I agree with the findings, although not so sure the drivers are changing that dramatically, I hope they do. I'm not sure Metacafe has chosen the growth path and that it had any choice once the M&A path got shut by Google buying YouTube. I also doubt the Israeli founders are less "romantic" and ambitious than their US counterparts. Retiring at $4M would please many people, most people, but a lot of Israeli entrepreneurs have much bigger dreams of "changing the world".
Out of the reasons you mentioned, there are two that I would point as key. The first one is the financial structure. The Israeli high tech industry is almost solely fueled by VC money. VCs prefer not to take the risk of gambling for IPOing an Israeli company when a $100-$300M exit to an American enterprise is at hand. After all, who would be fired for agreeing to sell under such parameters? and who would survive passing on such a deal for a failure later on? An exit at that stage is typically built around $10M-$20M annual revenue, little or no profitability. I've seen companies getting packaged for an exit as soon as they got their first big contract. In "big company" terms, this is a company that may have proven its technology, product and business model, but has not yet grown scalable operations. The acquisition is going to take care of exactly that. And if that's the required profile, why bother with scaling operations? The focus is on proving technology, getting key customers and getting out. This is, in many ways, the true definition of sizing the opportunity.
The second key is the perceived shortage of Israeli executives who can potentially scale such a company. I am using the term perceived because there are plenty of excellent Israeli executives who run very large operations. However, and this may not be politically correct, American executives know how to push the Israeli buttons - they are much more organized, have a much better Rolodex, know how to construct a marketing strategy and have great command of the English language. Don't underestimate the impact of these parameters on the typcial Israeli Founder, CEO and Investor. The Israeli business culture looks up to the American business culture and this means Israeli companies feel uncomfortable in competing with larger American competitors. While Israeli companies feel somewhat comfortable in "traditional" Israeli high tech pockets, such as security (checkpoint) and communications (Comverse, Amdocs), they feel totally the opposite in Enterprise software, Media and "Internet", not to mention consumer electronics.
An Israeli Nokia at some point? Maybe. IPOs need to get back in fashion first, and so does "Chutspa", that intangible ingredient that fueled Teva, Iscar, CheckPoint and Comverse.
Sam Daoud
· 2 years ago
Great article, very insightful. However one of your "facts" is misleading. You state "Israel is the #1 startup-producer in Europe" Sure that may be true if Israel were in Europe. Last I checked on the map, it was in the Middle East. Might want to have that corrected as it takes away from the authors credibility.
Alex
· 2 years ago
Comverse CEO Found Hiding in Sri Lankan Fishing Village
kobi alexander
An Israeli newspaper reported Thursday that Kobi Alexander, the voicemail technology fugitive wanted in the U.S. on stock option manipulation charges, has escaped to a small fishing village in Sri Lanka. But wait, there's more: Alexander, the head of U.S.-based voicemail firm Comverse Technology (CMVT), ran for it, but not before transferring $57-million to an Israeli bank account. It took a private investigator hired by an unnamed U.S. venture capital firm to track Alexander down. How? Apparently via "an Internet phone call" made by the Sri Lanka-hiding CEO.
Arnon Kohavi
· 2 years ago
Some contrarian view: 1)It is better to sell companies at the peak, take the money and start new ventures, rather than hoping your company will become the next Nokia, and not the next 3Com or RAD. 2)DSPC and Chromatics sold at the right time. Saifun waited too long. What is better? 3)Many of the Israeli companies that sold, kept the R&D in Israel, so the expertise remained in the country and was used to seed new companies. 4)Teva is the Israeli equivalent of Nokia, but it is the exception. CMVT, AMDOCS, MERQ came close, but never made it. 5)To create a true large company, the management needs to be multinational, a tough thing to do in Israel, most of the companies mentioned above were US-based with ex-Israelis managing them, so is that considered Israeli?
Jonathan
· 2 years ago
Very good points Daniel,
I've worked for one of the most successful Israeli software companies as well as some startups. I think there's an additional issue here related to the lack of $1bn experience:
Israeli companies are often led by people who are very good at tactics: they are resourceful, fast, assiduous so they build good products quickly and win deals.
On the other hand, they often lack strategic vision - they compare poorly with their US counterparts, and they don't aggressively or creatively seek new avenues of growth beyond their initial cores. So when the core dries up, so does the growth - and they hit that $1bn ceiling.
Maybe it's the military mindset, who knows?
Guy Horowitz
· 2 years ago
‘Guilty as charged' on all four counts... but there are some extrnalities which cannot be ignored.
1. Very small (actually non-existent) local market. American and European companies have a 'fertilizer' in their first few years in the form of large and friendly local or neighboring markets. Even Nokia, which clearly does not sell too many handsets in Finland, has enjoyed early success in fairly large neighbor countries. As all of us know, Israel's nearest significant market is a few hours (and several trade tariffs and taxes) away. There are many markets which are practically irrelevant for Israel for obvious reasons. It does not stop companies from growing, but it certainly slows down their growth in the first few years, which helps wear out the stakeholders' patience. BTW - This is less relevant in the Internet space, where geographical borders have almost no significance. Israel has played a major part in building the global online gaming industry, and has generated at least two major IPOs - it's just something VCs don't brag about...
2. We're shooting for the fences, but we just came out of minor league. Our fences used to be much closer, so even a double down the left field is perceived as a home-run. As you said, our VC industry is fairly new, give us some time to get used to the majors.
3. The management gap. Maybe a bad name for the phenomenon we all know - Israelis are great entrepreneurs but (on the whole) are not great executives when it comes to outbound / strategy. We are getting there, but it will take time. Israel's VC industry hasn't done extremely well in attracting foreign executive talent, or even repatriating great Israeli executives who live abroad. (BTW - Microsoft has done it - getting Moshe Lichtman, a senior VP, to go back to Israel and start its Israeli strategic development center). If we get more management talent over, we'll certainly see more mature sell/grow decisions.
BTW - Metacafe is a great example, but we have all seen the headlines just a year ago. My personal view, and I might be wrong, is that they also preferred selling over growing, but the price was not right. But then again, this might have been the case with many other companies who eventually made it big.
Harshal Vaidya
· 2 years ago
Exactly same mentality exists in India. Even we here are desperately wanting to build the next Google like companies rather than low-end, cheap labor outsourcing !!
shuly Galili
· 2 years ago
Very insightful and imoprtant issue for the future of Israel's tech industry. In my mind Israeli entrepreneurs posess excellent drive, creativity and guts...obviously talent. What is often missing is ability to accept and implement processes and long term strategic vision. It is all a matter of time and we know...there are some great leaders out there already who grow great companies...Guy Gecht (EFI), Eyal Waldman (Mellanox) etc.
Yoav
· 2 years ago
The only way an Israeli Nokia can evolve is by rare combination of sheer luck, great technology and exeptional people. As the sole source for funding in Israel is VCs, there are a couple of things that prevent it to happen: 1. Israeli VCs will NOT place big bets on founders who are 1st timers. 99% of the cases, they will NOT place a bet at all. That is not the case with some prominent US VCs, who build big companies by placing big bets on 1st timers. 2. Israeli VCs place mid bets ONLY on 2nd Israeli timers, or prominent American Execs. 2nd Israeli timers are after more money, and when the 1st opportunity comes along they will take the money and go, as well as their VCs. If things go bad, they will not care as much. That is why many 2nd companies of 2nd timers are crap.
Your Own Cooking
· 2 years ago
Danny - if I offer you 200,000,000 for adapt.tv today, are you a taker or passer?
All Comments
I agree with the findings, although not so sure the drivers are changing that dramatically, I hope they do. I'm not sure Metacafe has chosen the growth path and that it had any choice once the M&A path got shut by Google buying YouTube. I also doubt the Israeli founders are less "romantic" and ambitious than their US counterparts. Retiring at $4M would please many people, most people, but a lot of Israeli entrepreneurs have much bigger dreams of "changing the world".
Out of the reasons you mentioned, there are two that I would point as key. The first one is the financial structure. The Israeli high tech industry is almost solely fueled by VC money. VCs prefer not to take the risk of gambling for IPOing an Israeli company when a $100-$300M exit to an American enterprise is at hand. After all, who would be fired for agreeing to sell under such parameters? and who would survive passing on such a deal for a failure later on? An exit at that stage is typically built around $10M-$20M annual revenue, little or no profitability. I've seen companies getting packaged for an exit as soon as they got their first big contract. In "big company" terms, this is a company that may have proven its technology, product and business model, but has not yet grown scalable operations. The acquisition is going to take care of exactly that. And if that's the required profile, why bother with scaling operations? The focus is on proving technology, getting key customers and getting out. This is, in many ways, the true definition of sizing the opportunity.
The second key is the perceived shortage of Israeli executives who can potentially scale such a company. I am using the term perceived because there are plenty of excellent Israeli executives who run very large operations. However, and this may not be politically correct, American executives know how to push the Israeli buttons - they are much more organized, have a much better Rolodex, know how to construct a marketing strategy and have great command of the English language. Don't underestimate the impact of these parameters on the typcial Israeli Founder, CEO and Investor. The Israeli business culture looks up to the American business culture and this means Israeli companies feel uncomfortable in competing with larger American competitors. While Israeli companies feel somewhat comfortable in "traditional" Israeli high tech pockets, such as security (checkpoint) and communications (Comverse, Amdocs), they feel totally the opposite in Enterprise software, Media and "Internet", not to mention consumer electronics.
An Israeli Nokia at some point? Maybe. IPOs need to get back in fashion first, and so does "Chutspa", that intangible ingredient that fueled Teva, Iscar, CheckPoint and Comverse.
kobi alexander
An Israeli newspaper reported Thursday that Kobi Alexander, the voicemail technology fugitive wanted in the U.S. on stock option manipulation charges, has escaped to a small fishing village in Sri Lanka.
But wait, there's more: Alexander, the head of U.S.-based voicemail firm Comverse Technology (CMVT), ran for it, but not before transferring $57-million to an Israeli bank account. It took a private investigator hired by an unnamed U.S. venture capital firm to track Alexander down. How? Apparently via "an Internet phone call" made by the Sri Lanka-hiding CEO.
1)It is better to sell companies at the peak, take the money and start new ventures, rather than hoping your company will become the next Nokia, and not the next 3Com or RAD.
2)DSPC and Chromatics sold at the right time. Saifun waited too long. What is better?
3)Many of the Israeli companies that sold, kept the R&D in Israel, so the expertise remained in the country and was used to seed new companies.
4)Teva is the Israeli equivalent of Nokia, but it is the exception. CMVT, AMDOCS, MERQ came close, but never made it.
5)To create a true large company, the management needs to be multinational, a tough thing to do in Israel, most of the companies mentioned above were US-based with ex-Israelis managing them, so is that considered Israeli?
I've worked for one of the most successful Israeli software companies as well as some startups. I think there's an additional issue here related to the lack of $1bn experience:
Israeli companies are often led by people who are very good at tactics: they are resourceful, fast, assiduous so they build good products quickly and win deals.
On the other hand, they often lack strategic vision - they compare poorly with their US counterparts, and they don't aggressively or creatively seek new avenues of growth beyond their initial cores. So when the core dries up, so does the growth - and they hit that $1bn ceiling.
Maybe it's the military mindset, who knows?
1. Very small (actually non-existent) local market. American and European companies have a 'fertilizer' in their first few years in the form of large and friendly local or neighboring markets. Even Nokia, which clearly does not sell too many handsets in Finland, has enjoyed early success in fairly large neighbor countries. As all of us know, Israel's nearest significant market is a few hours (and several trade tariffs and taxes) away. There are many markets which are practically irrelevant for Israel for obvious reasons. It does not stop companies from growing, but it certainly slows down their growth in the first few years, which helps wear out the stakeholders' patience.
BTW - This is less relevant in the Internet space, where geographical borders have almost no significance. Israel has played a major part in building the global online gaming industry, and has generated at least two major IPOs - it's just something VCs don't brag about...
2. We're shooting for the fences, but we just came out of minor league. Our fences used to be much closer, so even a double down the left field is perceived as a home-run. As you said, our VC industry is fairly new, give us some time to get used to the majors.
3. The management gap. Maybe a bad name for the phenomenon we all know - Israelis are great entrepreneurs but (on the whole) are not great executives when it comes to outbound / strategy. We are getting there, but it will take time. Israel's VC industry hasn't done extremely well in attracting foreign executive talent, or even repatriating great Israeli executives who live abroad. (BTW - Microsoft has done it - getting Moshe Lichtman, a senior VP, to go back to Israel and start its Israeli strategic development center). If we get more management talent over, we'll certainly see more mature sell/grow decisions.
BTW - Metacafe is a great example, but we have all seen the headlines just a year ago. My personal view, and I might be wrong, is that they also preferred selling over growing, but the price was not right. But then again, this might have been the case with many other companies who eventually made it big.
As the sole source for funding in Israel is VCs, there are a couple of things that prevent it to happen:
1. Israeli VCs will NOT place big bets on founders who are 1st timers. 99% of the cases, they will NOT place a bet at all. That is not the case with some prominent US VCs, who build big companies by placing big bets on 1st timers.
2. Israeli VCs place mid bets ONLY on 2nd Israeli timers, or prominent American Execs. 2nd Israeli timers are after more money, and when the 1st opportunity comes along they will take the money and go, as well as their VCs. If things go bad, they will not care as much. That is why many 2nd companies of 2nd timers are crap.