Israel has always taken a disproportionate share of global media
attention. This has long held true in international politics, where
Israel would prefer a little
less attention, but also in high tech where the media attention on startup success has often been overstated and anecdotal.
For the better part of a decade, Israeli venture returns have been
disappointing, frustrating many who were once convinced they had found
the next big thing. But more than a decade after the last bubble burst,
the Israeli venture capital industry has steadily matured, reaching a
turning point over the past year.
The return profile in Israeli high-tech investments is improving
remarkably as entrepreneurs build stronger, more ambitious startups with
eyes on a much bigger prize and a higher probability of success. The
Israeli tech industry may not be advancing at the pace that impatient
investors and reporters demand, but the last decade has also proven that
Israeli high tech is far from a fleeting trend.
As a fund that has been investing in Israel since 1992, with a
dedicated office there since 2007, we at Bessemer see a stark difference
today versus what we found in the Israeli startup environment 10 years
ago.
Heightened Ambition
Israeli entrepreneurs have always been ambitious, but the maturity of
the Israeli entrepreneurial ecosystem now gives emerging companies a
better chance to deliver on big dreams and therefore a better chance of
raising money to pursue them. Today’s crop of entrepreneurs has grown up
in the startup ecosystem and seen peers disappointed by selling too
early or shutting down only a couple years after raking it in. This
means not only more serial entrepreneurs, but more maturity and
experience in the first 50 hires these startups make.
The perspective shows. Venture-backed M&A and IPO exits have grown each year since 2011; Waze (Google) was the largest venture-backed M&A deal in 13 years, but so was Intucell (Cisco) when it was acquired earlier 2013 and XtremIO when it sold in 2012.
Wix, which started trading on NASDAQ late last year, was the largest IPO of a venture-backed Israeli start-up
ever…and has since been followed by Varonis. But companies such as Mobileye, CyberArk, Outbrain
and others will likely file this year if they haven’t filed
confidentially already. And I am increasingly confident that in the near
future, the first results of a Google search for “Israeli IPO” will
yield links related to public offerings rather than the acclaimed Israel
Philharmonic Orchestra.
In most cases, these successes come years after rejecting otherwise
lucrative offers, with management choosing an independent path despite
higher risks. Remaining independent is generally much harder for Israeli
startups relative to American peers.
To start, emphasis on cutting-edge tech and strategic partnerships
triggers interest at a very early stage, well before a proper business
has been built. And because scaling an independent business 6K miles
away from the customer base is always daunting for the Israeli founder,
accepting an early acquisition offer is often a very rational decision.
Direct Customer Acquisition
Startups become large, independent success stories when they “control
their destiny,” which requires owning the distribution channel and,
most importantly, owning the
customer relationship. Historically,
Israeli companies and their venture backers thought it sufficient to be
the owner of unique and proprietary IP. For this reason, Israeli
startup success typically hinged on building strategic partnerships and
OEMs that could bring strong technology to far-away markets at a
relatively low cost and low risk. It’s often forgotten, but this is how
Checkpoint (Sun), Amdocs (AT&T), and Gilat (GE), became success stories.
Twenty years later, Israeli startups now know that such partnership
shortcuts come at a profound cost to the company’s ability to stay
independent long-term. Unfortunately, Israeli startups still tend to
hire biz dev well ahead of sales, but the successful ones stand out for
making every effort to own the means of customer acquisition as well as
the resulting relationship.
This industry-wide transition is exemplified by the rise of Internet,
SaaS and mobile companies — something once thought unthinkable in
Israel. Wix, Waze and Outbrain each devised a method for scalable direct
customer acquisition, whether it was through advertising channels,
mobile platforms or sales reps. The same is true with many
enterprise-focused companies, which increasingly eschew the “white
knight” OEM and build an independent go-to-market strategy.
ShakeUp in the VC Landscape
American VCs first entered the Israeli market in the late nineties,
focusing primarily on follow-on financings in startups originally funded
by local Israeli funds. Over the last five years, the traditional roles
of early-stage Israeli funds and later stage American funds have become
blurred. Six American VCs with deal-makers residing in Israel,
including BVP, are among the most active early stage investors in Israel
and at least four newly established Israeli VCs are focused exclusively
on later-stage opportunities.
The resulting American imprint at the early stage has been
substantial, further fanning the flames of ambition and independence of
Israeli entrepreneurs. American investors have brought not only larger
checkbooks but a better read of the U.S. market and competitive
landscape. American VCs have also introduced a more aggressive set of
venture tools aimed at helping Israeli start-ups grow faster including
growth equity financings, acquisition strategies and previously shunned
founder liquidity. It’s American VC influence that’s behind the direct
customer acquisition strategy and the spurning of strategic
partnerships.
The Future Is Rosy
Recent high-profile exits have investors once again focused on
Israel. Active VCs are reaping the rewards after much patience, and
institutional investors – who were heading for the proverbial door –
have paused and are taking a second look.
Some see these startups as not yet polished enough to warrant
attention, but they do themselves a disservice. Israeli high tech has
matured to a point where we will continue to see a steady stream of
large M&A exits and IPOs for years to come. Israel is the only real
technology rival to the Silicon Valley, and the Valley know this well.
Just as political observers no longer view Israel as the underdog, few
tech giants and investors are willing to underestimate the potential of
an Israeli startup.
