Why Israeli Start-Ups Fail
My good friend and long time GigaSpaces partner Nati Shalom forwarded to me and to another good friend and GigaSpaces alumni Geva Perry this blog post by Steve Duplessie titled “Fail Factors – Why Startups Die: The Israeli Illusion“.
This post spurred an interesting email thread among us that I think has some good insights.
Duplessie’s post tries to analyze in a very well-written (and sometimes comic) way the billion dollar VC question – why Israeli start-ups are so successful at innovation, but fail to earn the “home run” valuations at exit time. His central theory: Israeli companies are handicapped. They are removed from THE market, both geographically and mentally. They never fully embrace the “market realities of the US” and instead pay lip service to it by hiring local sales and support teams which just ends up making matters worse. His solution: hire US CEO and execs early on, and make the transition all the way.
This topic is very near and dear to my heart – having managed companies both in the US and in Israel selling to the US. I believe I carry all of the scars – and then some. That being said – I think that fundamentally Steve is right, but for the wrong reasons. Let me explain.
The conventional wisdom that Israelis are great technologists, but morons when it comes to understanding “market realities”, i.e. marketing and business management, was a mantra a decade ago. However – there is no shortage today of savvy Israeli business executives who have lived many years in the US and feel there at home as much as they do in Israel. The fact is – Israelis understand market realities in the US no less than american executives. Furthermore – US execs tend to focus all their efforts on the US, ignoring “the rest of the world” as if it is just another small market, while Israeli execs are far more global and therefore sophisticated in their thinking and action than their US counterparts. These days – this is a big plus. True – culture gaps exist (as our GigaSpaces team can attest), but I believe these have more to do with the inherent culture gap that exists between developers and sales guys, than between Israelis and Americans.
I believe the reasons lie elsewhere. I’d like to quote Geva, who made the point in our conversation that “That said, there is a problem. But it’s not about Israeli startups necessarily, but startups not in Silicon Valley (I’m seeing similar issues with U.S. companies based in Boston). And it’s much more subtle than “thinking that knowledge of the market is not important”. It’s the fact that like in all industries and communities, there is a close-knit “old boys club” that if you are connected with it, life is much easier. and that old boys club is physically located in Silicon Valley.”
I agree with Geva 100%.
However there are grim conclusions to this line of reasoning. Either
a. You don’t build companies out of Israel; or
b. You adjust your investment strategy to accommodate for the fact that Israeli companies on average return less on investment than US ones. i.e. do more with less funding…
Both are pretty challenging:
1. The simple fact is that Israelis by definition are in Israel…and most of them like it that way. It is also true that there is a continuing fountain of innovation from there. And we also know that putting an American CEO and executive team to manage an Israeli R&D shop is the true path for disaster. So the only conclusion: We somehow have to make it work in spite of the distance from the old-boys club, or give up….(or move Israelis to the US en-mass)
2. Israeli companies still have to compete with US ones that are and will be more funded (and closer to the market and to the old-boys club). So less funding puts them at a double handicap.
Here is where the new business models of SaaS and low-touch marketing, sales and operations can really allow Israeli-based companies to overcome at least some of their inherent handicaps. But that is a topic for another discussion.
Regardless however – home-run valuations are at the end of the day closely related to who you know and more importantly who your investor knows and that goes back to Geva’s point about the club.
Like Steve Duplessie said: Who said life is easy or fair ? This cliche is especially true for Israelis. But then again it’s always been stacked against us and somehow we’ve manged to do OK, so I’m guessing we’ll somehow figure it out. Worse case, we won’t be filthy rich, just well off….
