Above: Dinner in the West Bank
However, the size of the results, in terms of dollars produced per company, and per dollar investment, lags behind other regions, including the U.S. and Europe.
When Israeli companies exit, they do for smaller amounts of money. Israeli companies raised about $4.2 billion in venture capital in 2009-2011, with exit values of about $7 billion in that same time frame by Israeli venture-backed companies. That compares to Europe, where venture-backed companies raised $18 billion and had exits of about $40.7 billion, and the U.S., which raised $86 billion and had exits totaling $194 billion. So while European and U.S companies returned well above 2X the amount they raised in the time frame, Israeli companies returned about 1.6X. What’s more, Israeli companies actually had more exits per company funded, so the amount per exit is far less in Israel than in other countries.
The data comes from Dow Jones, which compiles the best stats on venture capital and exits, and this data is very similar to the data offered by Israeli research group IVC. To be clear, the data does include companies that are founded by Israelis, and which continue to have an office in Israel, but where the headquarters have since moved abroad. Now, I certainly realize that this data could be skewed by the specific timeframe selected. But even if you take the years 2001-2008, you’ll see that Israel’s ROI was just slightly more than 1x (Israeli companies raised $13 billion, and returned $14.7 billion), whereas Europe returned more than 1.5x (raised $51 billion and returned $88.5 billion), and the U.S also returned more than 1.5x (raised $226.5 billion, and returned $381.7 billion). By the way, there’s been plenty of discussion of the period between 2001 and 2008, but I checked that out, and it turns out it was based on faulty data by all sides. Some were trying to include data from the year 2000, which is not a good year to include. That year was a bubble year, and most of the value created by exits then were quickly lost. I’d argue 2001-2011 represents a balanced decade for measurement.
So what else is behind this tendency for Israeli entrepreneurs to sell quick and small?
Well, having so many companies and entrepreneurs is itself an indicator of the challenge. By default, if you’ve got a culture that encourages entrepreneurship, it’s harder to get other smart people to join your company. “Anyone who is an engineer starts a company,” explains Eisenberg, the Israeli venture capitalist with Benchmark who hosted me at his winery, in a good blog post on this subject last year, “making it more difficult to find engineering and product talent with which to scale companies.” More entrepreneurs end up going it alone and staying small. And if you’ve already beaten the averages on the actual number of startups created, there’s just no guarantee you’ll do better on the outcome side. Indeed, the vast majority of startups in any country end up failing. But even here, Israel does ok. Take the years of 2009 to 2011. For every venture-backed Israeli that reached an exit, there were five companies that got funding in that same period. In the U.S and Europe, for every company that reached an exit, there were six companies that got funding. In other words, Israeli companies exited at a better rate, during that time frame. So to be clear, I am not doubting the success of Israelis. Instead, this essay is attempting to hold Israelis to a higher standard: They’ve done very well, but can they go really big?
I don’t know if that’s a fair question. This is a very small country, with just 7 million people. So consumer Internet companies haven’t been Israel’s specialty. Fast-growing, megasized companies — the Googles, the Facebooks, the Zyngas and Instagrams — tend to be consumer-facing. And while you can argue that technology knows no borders, and in theory it doesn’t matter where a company is based these days, it’s indisputable that the U.S., specifically Silicon Valley, still has a natural advantage as a base for big consumer plays. Not only is the entire U.S. market a natural default target, entrepreneurs surrounded by ambitious and experienced peers here are quickly programmed to think big from the beginning. YouTube and Instagram show you don’t need to make any money at all to be successful. Few, if any, other markets have truly appreciated this difference.
Also, Israel only recently entered the Internet and digital media industries. “We have not matured in that area yet,” says Danny Cohen, a partner at venture firm Gemini Israel Funds. He, like others, points to promising companies like Wix and OutBrain. But these companies need a few more years to grow.
But Israel has excelled at other, deeper technologies in the area of chips and security. (Incidentally, Israel’s military, a source of many of Israel’s top entrepreneurs, didn’t help matters when it standardized on an older software stack, leading with Microsoft. Benchmark’s Eisenberg argues this is why it’s so difficult to find programmers focused on the newer, more dynamic Ruby on Rails.)
Another cause: Israeli investors. “Investors do not hold on long enough. They sell early,” Eisenberg told me, echoing what others said. Israeli venture firms have been good at fostering early innovation, but not at the scaling part. Part of that is because Israel’s VC industry is so nascent; it first emerged 1993. Starting with smaller funds, they’ve remained small, and are more focused on raising their next funds, so they don’t have as much experience in scaling companies.
Israel remains engineer-heavy, and is relatively weak in sales and marketing — another ingredient key to scaling. Overall, entrepreneurs and VC firms simply find it more difficult to grow. They then need to make the step abroad to continue their growth, but that adds time and complications. For whatever reason, Israeli VC firms are struggling. In 2010, local VCs did not raise any money at all, leading one VC to write that the local start-up industry was “heading for collapse.”
Why, if logic tells them that “holding” is going to lead to a bigger exit down the road, are Israel VCs unable to hold? Eisenberg responds with the following bullet points:
- Israel in general is a place of short term thinking. It is true in politics as well as in planning.
- Local VCs are always concerned about raising next fund, so they try to put “runs” on the board.
- They can’t imagine that companies can scale. You should see the reaction here to Instagram deal — people were saying it is stupid to pay up for photo app. No understanding of scale.
- 7 million people in a country makes you think smaller than a country of 300 million people.
- VCs in the past were really inexperienced. U.S. VCs have changed the dynamic entirely.
Of course, Eisenberg, who represents a U.S. venture firm, may be biased, but his views ring true. And the arrival of scores of new investors could be about to change the game. Back to Sharon Tal, the entrepreneur with the hot social gaming company DragonPlay. Just last week, when he raised a large $14 million round of capital, he did so from Accel, he said, because of its perceived ability to help him scale. He bonded well with the Accel partners, and even before doing the deal, those partners introduced him to contacts at Facebook and other key companies. Moreover, Accel has experience backing big players in mobile and gaming, including Rovio, Admob and Amobee, which also impressed him. “I realized that if I wanted to get big, and then sell company or go to IPO, I needed some professionals with me, mentors, people who could help me with business development,” he told me. His company was seeded in 2010 by Entree Capital, a London-based firm. (…continue reading)