Israeli start-up Qlusters produces a Linux-based clustering software solution. The company has just completed its first financing round, raising $6.5 million from Benchmark Capital and Israel Seed Partners.
Qlusters CEO Ofer Shoshan arrived prepared for this interview with a belief system so complete there was virtually no need to ask leading questions. The 32-year old Shoshan had already founded Coretech, an unsuccessful start-up that developed cardiology devices. He admits he made every mistake in the book with that venture. Shoshan has also worked as an independent project manager, technology advisor for venture capital funds, VP Business Development at RichFX when it was still called WebGlide, and VP Marketing of Comsec (TASE: CMSC), and obtained an MBA from INSEAD, Fontainebleau, France, without first obtaining a BA.
“Qlusters actually began in a small village in France. When I returned, I knew I wanted to do something myself, even though I had offers from consultancy firms, venture capital funds and high-tech companies. I considered entering the security field, and made a few trips to the US with Israel Seed Partners general partner Michael Eisenberg to check out ideas. These were the kind of trips in which you land at JFK at 5:30 in the morning, go to a meetings at 8, 10 and 12, and then fly to Boston at 3 pm for more meetings.
In this way, we met 15-16 potential customers each trip, with the final meetings held at the airport on Thursday evening, before returning to Israel. On these trips, I met people on the VP level at Goldman Sachs and Morgan Stanley, who gave me feedback on my ideas.
“After three or four such trips, I seriously began thinking about one of the proposals I had heard. In late March 2001, Michael offered me the position of entrepreneur-in-residence at Israel Seed. That’s the greatest job in the world. You get a salary to take time off to think. It’s really lovely. We looked at scores of fields and at least 50 ideas, based on a testing methodology we developed, made a few more trips to meet potential customers and met a lot of people who did not leap up with checkbooks open.”
Shoshan says the advantage of being an entrepreneur-in-residence is that one does not fall in love with a technology and try forcing it onto a product. He also notes that exploiting the resources of a venture capital company is quite helpful and in general, “its quite nice walking around with a VC visiting card.”
Shoshan ultimately settled on file clustering for Linux. “This is such a simple concept that even my mother understands it,” says Shoshan. “The concept is that clustered Linux files can do the same things as mainframe and supercomputers at a tenth of the cost, using a simple, inexpensive and linear upgrade.
Shoshan recruited decentralized computer systems expert Dr. Moshe Bar to be the second founder of his company. Qlusters was founded on November 1, 2001, with the support and financial backing of Israel Seed. Eisenberg said, “The company had a business plan, product architecture and potential software personnel that we marked for recruitment.”
Shoshan says, “It’s important for me to state - as someone working in the field during the bubble, who saw that things were bordering on corruption - that we are Spartan.”
“Globes”: How does this sit with the fact that you opened your offices in the Azrieli Towers in Tel Aviv, even before your first financing round?
Shoshan: “Our rent is 40% below the regular price, in a sub-lease. We also got all office furniture, blackboards, chairs and desks. We didn’t spend a penny to enter these offices. We also bought our computers and servers from companies that were cutting back or went out of business. There are no complimentary massages, no company cars. I travel by train.”
Eisenberg: “This company operated with just $550,000 from March 2001 to March 2002. It now has 16 employees.”
During its first months, Shoshan and his colleagues focused on finishing the product and making initial sales, which would ease the financing round. “Many Israeli companies believe in the submarine method: raise money, dive down for two years of product development, then return to the surface to discover there is no market. I believe in the guided missile method: develop the product while listening to customers, get feedback, and improve the product accordingly,” says Shoshan.
Qlusters opened its first financing round following its first sales in April. The $6.15 million round was just closed, with Benchmark Capital’s US and Israeli funds and Israel Seed Partners investing. This was Benchmark’s first Israeli investment since opening its Israeli fund. The capital is intended to last two years, to pay for Qlusters’ 16 employees.
“We were comfortable raising capital with the knowledge that Israel Seed was prepared to finance us for another year on its own,” says Shoshan, adding that when a financing round is held without pressure, the company-fund relationship is turned around. “We didn’t contact any VCs. They all contacted us three months ago.”
That is because Eisenberg had contacted them.
Eisenberg: “Correct.”
Shoshan: “In any event, I met about 20 funds, which was way too many. I told some of them ‘No thanks” over the phone. Everyone knows which funds have done nothing in the past two years. There are Israeli venture capitalists who still think in terms of a year or two ago. They met me once or twice, and then didn’t follow up. When we began leaking information about our agreement with Benchmark - that's when they called back to express interest.”
Shoshan claims that foreign venture capitalists also do not really understand the market. “TeleSoft Partners managing partner Arjun Gupta, for example, was not even sure if a Linux system would work. Luckily, we could choose which fund we wanted to go with.”
Shoshan says that Kevin Harvey of Benchmark’s Silicon Valley office and Mark Kremer of its Israeli office were a cut above all the other venture capitalists he met. “They didn’t wonder whether Linux worked in the field, and whether someone would pay for it. Harvey invested in the Red Hat (Nasdaq:RHAT) IPO in 1999. Benchmark’s staff were prepared to work with the company even before the investment was certain. Even if their investment didn’t take place, they greatly improved what we had to offer. In the end, we had could compare their proposal with one from a European fund with a strategic investor, and we opted for Benchmark. On Friday, I got a call from HSBC to tell me the money was in the bank.”
Published by Globes [online] - www.globes.co.il - on July 29, 2002