Start-Down: Israeli Start-ups in crisis

in News by Gal Mor — July 27, 2010 at 9:25 pm | 7 comments

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In the Best selling “Start-Up Nation” authors Dan Senor, and Saul Singer try to answer following question: how is it that a small country, surrounded by enemies, and of no natural resources to speak of, becomes a global center for technological entrepreneurship that produces more start-up companies than China, India, South Korea, Canada and Great Britain? Chutzpa, a talent for improvisation, and a ‘don’t worry’ attitude are among the reasons provided as answers to this question by the authors. Other explanations offered for Israel’s silicon Wadi (valley arabic) being a rival for it’s California sibling include government investments in new technologies, and a compulsory military service.

Investments Are Down

Unfortunately this is no more. The book that won accolades from ex-Ebay CEO, Meg Whitman, paints a picture of the past.  $577 Million were invested in Israeli companies in the first half of 2010, this represents a 6% increase in comparison with the first half of the previous year. According to IVC statistics (PDF file), this rise in investment figures, might be signaling a rebound in trends, but wait,  take note of the following figure;  in the first half of 2010, Israeli VCs  invested $169 million in Israeli technology ventures, a 23% drop from the previous year. Another perspective reveals that VCs made up only 26% of the total investment capital during 2010’s second quarter in contrast with 2009 Q1’s 33% and Q2’s 40%.

VCs fuel the Hi-Tech industry in general, and start-up companies in particular, however without  investment neither chutzpa nor brilliant minds will suffice. We could blame the current state of affairs on the world economic downturn, or the flawed VC model which sees the actual companies as their product, rather than the technology these companies develop, but that would be akin to viewing the situation through a keyhole.

Lack of Manpower

Benchmark’s Michael Eisenberg, claims that Israel’s Hi-Tech industry is in the throes of a severe crisis that won’t be resolved even if the economy turns for the better, unless drastic measures are taken. The world is changing and Israel isn’t adapting to these changes at a satisfying pace. Unlike Israeli academic institutions that churns out several hundred new engineers and Hi-Tech people every year, India and China turn out thousands. These legions of engineers and technicians will work for almost any price, and while this cheap labor force might still be lacking the Israeli entrepreneurial spirit, they are quick learners. It would be naive to believe that the ‘Davidian’ effect alone will allow Israel to succeed.

“We live in a flat world” claimed Thomas Friedman in his bestselling “The World Is Flat”. Our world has been flattened by the internet, as well as, globalization, and in this new world China and India are taking the lead away from The US and Europe. In this world every business model becomes a commodity, a product easily copied. Twitter and Facebook have become hugely successful without having any business model. On this new playing field there is little chance for an Israeli company to turn into one of these behemoths. In this realty even companies the likes of Elbit, Scitex, Checkpoint, or even Comverse would be hard pressed to make substantial headway.

The Exit Culture

Ironically it was the impressive exits made by innovative start-up companies such as Mirabilis, and Chromatis,  that sowed these seeds of destruction. It is fair to assume that two guys sitting in a Tel Aviv garage are most likely planning a product that will assure a grand exit, and not offer the world some added value. As sad as it sounds Israel has too many mediocre and sub-par start-ups, that don’t solve any real problem and lack any real innovation. Television series such as “Mesudarim” (trans – “Well To Do”) have cultivated a perception that Hi-Tech equals wads of cash, and a hedonistic life style, when in fact in many cases, even talent, perseverance, and hard work offer no guaranty for success.  Eisenberg explains that his path does not lead to the next Facebook, rather it wastes local talent on many small companies  whose sole goal is to be acquired quickly. Statistics show that most, fail.

Betting On The Wrong Technologies

Another problem Eisenberg points to is the tendency for local start-ups of adopting old school development platforms such as .NET and C#. The fact that the IDF has been taken over by Microsoft and has avoided open source projects has dramatically affected the type of skills veterans display when joining the private sector. The failures of the education system have done very little to help. If anyone believes that Google, Facebook, Amazon, Twitter, Salesforce, or any other big internet company that has become prominent over the past few years was developed using .NET they have another thing coming. It is no wonder that their is a serious shortage of high quality man power in Israel. The world has turned the way of cloud computing and huge data farms that offer highly scalable technologies, while Israel is honing its Microsoft skills that are at this point, lagging well behind Apple and Google.

The Backwards Israeli Internet Market

In the web 2.0 age people have grown to expect brand names and a pleasant shopping experience. Israel’s online commerce is dangerously behind that of the US. Our broadband is surprisingly narrow, and new technologies such as the iPhone and iPad take to long to make it to market here. Most Israeli websites and web-applications are out of date, we lack any real sources for inspiration.

Unfocused Investment Policies

Some of the blame falls squarely on the shoulders of the Israeli government, who through the auspices of the Chief Scientist’s office has maintained unfocused investment policies which avoid disruptive technologies. These policies have caused the ministry of Industry, Trade & Labor to amaze us with the following statement, “innovation is not a standard by which government fund distribution should be measured.”  But what do you expect from a government that behaves like a venture capital fund itself? Is it surprising that more and more technology is being nudged away from here?

The Fear Of Big Corporations

The scathing criticism heaped on the government for subsidizing industry giants such as Intel is populist in nature. While criticism over the centralist economic policies of the government is admirable, it just isn’t relevant in this case. Even though the R&D departments of these technology companies are essentially exporters, they also happen to attract local talents with tempting jobs rather than have them go overseas. These companies also feed quite a long list of players on the technological food chain. It’s good that the government has cancelled a proposal to restrict research and development grants to companies with annual sales figures that don’t surpass $100 Million, simply because the companies that would suffer from this restriction are the ones that stand a good chance of successfully developing innovative new tech products and create more jobs for the market. Indeed it makes no sense to prefer smaller companies just for their size. Not only should Israel avoid chasing big international companies away, it should make every effort to bring them over here.

It’s commendable that the chief scientist’s budget was raised, rather than slashed. It’s also good that preference will be given to companies that prove innovation, and new efforts made to establish long term policies. Unfortunately, these applaud-able efforts will not prove to be a solution to the problems described in this article. Nothing short of a multi year reform plan that will place elite technologies at its focal center will do, and if you think about it, this issue most definitely a matter national security.

Translation: David Miron

Tags: featured funding High tech IVC startups VC