With a heavy heart I write this post today in dedication and admiration of Dov Moran, entrepreneur extraordinaire and Israeli business legend who seems to be shuttering Modu after roughly 4 years. The company was at one time the biggest story in Israel, as Dov attempted to build a massive B2B2C business in the cellular phone manufacturing business, based on the novel concept of a tiny phone, simple UI, and additional functionality/apps coming from hardware jackets, built both by the team and by the best external manufacturers. The concept was revolutionary, and at one time seemed like a serious challenge for Nokia, Motorola, Siemens, LG and Sony Ericsson. For anyone who did not know of these guys, or forgot - take a walk down memory lane to this post on Engadget.

For a bit of context, remember that the original iPhone (not the iPhone 3G) launched in late 3Q07, so the world was still very much wide open at that moment. Modu's appeal was for users seeking a simple phone with basic functionality, but with expansion possibilities, which was frankly not available at the time - remember the most popular cellphone in 2007 was still made by Nokia.

Modu represented something larger than just a cellphone upstart, having been one of the first Israeli tech firms focused on building a mainstream consumer product and brand - it also captured the imaginations of the country, with many of the top executives and leaders across technology, sales, marketing and logistics signing up to take the fight to Nokia. Dov Moran, the CEO and founder had done this before with M-Systems, one of Israel's largest tech companies which went public and was ultimately acquired by SanDisk. Like many brand name startups in the US (Microsoft, Yahoo!, eBay, Paypal, etc), M-Systems created a large alumni community that built a generation of excellent and revolutionary Israeli startups, so obviously Dov had tremendous clout in raising funds and capturing the hearts and minds of the best talent in Israel.

Unfortunately, after years of product delays and rapid advancement of competing firms, Modu is closing its doors. There was little knowledge at the time of development that both Apple and Google would be building smartphone operating systems that would properly work, provide a great experience, and allow 3rd party developers to build software tools that could leverage the improving hardware on the devices. While Modu focused on solving the same problems and user interests that had been the focus of the industry for years (simplicity & size), Apple and Google were looking for larger and more complex devices, albeit with simple UI. Who could have known?

My Key Takeaways

  1. There is no 'can't lose' team - Wealth, extensive networks, and the right investors does not ensure success in the short or medium term. Modu ruled the Mobile World Congress in February 2008, with excellent execution of a marketing strategy and an innovative product led by a charismatic and established management team, but was mostly irrelevant by the end of that year. - Modu @ Mobile World Congress 2008; The same could be seen from Plastic Logic, which built the sexiest eReader than never made it to production a few years back.
  2. Paranoia is the key to survival - Large companies with capital, like Microsoft, Facebook, and Google, have followed the Andy Grove path. Better for them to make a bunch of talented entrepreneurs cash rich than to be buried by the little guys in the future. In the case of Modu, the team was extremely confident and consistent on the module phone, and would not deviate in the face of competition moving in the software direction, despite several key indicators over the last few years. Singular focus is good at times, but can be the death of your business if you don't consider shifts or 'pivots' based on competitive moves.
  3. Sometimes good ideas should fail - Modu raised an enormous amount of money over the years, particularly after its initial investment rounds of ~$85m (as per Crunchbase) - the total reported is between $110 - 130m. One of the things we've seen in the shift to web businesses is the ability for investors/entrepreneurs to cut their losses early and with minimal blood lost, particularly in relation to hardware plays. In this case, however, the company seems to have raised some $40+ million after it became clear that the focus of the business was on the 2G market (namely Africa, and parts of Asia, Eastern Europe and Latin America). Without too much thought, investors should have appreciated how difficult it would be for an upstart to compete with low-cost producers in these countries, where upselling at a medium-high price point would be difficult - and that ultimately, valuation expectations would need to be lowered substantially.
  4. Miracle Exits don't always happen - Just because anecdotally it seemed that Motorola would be a good acquirer of at least the technology, given its portfolio a few years back (think about the gap between RAZR and Droid), clearly Motorola never did come to the rescue here - in today's day and age, companies, however successful, do not need to be acquired by larger companies. In the Twitter-verse, you see many companies who seem to be dependent on a Twitter acquisition, but none seems to be on its way (remember, Twitter has been tight on acquisitions thus far, but who knows what new funds will do with their M&A Activities). The point is, businesses need to be built with the intent of being independent and interesting - not to be a great addition to a specific acquirer. The reality is that there is no guarantee.

To close, I have been a big fan of Dov Moran and the team at Modu. I only wished they had a bit more runway or foresight to handle some of the waves that came their way over the last few years. Their new handset, which ran Android, looked like a great product, but by then their partners who were excited to build jackets for the initial modu, seemed tired and ready to sit it out this time around. Regardless, I wish the team well, and hope to see new and exciting innovations coming from the concepts developed at Modu over these last few years.