Even in Israel, it is hard to turn young companies into adults
THE young must shout if they want to be heard. In a stone hangar in the old port of Jaffa, 30 entrepreneurs have five minutes each to present their start-up companies to a panel of digital luminaries and an audience that includes potential investors. Not everyone in the room is ready to shut up and listen, so the hopefuls must battle against the din. Feng-GUI explains how, by simulating human vision, it can tell advertisers and designers which areas of a web page are most likely to grab people’s attention. CopyV promises to send large files quickly and securely. With Fooducate, “a dietician in your pocket”, on your smartphone, you can scan bar codes in the supermarket and find out what’s really going into your trolley.
Israel’s legions of young technology firms clamour for attention and money. Rapid-pitch events like this one, at DLD Tel Aviv, a two-day conference in November, are common. More than 300 firms applied for a slot at DLD; 100 turned up; the lucky 30 were chosen by raffle. Yossi Vardi, a technology entrepreneur who has invested in 5 start-ups since 1996, says that he receives between three and eight approaches every day.
Dan Senor and Saul Singer called Israel “The Start-Up Nation” in a book of that name in 2009. The label has stuck because it fits. Everybody and his brother-in-law seems to be starting a company—with old schoolmates or army colleagues, in a spare room or the parental home. Starting a business is easier than ever, thanks to advances in information technology. Budding designers of smartphone apps can rent space when they need it on a remote server rather than buying huge amounts of computing power. “The internet has democratised the right to innovate,” says Mr Vardi.
Israelis innovate because they have to. The land is arid, so they excel at water and agricultural technology. They have little oil, so they furrow their brows to find alternatives. They are surrounded by enemies, so their military technology is superb and creates lucrative spin-offs, especially in communications. The relationships forged during military service foster frenetic networking in civilian life. A flood of immigrants in the 1990s gave national brainpower a mighty boost (see article). The results are the envy of almost everyone outside Silicon Valley.
Small country, big dreams
But even in Israel turning tech start-ups into big companies is difficult. For all the comparisons with Silicon Valley, Israel has not begotten a Hewlett-Packard, an Intel or a Google. Its best companies are often bought by American giants while still in their infancy. The biggest home-grown technology company is Teva, a drugmaker which is listed on NASDAQ, an American tech-oriented stockmarket, with a market capitalisation of $43 billion. In information technology the biggest is Check Point, a security specialist founded by veterans of Unit 8200, an elite army-intelligence group. Also on NASDAQ, on which Israel has more companies than any foreign country bar China, it is valued at $11 billion—no minnow, but no whale.
Very young firms have a good deal of support, which is getting stronger. Accelerators, in which entrepreneurs can shape their ideas and meet advisers and investors, are springing up: this week, for example, UpWest Labs, which intends to bring five to ten Israeli start-ups to Silicon Valley for ten-week stints, began its first programme. As well as meeting helpful people, the hopeful entrepreneurs receive $20,000 in seed money.
“There’s a plethora of opportunities at a very early stage to raise $20,000 or $100,000 to get a minimum viable product out there,” says Liat Aaronson, the executive director of the Zell Entrepreneurship Program, a scheme for final-year undergraduates at IDC Herzliya near Tel Aviv. The difficult bit is turning small firms into bigger ones.
One commonly cited problem is a lack of early-stage venture capital: sums of $1m-2m or so. Ms Aaronson agrees that this step is “trickier”, though some firms emerging from the Zell programme have attracted such amounts. People on the course founded the Gifts Project, acquired by eBay in September, which allows people to club together to buy presents online for their friends, and Wibiya, a web-design company that was bought by Conduit, a biggish Israeli firm, for $45m in July. Alumni set up LabPixies, a developer of web and smartphone apps that was spirited away by Google for $25m in April 2010.
Israel attracts far more venture capital per person than any other country—$170 in 2010 to America’s $75 (see chart 1). Yet there does not seem to be enough early-stage money to go around. One reason is that there are simply an awful lot of young companies fighting for a share of the pot.
Another is that venture-capital firms in Israel, just as in other countries, have had a lean few years. That could be changing: investment is climbing back towards its pre-crisis peak (see chart 2).
But some funds based in Israel, several of which were created with public money in the 1990s, are still having difficulty raising money and are hesitant about deploying what they do have. They are likelier than big international brands to deal in smaller amounts. According to the Israel Venture Capital Research Centre, Israeli funds now account for only a quarter of the amount raised by the country’s high-tech companies, down from two-fifths a few years ago. Whether the brand is Israeli or foreign, says Adam Fisher of Bessemer Venture Partners, an international group, the money comes from abroad.
Building a business requires more than money and technology. Companies need customers, and in a country of 7.6m people there are not very many. So Israeli firms are often global virtually from the start. For example, BillGuard, which alerts its users to errors and fraud on their credit and debit cards, has an office in New York, staffed by Yaron Samid, its chief executive and one of its founders, and the head of business development and sales, and keeps a 15-strong product-development team in Herzliya.
Now that young Israeli companies are applying their technical brilliance to consumer products as much as to designing semiconductors or developing computer-security software, broader skills matter more. In a blog post last July, Mr Fisher exhorted them to think about their entire business model, including product design and marketing, from the outset. Some start-ups, he wrote, had made this mental leap, but the “tech crutch”, a model of focusing on technology alone and then selling to foreign multinationals, was “increasingly unsustainable” in the face of competition from China, South Korea and Taiwan.
Building businesses also requires people who are willing to be, say, the 50th employee in someone else’s firm. But in a nation of start-ups a lot of people want to be their own bosses. Talent risks being thinly spread. Mr Samid’s theory is that after their stint in the army many young Israelis have had enough of being told what to do. He reckons that three-quarters of the members of TechAviv, a network of entrepreneurs that he set up, are start-ups with fewer than ten employees.
And making a business into something not merely big but enormous means resisting bigger companies’ blandishments of a few million dollars, or even a few hundred million. Given a certain payoff for selling and an uncertain future going it alone, it is not surprising that many people take the money. Several companies have rejected offers of hundreds of millions of dollars only to fail a few years later. So leaving the task of building a company to someone else may not be such a bad idea.
Mr Vardi certainly thinks so. “We are developing intellectual property, not just companies,” he says. He reels off a list of American tech giants, from Intel to Google, with operations in Israel into which they have folded local firms. Several have been in Israel for decades. It is these multinationals, he says, that create “the 30th, 40th and 500th” jobs in Israeli start-ups. Intel employs more than 7,500 people in the country; HP too has several thousand staff; IBM has more than 2,000. This month Apple made its first Israeli acquisition, Anobit, a maker of parts for flash-memory drives, for a reported $390m. It is said to be setting up a research centre too.
Israel is not alone in agonising over the sale of its home-grown companies. In Britain, the sale of Autonomy, a software company, to HP for $11 billion last year caused a brief national lament. Some Israelis may wish their crops grew taller in the field before the harvest. Most countries would settle for sowing half as much seed.