For Israel’s tech startups, size doesn’t matter

Despite its size, Israel is third in Nasdaq-listed companies. One VC says it’s because Israelis live and breathe risk.

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(Photo: Wikimedia)

Israel is a fascinating country on a technological level because of the sheer number of companies, innovations and entrepreneurs it produces. This week, fresh from a tour of Israel’s tech sector, I’m going to run through some of the highlights—as well as a lowlight or two—that I experienced.

Israel is third in Nasdaq-listed companies (behind the United States and China and ahead of Canada), but that’s not all: last year, 550 Israeli companies got venture capital funding, compared to 2,500 U.S. startups. That’s about 20% of the relative investment, despite Israel having only 2% of the U.S. population. Talk about punching above your weight class.

That over-performance is being fuelled by the likes of Jonathan Medved, one of Israel’s many, many venture capitalists. Medved is one of the more successful VCs—over the past 20 years, he has helped bring 11 companies to valuations of more than $100 million, with some of his more notable investments including Shopping.com (acquired by eBay) and Answers.com (acquired by Summit). A few years ago, The New York Times named him one of the 60 most influential Americans who have made an impact on Israel.

Speaking with Medved was definitely a highlight, as he did a good job explaining why Israel has been so successful in cultivating a world-class technology sector. As an added bonus, he also shed some light on the similarities—and striking differences—between Israel and Canada when it comes to tech. Here’s a condensed version of our conversation:

What’s the secret of Israel’s success in technology?

It’s because of our attitude toward risk. This place is risk central. We live risk, we eat risk, we wake up and hear President Whackjob talk about wiping us off the face of his map. That’s real risk and I worry about that.

So the risk of starting a company and losing my job or losing somebody some money, that just doesn’t compute. I’m not cavalier about other people’s money or jobs, but here that doesn’t qualify as risk, which is weird because in many, many countries, quitting your job and starting a company and taking money from someone and losing it is a big, big no-no. You put the guy on suicide watch if it doesn’t work out. Here, it’s okay. Silicon Valley is very much that way too. It’s part of the game.

I wish we didn’t live in such a risky place. I wish I didn’t have memories of cafes that I loved going to being blown up. Today, it’s all calm and chill but 10 years ago it wasn’t. What’s weird is that it didn’t have an impact on people starting companies and, weirder still, is that it didn’t affect investors. That’s not something I fully understand. You’d think that today people would be trying to figure out, ‘What’s my Iran risk for Israeli investment,’ but no one talks about it. Venture capital dollars between 2010 and 2011 were up by over 70%. It went from $1.3 billion to $2.2 billion. More foreign money is pouring into the country. Go figure.

There’s also the immigrant thing. They turn out to be killer entrepreneurs. Immigrants have essentially been there and done that, even if they haven’t formed a company. They actually have formed a company, it’s called ‘My Life Dot Com.’ They took the risk to come to a foreign country, where they essentially had to worry about legal stuff, banking, staffing up, marketing and many of the things you need to do to build a company from scratch. Some of them do it with laundries or restaurants or gardening or construction, but an increasing number do it now with tech.

In the U.S. as a whole, about 25% of new startups are founded one way or another by an immigrant. The estimate in Silicon Valley is that the number jumps higher to like 50%, so anyone who talks about shutting down immigration should have their head examined. These guys are great, great job creators.

A lot of people don’t get this country. They think it’s a white country, but it’s so totally not true. The majority of the Jews who live here come from Africa and Asia. Our diversity is one of our huge strengths. It also makes for great cuisine and beautiful women.

What about the military’s role?

The army is a huge part of it too. It’s not just the source of the technology, it’s the source of, ‘Failure is okay, but don’t do it too often and learn from your mistakes.’ Junior officers get a huge amount of leeway. I have two sons on the way to being officers. They’re not in tech units, but the army is so tech-oriented and they’re learning managerial stuff. In most countries, sending your kids to the army is a total curse where they have to, God forbid, be in harm’s way. And yet, it’s turned out to be a total blessing.

The Israeli army is unlike any army you’ve ever seen. There’s no spit and polish, they march really badly, they don’t do a lot of saluting. The difference here is that the best and the brightest go to the army more often than the lower classes, as opposed to in America where it’s a way for upward mobility.

Here, when I look at a resume, I don’t look at the university first, I ask, ‘What did you do in the army?’ That’s a terrible thing in America, where a guy who has been a company commander in Afghanistan or Iraq goes to try and get a job at a tech company, some 25-year-old HR weenie asks them if they’ve ever had a real job. You think about how many skills that guy has and how much he had to do. I don’t care where you are politically, they should be more employed than they are.

Israel, like Canada, is producing a lot of small startups, but doesn’t the country need big companies?

There’s a huge debate as to whether we’re selling our companies too early. The question is whether all these startups are really good for the economy or do we need big companies and are these entrepreneurs who are selling out for $60 million or $90 million really doing the patriotic thing? Should they be driving their companies harder? It’s a strange conversation to have, but because everything here is about politics and our survival, this has been all over the papers.

I think that what we have, where we’re feeding into the food chain very early, is a great thing and it’s a totally defensible space. We’re getting guys who do this over and over again, so if you look at the number of companies that have been bought in M&A over the last 20 years, it’s something like 1,500. You figure there’s got to be 5,000 or 6,000 serial entrepreneurs tromping around this place.

You’ve got guys like Ariel Maislos (who recently sold his company Anobit to Apple for around $400 million) who make people like me salivate because I don’t care what he wants to do. If I get lucky enough that if and when he leaves Apple, you just want to give him money. There are guys like Dov Moran, founder of M-Systems which invented the flash drive and was bought by Sandisk for $1.5 billion. He then went and built this incredibly ambitious company called modu, which wanted to build the world’s smallest mobile phone. It was a total failure and must have lost hundreds of millions of dollars. But now he’s back with a whole bunch of companies and I just wrote a cheque today to one of them.

You look at Shai Agassi, he was just fired two weeks ago. He was incredibly successful in raising money for this Better Place thing, like $400 million or $500 million, but the board of directors weren’t happy with the performance of the company, which has only sold 500 cars.

The point is, you have guys like that all over the place now, plus junior guys we’ve never heard of. For an investor like myself, it’s getting a boatload easier because your odds of winning again are off the charts. The fact that there are so many winners running around, it’s very attractive to make the investments.

The money coming in has also changed in character. It used to be an even split of Israeli and foreign capital deployment, but now it’s about 75% foreign. Foreigners don’t hesitate to invest in an Israeli company without a local partner. About half these deals are being done without a domestic partner around the table.

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Those are great points when applied to Canada. Canadian entrepreneurs are often accused of being too conservative, which may be part of the reason for why our startups sell out early. They certainly don’t have the same necessity-driven appetite for risk that their Israeli counterparts do.

At the same time, there’s also the similar debate about whether Canada needs large national “champions” such as Research In Motion or Nortel. Medved attitude suggests we might not—that what we need instead are more serial entrepreneurs. Proven winners attract investment from all over the world, which ultimately may be just as good as having big companies.

One comment on “For Israel’s tech startups, size doesn’t matter

  1. Its very true of what they say about Israeli business startups, because along with the risk, they have the appetite to pull it along and reach their goal and that’s what makes them unique from other nations. Read a similar article on http://www.bdc-canada.com , wanna share !

    Reply

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