You’ve heard Israel is small but you can’t appreciate the scale until you’ve driven from one side of the country to the other. Pick two points on a map? That’s about an hour away. That settlement you read about on the news? Oh yeah, it’s right over there. Last week we took the whole Creandum Advisor team to Tel Aviv to see what we could learn from such a significant tech country. After meeting with fund investors, VC’s, angels and startups, we learned that the national sport of Israel isn’t soccer or any other sport, it’s building companies.
Israel is unique in many ways
In the U.S. it’s understated how much DARPA and other military investments have kickstarted Silicon Valley’s rise, but in Israel it comes up in nearly every meeting. Many of the investors and entrepreneurs we met came out of the fabled Unit 8200, a high tech division that collects signal intelligence for the Israeli Defense Force. Israel has mandatory conscription to their military service and we learned Unit 8200 is given first pick of crop, and is said to screen men and women as early as 16-17 as contenders.
The best and the brightest are then thrown at unsolvable problems in cybersecurity. As the stories go, they don’t always succeed at those problems, but sometimes when they throw the fourth or fifth team at it, they succeed. On top of unparalleled training in data and security, there’s real leadership skills that come out of this unit – multiple people we met mentioned they led a team of 50 to 150 by the time they were 23. This has given future entrepreneurs much more structure and education than a hackathon weekend, and has led to Israel’s sector skills in data, security, AdTech, and SaaS in general.
Drawing from this technical talent are also large American corporations which after successful tech acquisitions have opened local R&D facilities, which has a very positive on Israel’s startup ecosystem. As we wrote in our post on Aircraft Carriers, these large corporations like Google, Microsoft, Paypal, and others acquire Israeli talent, feed acquihires, and take an active part in the ecosystem. This type of resource is obviously something many european startup capitals could benefit from having in their backyard.
And as far as developing the ecosystem, Israelis seem keen to start again in Israel after a successful exit. Whether it’s a mix of the great food and weather, family ties, or the strong draw of Israel’s cultural heritage, we feel anecdotally that many of the entrepreneurs and investors we met see Israel as the natural location to start a company. There’s good reason, given the country’s strong technology talent and the fact that the country is flush with Venture Capital. In 2015 israel saw 373 funding rounds totaling $3.58 billion, while meanwhile Sweden, as an example, saw 143 funding rounds totalling $1.07 billion.
There are still things we can learn from Israel’s take on startups.
Culture is hard to imitate, but Israel feels similar to Silicon Valley in the sense that people are more willing to share their contacts, time, and knowledge, something the rest of Europe could learn from. But more than that there’s a real performance culture that’s tangible when speaking to VCs, Angels, entrepreneurs, and their team. We found no lifestyle entrepreneurs in Israel, there’s a seriousness to company building that’s hard to compare with anywhere else.
The government is geared towards building serious companies as well. Israel’s VC scene really took off in 1993 with the Yozma initiative, a project by the Israeli government which invited foreign VCs to Israel with tax incentives and a promise to double any investment with government funds. This had a tremendous impact on available investment, as a result the country’s available venture capital grew from $58 million in 1991 to $3.3 billion in 2000 according to George Gilder’s Silicon Israel.
These two points are best revealed in a story we heard from Shmil Levy, one of the founders of Sequoia’s Israel franchise. Back in the 90’s he grew his company to be exited, only to find that Israel’s laws didn’t support M&A. That exit opportunity vanished, but the second buyer stuck around for Israel’s laws to change in order to complete the transaction. Here Stockholm the trending hashtag is #Backaspotify, as Spotify is battling a Stockholm’s mess of housing laws and Sweden’s poor legislation surrounding stock options, making it difficult to compete for talent. What’s missing back home is the sense of urgency to support startups, and just look at Israel’s results.
But perhaps the most practical thing we can learn is the power of expanding out of your home market early. Israel has the same problem as many European countries given that with a small local market you’re forced to have a global outlook from day one. While many europeans repeat the same talking point, Israel isn’t blessed with neighboring countries hungry for products, meaning there’s less incremental expansion, such as from Finland to Sweden. The logic seems to be that if it’s already a five hour flight to a London office, why not head all the way to New York or San Francisco? We’re not implying that Israelis aren’t entering the European market, but after a day of meetings our new Investment Manager, Bjarke Staun-Olsen, remarked that it really felt like we were visiting the 51st state of the USA.
Despite our positivity there are still things Israel can learn from Sweden.
The Nordics do branded consumer products well – looking at Creandum’s portfolio companies for example Spotify, Tictail, Kahoot, Vivino and iZettle come to mind as products that have a lot to owe to the momentum they’ve built around their brand to reach customers. Israel, for better or worse, still has a way to go with product and marketing, but still count companies like Waze, Fiverr, and Via as big consumer facing examples in a deep sea of SaaS.
Most importantly, Israel could benefit from patience and building Aircraft Carriers for themselves instead of continuing to sell in the $100 million range. We heard a few anecdotes why this might be, ranging from having too many American aircraft carriers in their backyard (full of cash ready to be spent overseas), to a lack of role models that have made it to the major leagues at home, and even ranging to Israeli culture means to be ready to pack up and move at a moment’s notice. If you’re facing an existential threat, $100 million isn’t bad by any means. But with all the fundamentals at place, I think we’re all waiting to see what true tech giant will be built in this promised land of tech.
We took our team to Israel to see what we could learn from Israel’s startup success, and on the flight home felt even more certain of Creandum’s motto that the world is flat. Woo, a startup we met, is a great example of this. With an office next to Tel Aviv, they’ve launched a product targeting recruiting and hiring in the Bay Area. They’re not targeting an ambiguous “global market”, they’re targeting a city a 14 hour flight away! This is truly putting into practice what we’ve been repeating on stage at tech conferences for the past 13 years.
We found that Israel’s entrepreneurs expand early to the U.S. with the help of investors and mentors that have come before them, which is exactly what we provide with our U.S. team who work hands-on with the Creandum funds’ investments. We’re proud to be working with Europe’s best entrepreneurs that share our vision, and after some sun, culture, and good food we feel redoubled in our efforts. And most importantly we have to thank everyone in Tel Aviv that met us and supported our trip – we owe this wisdom to you. We would like to extend a special thanks to our friends at Vintage Investment Partners who welcomed us as family, helped us get the most out of this trip and shared their all insights about Israel.
Last week, Creandum had the privilege of visiting Tel Aviv, meeting VC's and entrepreneurs. This is what we learned https://t.co/C7K33nGEB2
— Creandum (@creandum) April 22, 2016