[Editor’s note: This is an Op-Ed piece by Daniel Cohen, a venture capitalist at Gemini Israel Funds. He blogs about the Internet and the Israeli Venture Capital here.]

Here are some facts: Israel is the 3rd largest high-tech & venture capital center in the world. Israel is the #1 startup-producer in Europe (And this is in absolute numbers, not only relative to GDP). Israel has a strong position in the high-tech world, a position that is getting stronger with globalization .

Israel’s venture capital industry is celebrating its 15 anniversary and is looking stronger than ever. New funds are being raised, the deal flow quality is excellent, and the absolute number of funded startups is on the rise (For specific data, check IVC Online). In parallel, more and more US venture capitalists are entering the market, either through dedicated Israeli funds (Sequoia, Greylock, Benchmark), or through local representatives (Lightspeed, Venrock, Battery, Canaan, Bessemer, and many others).

In summary, Israel has brand recognition, a growing investor base, and high-quality entrepreneurs. Israel is famous for producing small companies with outstanding technology.

In spite of this, there are no examples of great Israeli break out companies – no Israeli equivalent of Google, Microsoft or Nokia. The one cloud hanging over the Israel high-tech scene is doubt about whether it can grow a large, successful, $1bn company. The top-tier US VCs have made their returns on a few very large grand slams. It’s very hard to build a top quartile venture fund with just singles & doubles.

Some argue that the Israeli entrepreneurs don’t have the mentality (i.e. patience) to actually build large companies. That’s already been proven wrong. Here is an example of some successful Israeli tech companies: Comverse ($3.9bn), Checkpoint ($5.8bn), Nice ($2.0bn), Amdocs ($7.8bn), Mercury (sold to HP for $4.5bn). These 5 companies are/were profitable, strong, and well-proven. However, they are all Old. Very Old. Checkpoint, the youngest of the group, was founded in 1993. This was 14 years ago.

So why does Israel lack large $1bn+ companies? I believe there were four key drivers for this, and all these drivers are now changing.

1. Entrepreneurs want to retire with $3-$4M: Till about 5-10 years ago, many Israeli entrepreneurs were looking to retire with few millions of dollars. There were not a lot of multi-millionaires in Israel, and the overall standard of living was not comparable to the United States. This is changing (for the good and the bad). People want nicer cars, bigger homes, and more exotic vacations. Suddenly, entrepreneurs are starting to think about $20M or $50M as their cash targets. If a company was started by 3 founders, a founder will see $50M only if his company reaches a very high valuation.

2. Impatience of investors: but it’s not only because of the entrepreneurs. Many of the VCs were happy to sell, and sell early. They were eager to show initial returns to their LPs, and did not have the belief or the courage (guts) to stick with the company in order to extract the most value. As I mentioned before, there is now a clear understanding that real venture returns will only come from big hits.

3. “Think small” mentality: In the past, Israeli companies were not focused on building the required foundations to become a significant market player: high quality management, strong financial support, and a large mainstream target market. I recently heard an interesting comparison between an Israeli company and its US competitor. The US Company raised $100M is now worth $3bn. The Israeli version spent “only” $20M, and is now worth… $25M. However, there are indications that all this is changing. As an example, Metacafe raised to date more than $50M, hired a top-rate US-based CEO, and is clearly trying to become a dominant player in the online video market.

4. The lack of $1bn experience: In Sports, it’s very hard to win a championship if none of your team members went through a past championship experience. The same goes with successful companies. If you have seen it once, you believe that you can see it again. In the early high-tech days in Israel, the entrepreneurs were all new. We are now seeing successful entrepreneurs returning to start new companies with bigger ideas. An example of that can be Dov Moran who founded M-Systems (Sold to SanDisk for $1.5bn) and just started a new company called InFone (Disclaimer: Gemini is an investor in InFone). These entrepreneurs are usually joined by Israelis that have returned from the US with substantial experience in large & successful companies.

The Israeli entrepreneurs and investors are all recognizing the importance of this issue. The theme of the last IVA (Israel Venture Association) conference in Tel-Aviv was “Start up big!” with a clear focus on how to build larger companies. Can it be done? People in Israel always say that we will never create an “Israeli Nokia”. Personally, I believe that in 5-10 years those people will be proven wrong.

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