Slangsoft’s Woes Serve As Reminder of Vulnerability of Angel-Financed Startups

JERUSALEM – Israeli Internet industry professionals said Wednesday that reports of troubles at Jerusalem software company Slangsoft are a reminder of the vulnerability of angel-backed startups to financial irregularities.

An article published in Wednesday’s Jerusalem Post reported that several former Slangsoft employees are suing the company for salaries they claim were never paid. In addition, the company owes large sums of money to vendors and suppliers, the article said.

After the article was published, several Internet professionals said Slangsoft’s situation had been known to industry insiders in Israel even though it hadn’t made the media.

“What stands out in the case of Slangsoft is the fact that it was funded by ‘angel’ investors. This sort of thing would never happen to any company that is backed by major venture capital firms,” said Jonathan Klar, an associate at venture fund BRM Capital in Jerusalem.

“Venture capital companies have financial oversight over their companies and carefully monitor burn rates and obligations,” he said. “They would never allow the situation to get to the point where employees aren’t being paid, and creditors are being cut off.”

Investment firms would look at other options, like setting up a bridge loan, he said. If the situation requires it, they would plan an exit strategy.

“There is a reputation to uphold,” Klar said.

Not every company can attract investment from VC’s, and that’s not necessarily a bad thing, says Robert Rosenberg of DataSphere of Tel Aviv, which operates Koldoon, a databank of high-tech companies and information.

However, these privately funded companies, which Rosenberg says amounts to approximately half of all Israeli Internet startups, suffer from an Achilles heel.

“They tend to not have very good management or very deep pockets. You need at least one of them in order to survive,” he said.

These companies, funded by what Rosenberg calls “the three ‘f’s: friends, families and fools,” are not doomed, but should use self-discipline to adhere to good management practices.

“What was good for the old economy holds true for the new economy,” he said. “The basic rules for sound management haven’t changed.”

In the case of Slangsoft, Klar said that employees, suppliers and investors should remember to check into a company before getting involved with them.

“This company had three chief financial officers in two years,” he said. “This should raise some red flags. The writing was on the wall for those who looked.”

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