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.

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?

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.

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.