. 

They want their money back. There are only two ways of converting a company into money. You either take it public and then you can sell shares so it’s suddenly a liquid asset, or you sell the whole company to somebody else. And that’s called an M and A. Together these two venues are called an Exit. So an exit has nothing to do with you, the founders, Even though you think it has to do with you, it’s not even with you. It has to do with the VCs having to give money back to their pension funds. That’s why they must, and I repeat, must have an exit. So to tell you a story, right, So I started card scan in 1993. Raised money from VCs because I needed to build hardware, open retail, all of that good stuff. But I didn’t raise a lot of Money. 

Then in 2000, I spun off Zoom Info. I spun it off to the same investors. So they put money in 1993. Seven years later, they get fresh stock in a fresh company, Zoom Info becomes successful and the investors come and tell me, you’re not done. It’s 10 years, I’m tired, give me my money back. I said, okay, there’s a fair market value, which is the money, you know, the valuation you give to in your stock options, which is usually about 10 cents on the dollar because you want to compensate your people, right? I say, I’ll give you the fair market value. He said, what? Are you joking? I said, no, I’m not joking. You want your money back, that’s the fair market value. He said, no, but the company is worth a lot more. I said, okay, so sit quietly and wait, right? 

So it became a joke. Every time we met for a board meeting it was, when are we going to see our money? And I said, I don’t know, whenever. And they said after a while they said, listen, you are the only company left in our fund. I’m retiring. Everybody is retiring. Can you please give me my money back? And I said, fair market value, whatever you want tomorrow. So when I finally sold the company, we had a funny deal. I won’t go into the financial details, but the deal was really giving the investors an exit and giving me a lot more money. And I came to them and I said, here’s the deal. I’m going to make a lot more money than you, but I’m finally getting you out of here. And I said, thank God. 

God finally, you know, it’s been 20 something year, we want out. We’re still friends, very good friends with them, okay? But just to show you that what they want and what you want might not be the same. Luckily the company was very successful and profitable. So I could joke with them. Now what do they do? Here is how it works. So they have a timeline. When they raise the money, they raise it as a seven year investment cycle. Because the people who invest in them want to get the money out. So there’s very clear timeline. I give you the money seven years from now, you have to return the money. Usually in the agreement there are extensions. So the extensions are usually to two years, three years and so forth. So after 10 years it starts being unpleasant. So how do they do? 

They invest in new startups because they want to get the money out. Right? So they invest in new startups in year one and two because they know it takes longer. So they invest the money in year one and two in new companies. Then they know they’re going to be additional rounds. Remember the companies are not profitable. Right? Remember that, right? So they are going to raise after seed, round A, round B, round C, round D, round E, round Z, whatever it is. Okay? So they need to participate in that. So they keep money for it always. They say they invest a third of the money they plan on round A, knowing that twice as much they will need to invest later on. That’s the official end. They get extensions and they hope for an exit. That’s the way it works. 

So they usually look at the 10 year time horizon. But let’s look at what does it mean. So if 9 out of 10 fail, how do they make money? They make big exits, right? So let’s look at it to make a big exit. It’s not in Tel Aviv, it’s going in New York and getting the company out publicly in New York. Let’s do a reality check. Every year about 1,000 companies are being created in Israel. Startups, it’s about, that’s the average. So since the year 2000, more than 20,000 companies were founded. Do you understand the number? 20,000 startup companies, VC backed companies. 

So in that period from the year 2000 to 2023, 100 companies went public in the US out of the 20,000, but only 38 companies were valued at more than 100 million, of which about 24 out of the 38, which means until the year 2020, only 14 companies went public out of 20,000. You understand it? It’s not one out of 10. Can you count? Okay, so these years, 2020, 2021 was the years where you can see unicorns running in the streets and people were talking about a billion dollar valuation for a company that only have a business plan. These are the crazy years. This is why I have relatively high confidence in venture capital. So if I do the numbers, it’s 0.2%. Remember I wanted to do my Ph.D. In computer science and math. 

So I checked 0.2% is a lot less than 10%, which is 1 out of 10. Okay, so why so few companies go public? Let me explain to you. For a company to go public, it needs to have about $100 million in revenues. You can’t just take any garbage and take it to the market. Even though it does happen like in the year 1999, 2000 in the dot com craziness and so forth. So they are every 10, 20 years the stock market goes cuckoo year over year. Growth of about 20%. That’s what the market wants, preferably profitable. And let’s build a model. One of the things that we teach in SmartApp is everything has to be converted to money and calculated. Because at the end of the day, companies are about money. So let’s build the model. Financial model. So it’s a SaaS product. 

Let’s assume simplest thing you can think of, $10,000 per year license, year one and two, product development, no sales. Okay? Right. That’s how VCs work. Three year, first 100 customers. The first year you start selling, you do 100 customers at $10,000. That’s a million dollar in sales. And you grow year over year. Every single year you grow by 40%. And you have a perfect. So you have a perfect renewal rate of 100%. Because remember, this is a license that every year they pay. Right? So if you’ve got 100 customers year one, those 100 customers will continue with you forever, which is not reality. Okay? But let’s just look at that. Great. The perfect company. So here’s how it looks. Year one, 100. Year two, you get 140. You go by 40%. Right? 

So 140 new customers plus the 100 that you already have, it’s 240. Year three, you have 196 new customers. Give me a clap for doing the numbers on the fly. Okay? And 240 from the previous year. And you can see that. So you get in year 13 to about 10,000 customers, year 13. And if I convert it to dollars, that means I get to my $100 million in year 13. But I only have 10 years. You see, I gave you the perfect storm. Phenomenal company. 100% renewal growth, 40% year over year. And you get to the 100 million after 13 years. What is the amount of investment that is needed to get there? I’ll do it very simple. In most of these companies, the biggest chunk of expense is salaries. To foster rapid growth. 

You keep hiring people at the same rate that you Want to grow. So you grow them 40% year over year, and you start generating profits only in year 12. I calculated it, and you lose about $100 million along the way. So you need to raise money along the way with several rounds to $100 million. And you do what I did at Roche, which is you finished one round of fundraising and you start the next one. That’s what I did as a CEO. Didn’t have time to run the company because I was busy raising money. Let’s do it simply. Life is hard. Same thing, except for a few changes. Only 30% growth year over year and 80% renewal, which is a little bit more realistic. And here’s what happens. You get to 3,500 customers at year 13, and that’s $36 million. 

So now you know why out of 20,000 companies, only 38 went public. Because you see, these are very hard facts. It’s not that simple to build a fast growing, profitable company. It’s not very simple. Did I convince all of you? I hope so. So what do you do? So you change what you do to drive to growth. This very strong pressure to grow make you make decisions that are not the best decisions for you. Because you need to hire a lot of people and out of experience. But you can see it in many places when you go and you have 10 people in the company, you decide, we’re going to hire another 15 people. People. Sounds like a small number, right? 

Well, what you do is you spend most of your time interviewing people, discussing who might fit or not fit, and then you bring the people in and now you have for every person who knows what they want to do, there are two people or one and a half person that doesn’t know anything about the company. You spend two, three months training the people, and then you realize that half of the people you hired were the wrong people. So you spend tremendous amount of effort on bringing people in, and it’s totally ineffective. But that’s what a lot of companies do. I talked to many companies and, you know, they were excited. They said, we grew so much last year. And I said, interesting. What do you mean by you grew? He says, oh, we grew from 40 people to 80 people. Can you believe that? 

And I said, and I said, yeah, I can believe it. Then I meet them later on when they come to me about how you build a real company. But it’s not their fault. It’s what VCs tell them to do. I just gave you $10 million. What the heck are you going to do with it. So go and hire people. That’s what you hear, okay? And it drinks as a burn rate. Blah. Okay? So you get a lot of pressure. What is the opposite? So what happened in here is that companies go through some interesting things. So let’s assume you are not able to grow and you start losing money. And there’s a pressure. So many of these companies, what they do is they start cutting expenses, right? Because you can’t pay the salaries where you don’t have money. So you cutting expenses. 

When you start cutting expenses, that usually means letting people go. When you start letting people go, there is a vicious circle happens. What happens is that morale goes through the floor, obviously, and the people who can go, which means people who are successful have a good resume. They know what they’re doing. They’re the first one to jump ship because they have alternatives. So you’re losing the people you really want and you maintain the people you really don’t want. That’s what happens. So usually it’s a spiral that goes down and doesn’t end very well. What other things that happen is companies go into basically breakeven mode, okay? So they are able to sustain the core team of five people, 10 people, whatever, and they are in what VCs call the walking dead. 

The walking dead is a company that has enough revenues to sustain operations, but not enough revenues or ideas or whatever to start growing. So they stay at a million, $2 million for years. You can’t close them, you can’t make them happy. So what’s the opposite? If day one, you change what you want to do, if from day one you change the purpose of the company from an exit to profitability. Now what do I mean by the word profitability? I keep using profitability. And many of you are in your master’s degree, so you understand what finance is. So profitability, by what’s called profit and loss, P and L is not what I mean. What I mean by profitability is positive cash flow. I’ll give you an example. 

If you sell a SaaS product, which means a softer product, and it’s $1,000 a month, you can charge the money in two ways. Either every month you charge a credit card by $1,000, or you tell them, I want to get $12,000 on year one. From a P and L perspective, it’s the same thing. Because even if you charge them $12,000 on day one, you can recognize it in your books once, month after month. It’s just like they loan you money, but you really like Them to loan you money. It’s much cheaper than going to the bank. So as a successful entrepreneur, you say, give me the money, please. I’ll keep it better than you. So it makes a huge difference. And in one of my presentations I showed a huge difference that happens in that case. So I’m talking about cash flow. 

And what’s the difference between a company that generates a profit of a million dollar a year and a company that loses a million dollars a year? Do you know what the difference is? So the answer, of course is $2 million. In the right wrong answer, the answer is company that loses a million dollar a year. You can calculate when it’s going to die. They have $3 million in their bank. They’re going to live for three more years, period. That’s it. A company that generates a million dollar a year lives an infinity gain. So it is that simple. Think about it. If you lose money, you can calculate when you’re gonna die. And that’s a huge difference. Okay? So yeah, companies know their expenses. Why they know their expenses because. No, it’s really simple. 

If you go down to the chain of what you do, it always people at the end. So that means your expenses are usually salaries, usually about 70% of your expenses or salaries one way or another. There are ways of dealing with it. But this is not for the first lecture. Okay? The impact of pursuing profitability first basically will change everything that you do. So the moment you start saying I need to be profitable very early on, it will change everything that you do. In one of the future lectures, I’m going to talk about the sequence by which you do things. I will explain it now because even though it’s a very simple concept, for most people, it sounds alien. So I have to repeat it three times before people start to understand what I’m saying. 

So let me explain to you how 99.9% of the companies work. Okay, I’m going to develop a car that can fly. I’ll take something smart or whatever it is, any product that you have. So the first thing that people do is they want to prove that they can build it. They’re going to build a prototype, then they’re going to build a proof of concept. Then they’re going to build the product. That’s what they’re going to do. And that’s what you guys are going to do. Because it’s obvious, why would I do anything else? I want to build that product. I’m going to build that product. So, okay, now you raised a million dollars or 10 million dollars. You build the product. You have 10 engineers, and you have the product. 

If you have 10 engineers, and let’s say your team is 15 people, you are about $300,000 a month in expenses. Whether you sold the penny or not, your bank account depletes $300,000 a month. And now you try to sell the product. What do your engineers do it at that time? They develop the next generation. They add features, they do things. Nobody ever used the product, by the way, because you didn’t sell it yet. But you have 10 engineers. You have to do something with them. So you do something with them. You get in love with the next feature that is going to just change the world. It’s disruptive. You still don’t have a single customer. Now you start saying, okay, I need customers. What do I do? Okay, let’s try to hire a vp, Sales, a marketing, whatever it is. There’s a little problem. 

Customers don’t report to you. Engineers do. They’re your people. Customers are not your people. They don’t listen to you. You have to figure out, how do you get to them? How do you make them listen to you? All of you are bombarded with messages all day long. You don’t even pay attention. You don’t even see the messages. It’s not that you ignore them. You don’t even see them. Okay, all of us are in the same place. So it’s extremely difficult to get the attention of potential customers, if you even know who the potential customers are. So most companies get into a tremendously dangerous area. They already have building expenses of a few hundred thousand dollars a month because they have engineers, they have a team, they have offices, they have all kinds of things, and they don’t have customers. 

And they try to figure out who their customers are. What I tell people is, start selling before you have the product. Did you listen to me? Start selling before you have the product. Sounds simple, but what do I sell? I don’t have the product. Honestly, I don’t even know how it’s going to look like. What am I going to sell to customers? That is the key issue that will make your company successful or not successful. The solution to that is you don’t really sell your product. You don’t, because you don’t have a product. What you try to do is get people to respond to the problem. Because if your product doesn’t solve any problem or doesn’t do anything interesting, then why did you develop it? 

So you expect that your product will do something to make It I’m going to explain to you something really interesting that we did at Smart. I was working with a company I mentioned at the beginning ofster ofsteer was doing something bizarre. There’s a technology called elasticsearch. It’s a database, doesn’t really matter. It becomes very complicated when you have large installations of it. Then the DevOps, the people who need to manage it, have a problem. How do you identify problems? Blah, blah, doesn’t matter, too much technical stuff. And the founder I was working with had an idea how to build, let’s call it a monitoring product that will identify problems and fix them. Okay, not very interesting. So I said to him, and how are we going to get to customers? And he says, what do you mean we don’t have a product? 

Why do you care about getting to customers? I said, listen, your product is so bizarre and the market is so bizarre, I have no idea how to get to customers. So let’s talk about that before we spend a penny on your product. And I said, what happens if there is a problem with a cluster of elasticsearch? What happens? And he says, oh, usually there is some sort of an error message that goes into the log file. You don’t have to understand anything about log files and error messages or anything. Just know it’s a bizarre thing. Okay? And I said to him, what do you do when you get this error message? So show me some error messages. So he showed me some error messages and remember Gavin, I told you I speak Chinese. It’s absolutely Chinese. You don’t understand what they say there. 

I said, what do you do with that? He said, honestly, I don’t know. I say, you’re going to develop a product and you have no idea what they mean? He said, no, they are cryptic. I have no idea what they mean. Said, okay, if you the genius don’t know what they mean, then probably no DevOps engineers know what they mean. So what do they do? They copy paste it into Google and they try to see what it means. So we did that and there was no information. So I said, okay, I have our solution. We’re going to build a database of all of these error messages and we’re going to tell them what they mean. So I asked how many error messages there are and. And he wrote a script because it’s an open source code and he said about 800. 

All right, let’s do that. Says, what are we going to write in the explanation? Remember, I don’t know what they mean. I said, that’s problem number Two. Problem number one is I want to see that people really get to that page, right? Okay, so we did that. We built 800 pages and they had like, I don’t even remember some bullshit that we put on the page. We put it on our website and we launched it. And Google was very elated to see this garbage and indexed it. And we started getting traffic. And we discovered very quickly that the Traffic was the 8020 out of the 800. About 40 error messages generated 80% of the traffic. So I said to Ziv, 40, you can figure out what they mean. Go and fix those 40. And that’s what we did. 

And we gradually started to develop a library of very interesting insights about elasticsearch. And traffic kept growing and our brand kept growing and we had no product whatsoever. And when Elastic bought Upstair a year ago. November. Yeah, November a year ago, they said that one of the reasons they bought us is because many of their customers used our content instead of their content because it was much better. So that’s just an example of thinking differently. Your biggest problem is not your product. That’s the list of your issues. I repeat, your product is the least of your issues. Having customers is problem number one. Number two, number three, number five, Number ten. Spend your time on that. I will give you another example and then we will open it for questions. I’m working now with another company and she developed. She was a video editor. 

Literally. I mean, she worked for years as a video editor and she developed a very sophisticated product that will do the job at 10% of the time instead of a human being, a really sophisticated tool ran out of money. The investors wanted to shut down the company. All the good stuff that I described to you. And she says, well, I have here this great technology. I’m not going to let them close the company. What are we going to do? So I said, who is your customer? She said, well, it’s media companies. Usually they produce a lot of videos and they need to edit them and clean them and do all kinds of things with it. So you see that thingy there? They take my video now. So I produce gazillion amounts of videos and I know nobody is going to watch them. 

Not because I’m boring, but because nobody is willing to listen for an hour on a video. They wanted snippets. They want a minute. Just give me the most important thing. He said, a minute. That’s all what I want. So me as a customer, as a video producer looked at it and said, you know, the world is moving into video production because it’s so simple. You see, we just do that and we now have an hour long video. I have about 30 hours of video on our website. You are welcome to go and you know that’s the best hour you’re going to spend, but there are 20 hours, so that’s the best 20 hours in your life. 

And I said, I wish there was a tool that will automatically take my two hour lecture and put out five snippets of two minutes that will really summarize what I say. And she said, that’s a piece of cake. My tool can do that easily. I said, okay, so here’s the growth engine. Remember I promised you were going to talk about the growth engine? Here’s the growth engine that we should be building. And we are now, as we speak, are finishing that growth engine. So I can’t give you the results yet, but I can tell you what we do. I said, what if we go to YouTube because like me and everybody else, you take the two hour speech and you throw it into YouTube, right? 

You go and look at it three months later and you see that two people saw it, you and your wife. So I said, why don’t we go to YouTube and look at it every day and look for people who posted long videos, but that they have the nice keywords like a webinar or a roundtable or a lecture or whatever it is that means like something business. And then look at who posted it, what company posted it, and then let’s go and look at tools like ZoomInfo and see if we can find the people there. So think about what do I have now? I know the person, I know the company that have the problem in my mind, which is they built an hour or two hour something. They put it on YouTube knowing nobody’s going to see it. 

I have the name of the company and I have the name of the person, all of that automatically. I have a list of people with the problem generated every day for the total sum of zero. Total sum of zero dollars. Because YouTube is open, you just go there, you want an API call and you get all of this information. Then we took the video and with an API to her product, by the way, we wanted to do speech to through text. But the engineer who was working on it, he says, no, you don’t, because YouTube gives you the text. So another expense went out the door. Okay, so we get the video and we get the text. We take the text running through ChatGPT and say, please Summarize it and tell me what sentences you take and what portions of the video it is. 

So now I have the cutting points. Her tool takes those cutting points, build all the nice snippets, and we have a nice page. Now on the left side you have the long one hour speech. On the right side we have 10 snippets with titles because we know what they mean and with the text of them. And we tell them, this is your page on your website, because you can take this. It’s all ready, it’s all done. Just stick this on your website. And suddenly on your website, you’re going to have a video library that people can really read and enjoy. Don’t just put blogs. You have more videos than blogs. That’s your blogs. And because we converted it to text, you’re going to also have the SEO value of it. We’re going to launch it next week. 

I’m just trying to show you what do I mean by. By thinking about how do you reach your customers in a way that is scalable, not by people and spending money and doing things? So I gave you two examples of totally a different way of thinking on your problems. Don’t think about your product. Think how you reach your potential customers. Okay, so if there’s anything that I would like you to take out of this lecture is when you work in here on building your business plan and all that stuff, think about that as the main thing you want to figure out. Who are my customers and what can I do to reach them at a very low cost. And to reach them, that means you either think about what are they looking for, like I did with upstairs. 

So they have an error message and they go to Google or proactively. But proactively, it has to be something that they can’t resist. Okay? They see their own video, you know, organized and cut in very different way. They will listen, they will look at it. I trust it. Okay. All right. I think I’ve talked enough. Before we finish, I have five more meetings with you. So it will be tremendously useful for you and for me to get guidance. I can talk for hours. I have lots of stories and I can talk about my trip to Tanzania. I can talk about anything you want. But what will bring you the most value will be tremendously important for me if we want to use the time. As you can see, I’m looking for profitability, you know, as little effort and get the maximum value out. 

So five more meetings is a lot of meetings. And I would like to know from you doesn’t have to be at this moment, but if you can give me feedback through Gavin, through you and others, and you can look at our website, smartupacademy.org you will see all my content in there to our conversations. But you have also. I put it there. So you have the text. You. You can scan the text. It’s easier. You can see all the presentations so you don’t have to listen to me. And just take a quick look at this. And if you can, guys, tell me what will be of greatest value for you that will be tremendously useful for you and for me. Okay, questions. What specific character people sing? You’re looking for? Oh, okay, now you get to my favorite subject. 

I start with the statement I tell everybody before we even start. I said, if it wasn’t for your employees and your customers, business would be very easy. And the common denominator of those two is they are people, and people are difficult. If you look around you in the room, each and every one of you is a unique individual. I’m not serious. Okay. Each and every person is a unique individual. You know, I tried in the past to recruit people by a part number. You know, I told the recruiter, I want somebody with five years experience here and knowing this and doing that and had these following titles and blah, blah, blah. It just doesn’t work this way. I make it even harder for you. The problem is exponential. It’s not just the person, because the person has to fit the team. 

And many times that doesn’t work. It might work at the beginning, but not later, just to make you really anxious. So everyone is spending the most amount of time selecting their spouse. There’s no more reference checking and everything that you can think of. And still half the people get divorced. They’re still the same people. They’re nice people. It’s just that the match doesn’t work. Same happens at companies. So what do you do? So I’m very smart. You see, I have answers to everything. This one I just tell people. I hire and I fire. I hire and I fire. I think one sticks. I’m as bad as that. I’m serious. It’s really hard. And I haven’t found anything that I can tell you. Here’s a way to hire the right people. I’ll give you a story because I like to tell stories. 

So in 2004, remember, I’m in the US with my wife and kids, and we decide to move back to Israel. I still have Zoom info. It’s an American company and I moved back to Israel. So I decided that it’s going to be very difficult. It was before Zoom and everything. How do I manage the company remotely? So I bring in a president to manage the company and I will be like whatever, the chairman. So I brought a person. He was a very smart guy, but we didn’t agree on anything. So I fired him. His name is Gary Hallowell and he left the company and started a competitive company called Net Prospects. He sold it two years later to DNB for $120 million. And he left all the way to the bank. So an idiot. He wasn’t okay. 

That’s why I gave his name, because he’s a very successful smart guy. And I fired him. Failure number one. Then I brought in somebody who at the time worked for me. I promoted him inside the company. He did a phenomenal job. I won’t mention his name because he was doing a great job as VPB’s dev. But when I made him into the CEO or the president, he was a disaster. So I fired him. The board was already anxious and angry at me and they said, okay, this time we’re going to give you somebody who is really good. So they gave me somebody that worked for them in another company and was tremendously successful. Built the company from zero to about 40 million, sold the company. Good guy hired him. After three, four years, I decided he was a disaster and I fired him. 

As a result, the board wanted to fire me, but because the company was profitable, I just ignored them. And that was it. The guy left the company and joined another company and became number one tremendously successful guy. So he was tremendously successful before he worked with me. He found that working with me was impossible because I’m an idiot and don’t understand anything. And he left and he’s again very successful. And the reason I bring this example is just to show you how difficult it is that the dynamics of a company, the working with one another is so complicated. You know, there’s nothing I can tell you. Sorry. But I will give you answer that is kind of answer, but not really. I look for three things. People who are smarter than me. I really like smart people. 

I want them to be egoless, which means they are not there to promote themselves all the time. They are there to solve problems and get results. And number three, they’re very results oriented. Which means a lot of people think about a problem and once they have an idea about the solution, they lose interest in it because in their mind it’s Solved. The fact that nothing changed in the world doesn’t mean in their brain. They solve the problem, they move on. I look for people who measure results all the time. Every morning they say, what have I accomplished yesterday? What am I going to accomplish today? That works for me. Again, this is very cliche. At the end of the day, I fail most of the time. Literally, I fail most of the time. Yes. 

How does a company decide if it’s supposed to stay private or go public? What other criteria? Like you want to be exchangeable or stay incognita? 

Nobody knows your number. Good question. So I made the decision that I don’t want to go public. So why? Because I didn’t want to have this quarterly pressure. I will give you answer that is very simple. First of all, get to the point where you can go public. When you get there, you already have accomplished a lot. 

No, I must keep about this part. 

I was there. I mean, were a hundred million dollar company growing 40% year over year, generating about 40% profit. I just didn’t want to, you know, I’m getting older and I wanted to just do something else like Smartup Academy, literally. And I just said, how much money do you need? And remember you talk about the, you know, it’s an infinite game. So making more money is just not what I wanted to do. But that’s just me. It’s a personal decision. 

Nobody like has barriers. 

It depends if you want to make more money and have all of these issues. Some companies get to the point where they are forced to go public. So were planning to go public. 

In Israel, but they decided not. 

No, there are companies that because of their size, you can’t have more than 500 employees or 500 shareholders without being a public company. Now that doesn’t mean that you need to launch the company publicly, but you start, have to have reporting that is like a public company. But let’s focus here about how do you get to the point where profitable. Okay, yes, you spoke about a lot. 

About customers, customers. What happens when you’re, when you have. 

Limited customers, amount of customers, when you. 

Reach only two defense companies? 

Customers or defense companies. That’s a wonderful question. You are in a very bad area. No, I’m not joking. Okay. Because what I mean by that is, remember I said before, you have a product, you start thinking about customers and how you reach customers. So if at that moment all you have is you and a piece of paper and maybe your wife, you decide to go to a place where there are only Five customers. It’s just the wrong decision. You don’t have any need to make that decision at that moment. If you go by the order I said, you say, I need to have at least 10,000 customers. And your thinking will be very different about the product you develop. Most companies do this mistake, okay? Which is they first develop the product, then they think, who is going to buy it? That’s too late. 

Way too late. 

How do you go to investors? Like, what’s your pitch? How do you get something like, consistent? 

That’s a very. No, that’s a very good question. I have a good friend who used to work for me and she started the company. Now she’s really smart and very successful and also made some money. So I said to her, why do you want to raise money from investors? Are you nuts? And she says, no, I need to. I still don’t understand why she did it, okay? But for her, it was really easy to raise money because her track record is such that she had investors all over her to give her money. I don’t know of anything you can say to investors, really, because all they want is to see this hockey stick and bullshit about disruptive technology and a huge market and all of that crap that has very little to do with reality. 

Also, most investors will tell you they can help you. The reality of it. They can help you raise more money. They cannot help you build your company. They cannot help you get your customers. They cannot help you with anything real. They can help you raise more money, okay? That’s their profession. They are well connected. They will help you raise more money. Why do they want to raise more money all the time. Time. So I explained to you, because it’s kind of cynical why they do it. How do venture capital firms. No, now it’s even worse. So how do they make money? So let’s say they raise $100 million. Remember, it’s not their money, right? It’s the money of the. 

It’s our money. 

It’s your money, right? So they raised $100 million. And they have an office and they have three partners. What do they do? They charge 2% management fee. So $100 million, 2% a year is $2 million. $2 million is nice, but $20 million is better. So what do they do? They need to raise more money. They raise money every year or every two years kind of tranches of money. Okay? So they raise 100 million. If they’re successful, they raise 200 million and 300 million and so forth. So they want to get to as much money as possible under management. There are two side effects to that desire. First and foremost, they raised $100 million. And two years later, they want to raise another 200 million. The first question that investors now will ask them is, how successful are you? 

Well, none of the companies had an exit. It’s just two years. Right? So how can they prove that they have invested correctly in our successful company? No, no, no. The way they do it is very simple. They force their companies to go and raise more money at a higher price. So if the price per share was $5 before the next round, they raise it. They raise the money at $7 per share. So that raised 40% improvement in my investment. Right. Before that it was 5. Now it’s 7, 40% improvement. So. Right. So they want to. They want their companies to be continuously raising money at a higher valuation, which is a lot of pressure on the CEO. Go raise money. It’s a good time. Now I’ll put you in touch with my, you know, my other partners and so forth. 

So that’s one reason why they force you to raise money all the time. Time. The, the other reason why they force you to raise money all the time is because they force you to, you know, grow. So they want you to. To have more money. And that’s why they push so hard on it. It’s not to the benefit of the company. You have to remember that. I thought I answered that for about the last hour and a half. If you are profitable, you are a. No, no, no. If you are profitable, you’re a grown up. When your parents say, I don’t want you to live in Tel Aviv and you don’t need them to pay the rent, you can live in Tel Aviv, right? But if they pay the rent, they tell you no, you’re living for Sabah. Why? 

Because that’s what I can afford. It’s that simple. If you are profitable and you not need your investors to put the next round of financing, you can do whatever you want. 

But they stay or leave. 

They stay. They have no power. I keep saying the same thing. When you don’t raise money, they don’t have power. When you need to raise money, it’s like your parents. If you, if they paid the bill, you do what they say. Okay? 

I just want to tell you, Jonathan, I think last week were in an open space in the. In Barcelona and I gave the students the last lecture that I literally teached him in the degree. And I hope they remember what I’m about to say. But I did tell you a few things. And one was. And you just repeated them. Now, what Bill Joe said, remember from Sun Microsystems, the smart people never work for you. Always look for the smarter people than you. And Peter Drucker, what did he say? There is only one essence for a company to generate customers. And you just got extraordinary examples from the real life of how that actually operates. And this is just the beginning of our journey with Yonatan. We’ll commence in two weeks. Again, thank you for coming.