In Israel's tech prowess, a downside of scaleDecember 12, 2011
by Kim Hjelmgaard
JERUSALEM (MarketWatch) —
Israelis are accustomed to bomb shelters and hostile neighbors. Its entrepreneurial class, Wunderkind of the technology start-up world, is facing a different kind of threat: one of scale.
It may have enemies on all sides and a dearth of natural resources to call upon, yet due to a rare combination of historical accident, military necessity and innate cultural chutzpah, Israel has, in spite of it all, evolved to a position where it is able to consistently crow that it is near the top in terms of having the most companies listed on the U.S.’s technology-heavy Nasdaq index COMP -0.04% . Israel has 58. In the top spot, Greater China, which includes Hong Kong and Taiwan, has 155 companies.
But an environment that makes for creating superlative technology start-ups — the Nasdaq barometer notwithstanding — doesn’t necessarily imply the near-opposite: that Israel is good at harvesting, from the close to 5,000 currently active start-ups, big companies. Or even that it actively wants to.
“You actually hear this complaint from Israelis a lot,” said Saul Singer, during an interview in Jerusalem. Singer is the co-author along with Dan Senor of the 2009 book “Start-Up Nation: The Story of Israel’s Economic Miracle.”
“Why do we just do start-ups? Why can’t we do bigger companies? And one answer to this is: What makes Israelis so good at doing start-ups, like the lack of patience and long-term planning, the lack of hierarchy and not being so interested in management and sales — the things, in other words, that start-ups don’t have to worry so much about compared to big companies — these things are arguably part of what makes us not so good at creating big companies.”
But what “Israelis need to understand,” Singer added, “is what while we sometimes wish we had more big brand-name companies, most of the world is looking at Israel and asking how can they do more start-ups.”
Israel does in fact contribute its fair share of bigger companies to the global corporate conversation. Nasdaq-component, and Tel-Aviv-headquartered, data-security firm Check Point CHKP -0.34% , for example, has a market capitalization of around $12 billion. Another Israeli-founded communications-technology firm, Amdocs Ltd. DOX +0.43% , is worth about $5 billion, and has 20,000 employees. Teva Pharmaceuticals Industries Ltd. TEVA +0.81% , which manufactured 63 billion drug tablets in 2010, has a market capitalization of over $38 billion as well as a direct presence in 60 countries.
“We are seven million people, but we make noise like we are 70 million,” said Yossi Vardi, one of Israel’s most celebrated technology entrepreneurs. Vardi first made his name as part of the team that created and later sold the ICQ instant messaging platform popularized by AOL Inc. He has had a hand in over 60 technology start-ups that have ended up in the corporate stables of places like Cisco Systems Inc., Microsoft Corp. and Yahoo! Inc.
“We in Israel are very good at being at the beginning of the food chain. We can do the technology, but we are not so good at the marketing part,” Vardi said. For that reason, he said, it is generally better for Israeli companies to seek acquisition by more established multinational players. “I would rather rely on Intel Israel or H-P Israel, with all their readily-available markets. Why should I care if the owners of Israeli companies are H-P or some anonymous shareholders on the U.S. stock market?” he said. “It’s much better that we can make use of these firms’ marketing, sales, management knowledge and deep financial pockets.”
“So we in Israel can’t make a Google?” said Vardi. “Fine.”
Gift that keeps giving
One company that has observed the spirit as well as the letter of this law is The Gifts Project, in which Vardi played a role as an angel investor.
“People ask about the exit culture in Israel, this idea of relatively small and young companies here getting acquired by U.S. firms,” fairly rapidly in their life-cycle, said Ron Gura, co-founder and chief executive officer of the self-proclaimed “social-giving” start-up. In September, The Gifts Project sold to eBay Inc. for a rumored $30 million. “There’s not a black-and-white solution to this, and I hope to see more big companies like Check Point coming out of Israel, but for us eBay is in the right position to help us crack what social-commerce really is about,” Gura said.
According to the latest data from the Israeli Venture Capital Association, Israel currently has 4,900 technology start-ups in circulation. These span industries as diverse as Internet applications, mobile data, clean tech, medical devices, computer hardware, defense and just about every other industry that hitches its fortunes to utility and innovation.
Ben Weiss, who runs a venture capital fund out of Hong Kong that connects Israeli ideas with Asian investors, said that although there are many examples of Israeli companies that have successfully transitioned from start-up to mature business — he cited Check Point and the powerhouse Teva — many are sold prematurely.
“It’s probably a mix of political, cultural and historical factors,” Weiss said. “Political in the sense that Israel is a country in a constant geopolitical storm and fear of an unknown future prompts entrepreneurs to go for the easiest and fastest option to sell out early. Cultural in the sense that Israelis are quite a fast-moving people. And historical in the sense that it has become a self-fulfilling prophecy: entrepreneurs grow up knowing that Israeli companies can only get to a certain size before they need to look for an exit — and so the trend continues.”
Shai Tsur, a business development manager at Microsoft’s Israel Research & Development, said that Israel established some large technology companies in the 1980s, but has had a hard time replicating this success. “People come up with all sorts of reasons for this,” Tsur said. “Israel doesn’t have managers experienced with handling companies past the $100 million mark, or the IPO market is weak, or that venture capitalists tend to push entrepreneurs for quick M&A exits instead of letting them build big companies, or that Israeli entrepreneurs don’t have the stick-to-it-ed-ness required to build big companies.
“While some of this is definitely true, we are seeing some more recent companies — like Conduit and Wix — growing large.”
Saul Klein, a partner at Index Ventures, a venture capital firm that has backed several Israeli start-ups, told the Tech Crunch blog
recently that across Europe and Israel “there are a legion of companies capable of achieving billion dollar valuations.”
Klein, too, cited Wix, an online publishing platform, and Conduit, a web and mobile app-distribution network used by Major League Baseball, Groupon Inc. and other global brands as Israeli firms that have the potential to break through to the big leagues.
Still, despite impressive numbers — Wix users have created over 13 million websites using its free website builder; Conduit has 250,000 million users and a network of 260,000 publishers — these companies are still relatively fledgling operations.
Wix has raised about $60 million in funding, according to TechCrunch, and a representative from Conduit said that they have raised a total of approximately $11 million in venture capital funding.
However, Conduit’s CEO, Ronen Shilo, did say that they are determined to keep building the company rather than make a quick exit. He also said that the idea that Israel is not good at building bigger companies is a theory taking hold in some quarters that he disputes.
“The truth is that our smart, young companies are in great demand, and so many are acquired when they are small — before they have a chance to scale,” Shilo said. Plus, he said, “Israel is a young and impatient country” and it’s still early. “Ask me in a few years.”
Kim Hjelmgaard is a MarketWatch editor based in London.