David Blumberg: When visiting Israel, I leave my heart at passport control and follow my head
For decades David Blumberg has been part of the local tech scene, now in a rare interview with Calcalist, he discusses his vision, Israel, and how come a Jewish, Gay, fourth-generation Californian supports Donald Trump
"We will always invest in Israel," says David Blumberg, one of the world's most seasoned venture capitalists. "I believe in Israel both as a capitalist and as a Zionist." Blumberg has been investing in Israel since the 1980s, he is a “traditional” Jew (Masorati) who speaks Hebrew (but prefers to be interviewed in English), and speaks enthusiastically about the local economy - he is filled with emotion when it comes to the Israeli high-tech scene (and not just about that).
Find the companies before they become companies
Blumberg, named his fund after himself - Blumberg Capital, something not many in the business do, but that is not the only thing separating Blumberg from the rest. He specializes in investing in startups at very early stages, seed and A rounds. In the current climate of massive fundraisings and growing numbers of unicorns, Blumberg has seemingly been pushed aside. However, it does not seem to bother him, he knows what fortune his early investments can bring.
Over the years he has made notable gains, most recently it was thanks to the New York IPO of DoubleVerify, a startup for ads monitoring valued at $4.2 billion. Blumberg led his fund's first investment in DoubleVerify, which started in Israel, back in 2009, and following the IPO last month, Blumberg Capital’s share soared to almost $700 million. Blumberg also had similar success with Check Point, EFI, Cyveraת which was purchased by Palo Alto, and Zooz, bought by PayU.
Blumberg’s ties with Check Point and Palo Alto can provide insight on how the veteran investor operates, utilizing his long-standing relationships with Gil Shwed, CheckPoint’s founder, and Nir Zuk, one of its first employees, and later the founder of Palo Alto. Blumberg (62) has been a known investor in the Israeli ecosystem for decades and was an early investor in Check Point back in the 90s. Tales of how he forced Shwed to meet with potential clients and how he functioned as the company’s de facto business development VP and not just as an investor have been told and retold for years.
Back then, no one would have guessed that Shwed and Zuk will each lead a major cyber company worth over $10 billion, but much of their early experience they gained with, and thanks, to Blumberg. “They are both geniuses,” he says diplomatically during a video call from his home in Miami. “That is what makes Israel so special, the fact both Gil Shwed and Nir Zuk were born in the same small country.” Blumberg also has a close relationship with Uri Levine, one of the founders of Waze, investing in Levine’s FeeX and FairFly.
If Blumberg arrived at Check Point during the company’s early days, today his fund aims to grow companies even before they become a company. The fund’s operation in Israel is led by Yodfat Harel Buchris, and Ido Novic (former top officer in the same unit), aiming to spot entrepreneurs at a very early stage. “We grab them right out of the army,” Blumberg explains. “They might not even have a clear idea yet, sometimes they just have a few lines of code and no team, but we help them with forming an idea and a team. We have special relations with the IDF’s top intelligence units. We also brought in Sharona Mizrachi, former Head of Human Resources at 8200. She knows the soldiers and their commanders, she knows what they did and who wants to become a CEO in New York. So every day we move towards earlier stages of investments.”
Blumberg’s current fund, his fifth, amounts to about $200 million with about 30%-40% of the portfolio being Israeli companies. To date, the fund invested more than half a billion dollars in more than a hundred Israeli companies. These days, the fund invests in about 30 local ventures, including unicorns such as Fundbox and Yotpo, alongside smaller operations like Namogoo and Theator. Investments that, according to Blumberg, are planned to continue, even if bleak predictions of a bursting high-tech bubble come to fruition. "We will invest when value levels are high, but also if the markets fall, and even if there are wars here,” he promises (the interview was conducted before the current escalation). "We might look to cut costs, choose to invest in options instead of stocks, fly less and do more virtual meetings, but we will always invest in Israel."
But isn’t there a fear of a global tech bubble bursting? Even the U.S. Fed warned earlier this month that current valuations were virtually unsustainable and a significant drop in prices is coming.
"People are looking at the stock markets and say 'there's too much enthusiasm here.' I use a water sports analogy, the Wall Street banks, the investment funds, even the economic media are all windsurfers, meaning they look at the current wave, at the wind at everything that is on the surface. We are not surfers, we are divers, working slowly, carefully, looking for interesting fish, not concerning ourselves with what is happening above water.”
In short, you are not concerned with technology stocks crashing, or a crisis in general?
“No. If you look at it, most of the big companies launched or soared during periods of recession, for example, Google’s growth after 2000 and Facebook’s after 2008. Obviously, it's a tragedy when people lose their jobs, but economic cycles are unavoidable. So it's better to put things on autopilot and have faith in Milton Friedman's notion of permanent income that supports growth. We can not assume we can run the global economy, we have to be humble. That is why I enjoy lightning and thunder, it reminds everyone how small they are."
“The only thing slowing innovation down is regulation”
My conversation with Blumberg, a rare interview with Israeli media, is taking place during a hectic period for the local tech industry, and through the sector as a whole. The huge sums of money being injected into young companies are changing the game, startups try and grow at a faster pace, they are hungry for talent and the high demand raises the costs of human resources, which means they need more capital at earlier stages.
If in the past Blumberg could have invested only a few hundred thousand dollars in a company, today’s investments cost a few million at least. It is the new normal. For example, Insight Partners can invest $100 million in Assaf Rappaport’s Wiz, a 1-year-old company, without flinching, or a huge fund such as Tiger Global Management, which was known to only invest in established unicorns or very large sums of money in the past, is suddenly interested in seed funding.
Perhaps this is the reason for Blumberg’s interview, after making his name as a top early investor, suddenly his field is overrun by new actors with very deep pockets. He is one of the first venture capitalists in Israel, however, his edge - his experience and his focus on early investing - is eroding thanks to big money and an influx of foreign funds.
"Nowadays it is much cheaper and easier to be a startup in the early stages," Blumberg insists. "First of all, operating costs are lower because everything is kept on the cloud, while the SaaS model (software as a service, renting software for a monthly fee) reduces sales friction, and makes it easier for startups with their sales. The model makes it easier for organizations to use small business’ products without having to buy expensive software packages from large companies. All it takes is a $15 credit card charge. It is a revolution that lowers barriers for startups."
These are not the only changes Blumberg has seen during his long career. Investing in Israeli companies used to be “cheaper” relatively than investing in American companies, which has made startups here more attractive, however, this "discount" seems to have disappeared these days. But Blumberg is convinced that it won’t hurt the market here. "Is the current valuation of Israeli companies a cause for concern? Yes. But is Israel still attractive? Yes, definitely."
“Because of geniuses like Shwed and Zuk who grew here, because of the military, and because of the Jewish mind.”
"Judaism, unlike many other religions, is based on a perception of constant progress and constant dissatisfaction, which leads to innovation. Jews were never willing for anyone to sacrifice them on any altar. When Shimon Peres once visited my synagogue in San Francisco he told me 'we are the world champions in dissatisfaction, we are never satisfied with what exists.’ That is true, and that is why we innovate so much, the only thing slowing innovation down is regulation.”
Blumberg hates regulation, and we will get to that a little later. But aside from that, Blumberg says he would also like to see a change in attitude from the local tech sector, speaking mostly about one of the industry’s growing challenges, the soaring costs of talent. "Startups compete with each other and especially with international giants that come to Israel. I remember a few years ago a senior official from one of the largest defense companies in the U.S. consulted with me and said ‘'we would like to enter Israel and recruit 7,000 engineers.' I told him ‘it’s impossible, you will break the market.'"
However, when summing up the recruitment plans of large companies in Israel in the coming year, the total reaches several thousand. Intel alone recently announced the recruitment of 1,400 employees, most of them engineers. So how do you prevent the market from breaking down? Blumberg offers a solution.
"Israel needs to further develop its outsourcing. The country is perfectly located in terms of its time zone and it can work relatively comfortably with most countries in the world, from the east through Lithuania, Poland, and Ukraine to the U.S. in the west. There is no need to worry about losing your relative advantage because you will always prefer to own a company rather than be its employee. Furthermore, when viewing an entire economy from above, it is better for company ownership to remain within a country, while employees can reside anywhere in the world. Israeli companies should spread like multinational companies from the U.S. or Germany. Not every high-tech worker should work from within Israel, this is an old mentality of 'build and be built,‘" that last part he says in Hebrew. “Today, even the Volcani Center understands that it is better to sell the seeds and not grow the tomatoes."
So according to your vision, Israel will become a global ideas incubator?
"Israel should aspire to be like Hong Kong or Switzerland, be the center of technology like they are the centers of trade and finance. The technological revolution is only beginning."
Even so, Israel is a technology-oriented economy. When I remind Blumberg that some say that the Israeli economy is an option on the Nasdaq, and when it rises it flourishes, he erupts with laughter, "I think I came up with that 40 years ago.”
“After I graduated,” Blumberg has a Bachelor’s degree in Government from Harvard, and an MBA from Stanford, “I knew I would do something with Israel, I even considered moving there and making aliyah. Then, my first job was at T. Rowe Price, an investment company, which perhaps was the first growth fund, and was among other things a major investor in Xerox and IBM. They sent me to Israel in 1981 to find out what the situation was, but they made it clear that they would not want to invest in a socialist country with high inflation, and where there are always wars. When I returned, I told them everything they thought is true, but also that these things are already included in the price of shares, so the fact that we do not buy shares of companies such as Scitex or Elscint, which behave like Nasdaq, is our loss.”
"Later in the 80s, I was the Bronfman family’s representative in Israel. They then owned Shufersal (Israeli supermarket chain) and some real estate, and in 1989 I was sent to find additional investments. When I returned, I told them, ‘my analysis is that the entire Israeli market trades at a multiplier of six on profit,’ meaning it will return the investment relatively quickly compared to investments in the U.S. where the multipliers were higher, so you should buy the entire Tel-Aviv stock market.’”
Escaping Silicon Valley
Blumberg grew up in Fresno, California, “typical middle-class family,” he says. "We were Jews, I went to the synagogue on Saturdays and to Sunday school, but we did not know anything, we did not celebrate any holidays. And yet, I was the weird kid who loved Judaism, the one who asks his grandparents about their life in Eastern Europe. The Rabbi at Sunday school told us about the Israeli pioneers who were drying up swamps, and I fell in love with it. Life in California seemed a bit boring to me, I thought ‘is that all there is? malls and ski trips?’ So I joined a Jewish study group, but I saw it less as religion and more as history and culture.”
When he was young, he says, he knew that he would work with Israel, and he had much curiosity about what was going on in the country. After high school, Blumberg spent an entire summer here, hence his Hebrew, and since then he has made sure to visit every year. He follows Israel closely, not only in business but also in politics. Throughout our conversation, he mentions the Likud, Israel’s ruling party, and “Ha-Marach” Israel’s Labor party’s old name.
He says that to this day he observes Judaism, makes sure to go to synagogue and does not miss an opportunity to discuss Israel, often with the enthusiasm that could be attributed to those who love it from afar but do not reside in it. "Every morning I get up and say ‘modeh ani,’” which means in Hebrew I give thanks. “I thank that there are, in the world in general, and in Israel in particular, more and more ideas, companies, and people who want to invest in growth. Or as a French friend once told me ‘Jews are like yeast, they make the whole world rise like bread.’”
Blumberg has been openly gay since coming out when he was 30, however, he is very protective of his privacy, even avoiding social events with colleagues. He lives with his partner and their two sons, aged 12 (They are planning his Bar Mitzvah in Jerusalem this summer) and 10. He is also a hawkish Republican and ardent supporter of former President Donald Trump. According to reports, he donated more than $100,000 to Trump’s campaign during the last elections.
Blumberg likes Trump because he also does not like taxes. When we discuss President Biden's plan to extend taxation over capital gains on the very wealthy and raise corporate tax, the gaiety that characterized Blumberg throughout the conversation fads. "Taxes should scare everyone," he says gravely. "This spirit characterizes not only the U.S. but the entire world, and it's a shame because throughout history it's easy to see that countries with low corporate tax rates perform better."
In general, Blumberg advocates for minimal intervention in markets, "governments tend to act too much, and the problem is that they try to solve problems linearly and do not know how to cope with non-linear problems. The massive flow of money by central banks in the past year is also a terrible economic mistake. Money has become too easy and there is too much capital available."
Taxation was one of the reasons that led Blumberg to move from San Francisco to Florida, and he was not alone. There is an ongoing discussion in the U.S. about a so-called "exodus" from traditional centers of influence, especially California. First, there was the tech crowd who left expensive San Francisco, including big names such as Elon Musk who moved to Texas, and Peter Thiel and Keith Rabois of PayPal who moved to Miami. Even companies such as Oracle and HP moved their headquarters to Houston. The second wave has financial entities leaving New York for Florida. It includes Goldman Sachs, Blackstone (the world's largest investment fund), and the giant hedge fund Elliott, which is planning to rent offices in Miami. Blumberg and his family's move to the east also made headlines.
"I had a very hard time leaving the Bay Area. My family has lived in California for four generations, but life here is much better and more rewarding," he explains. "Taxes are lower, education is better, there is less crime, the homeless are better treated and there aren’t any things like severe fires, because everything is better managed. I have won enough in life so I do not have to escape California’s high living costs like others, but I want to expand the fund to the evolving ecosystem in Florida." The U.S. is already anticipating a new Silicon Valley in Miami, which in recent years saw tremendous momentum in founding startups. Like many others, Blumberg just wants to be a part of it.
When I ask if he happened to move to Florida also to be closer to former President Trump, Blumberg laughs. But there are more than a few key figures who came out as Trump supporters and then moved away from “blue” California, including Peter Thiel and Keith Rabois. Both gay, both friends with Blumberg, who previously admitted that identification with the Republicans hurt him. "I do not think I have lost deals, but I know I have lost some friends," he said in an interview after Trump was elected president.
“The great Walter Wriston, who used to head Citigroup, once said that ‘capital goes where it's welcomed and stays where it is treated well, so are talent and ideas,’” Blumberg says. “That is why the financial sector and high-tech companies are moving to Florida. People have been leaving California in recent years because of poor governance, especially when it comes to real estate. And I recognize that Israel is making the same mistakes."
Please elaborate, what mistakes?
"Real estate prices in Israel are much higher than they should be because the government controls the land. Even with good intentions, such as not wanting to alter the landscape or hoping to preserve agricultural land, it is unclear why there should be kibbutzim near Tel Aviv for instance? I really like rural areas, I grew up in such an area, but at the end of the day, it actually hurts the weak."
Real estate and costs of living have soared in both Tel Aviv and San Francisco because of the tech industry and its high salaries.
"Technology does not raise prices. If demand rises, supply must increase, otherwise, prices will go up. One of the fascinating studies in the field belongs to Tom Sowell of Stanford, a student of Milton Friedman who should have received the Nobel Prize. He studied real estate prices from the 1960s to the last decade, both in the Bay Area and in Houston. Both areas are similar in size and structure, both have an educated population and thriving industries - in Houston oil and high-tech in the Bay. Houston gave a free hand to the real estate market, beyond safety matters, it did not restrict construction, meanwhile in California, there were many restrictions. The result is that in Houston real estate prices did not drastically rise while in California they quadrupled. And as mentioned, it also hurts poor families."
Politicians should learn to think like doctors
When Blumberg goes into criticism of governments or state conduct, it's hard to stop him. The current stock market tide, including excessive pricing of technology companies and the flourishing of SPACs (Special-purpose acquisition company, referring to "hollow", inactive companies that raise initial capital on the stock market and then merge with companies with real activity, mostly start-ups), is in his opinion a product of leadership mistakes.
“SPACs are the offspring of the Sarbanes-Oxley and Dodd-Frank acts,” he proclaims. Both acts, named after the legislatures behind them, forced hard regulations on Wall Street following the economic crises in 2000 and 2008. The 2002 Sarbanes-Oxley act focused on business transparency, while the 2010 Dodd-Frank act was meant to prevent the creation of too-big-to-fail financial institutions. Those objecting to the legislation claim it dangerously lowered the number of IPOs. “Those who are at fault for too much money being in the financial system are governments, not SPACs,” Blumberg says, referring to both the regulations and the stimulus packages the U.S. Government gave its citizens and fueled the growing investments in the stock market.
Of course, it was not just the citizens who have stepped up investments, rather big funders. "The fact that funds like Tiger Global Management deal with growth companies every other day is also a result of regulation, which kept technology companies private for a longer period. In the past, such funds would not even speak with us, but today they are looking to step in much sooner. That is the market's response to over-regulation."
Tiger Global manages $50 billion and is raising $10 billion more. It is an unheard-of sum, and Tiger Global very much represents this past, unprecedented year with big daily investments. The fund used to specialize in companies that are about to go public, but today it seeks companies in much earlier stages. Tiger Global is not the only fund that changed its strategy, and others are following into Blumberg’s old stomping ground, flooding it with capital. Yes, he is speaking here from a certain position, and with the same passion that characterized him throughout the whole conversation, fiercely defending his worldview, that it must be only the fault of the government.
When I remind him that during the Trump era we did not really see the administration reducing regulations, he replied: "This is not a party issue at all. The great de-regulator in the United States was Jimmy Carter (Democrat) followed by Ronald Reagan (Republican). Kennedy also made moves in the field. The tendency is to see deregulation as dangerous when in practice it is far less dangerous than a slow trickle of additional costs. Politicians should learn to think like doctors and follow the Hippocratic oath - 'do no harm.’"