In baseball, players often slide into the base in order to
avoid being tagged out, but almost never slide into first base. The reason no
one ever slides into first is not because it’s illegal, but because it slows
down your momentum if you want the option of running onto the next base. A lot
of Israeli high tech companies unwisely “slide into first,” yearning for safety
and calm after years of uncertainty and hard work, but inadvertently end up
losing the precious momentum necessary for continued growth. With fewer late
stage companies generating the kind of momentum and scale that late stage investors
look for, it is little surprise that Israel has an underdeveloped growth
financing market relative to the US. Maintaining
the growth momentum is how big companies are created, and is arguably one of
the biggest challenges now facing Israeli high-tech.
This is a post that has been in draft for almost a year based on hundreds of interactions I have had with start-ups and high tech execs in Israel and abroad. The issues are broad and provocative, and because a blog post risks being an oversimplification, I welcome my readers’ comments and critique. (see Hebrew version in TheMarker.com)
If there ever is to be a sequel to the book Start-up Nation, Israeli high tech must become as serious about product design, customer experience, and business models as it currently is about technology and R&D. Over the last decade, Israel has mastered an entrepreneurial/venture model, which involves sourcing entrepreneurs from military technology units, creating cutting edge technology products and ultimately selling a company, its IP and personnel to one of many foreign multinationals that have come to appreciate the Israeli brain trust. While this model of start-up creation has served us reliably, it is vulnerable to macroeconomic headwinds and is increasingly unsustainable in the face of technology commoditization that is rapidly approaching our shores in the form of competition from China, Korea and Taiwan. As it turns out, our over reliance on technology creates an endless demand for more technology talent, which prevents us from nurturing vital competencies in product, design and business. The resulting ‘tech crutch’ is a self-perpetuating cycle that threatens the future of Israeli high tech.
Three of my portfolio companies were included among the 10 most promising, young Internet start-ups in Israel, in an article by Guy Grimland in the TheMarker Magazine. In the photo above, you can see Raphael Ouzan, the CTO and co-founder of BillGuard, Ishay Green, the CTO and co-founder of Soluto, and Shai Wininger, the CTO and co-founder of Fiverr.
There are two styles of consumer Internet ventures emerging in Israel: product perfectionists and money chasers. Despite our tendency to celebrate and learn from both of them, one of these has a darker side we should be cautious of.
Product perfectionists are founded upon a belief that a unique and differentiated product will create an avid and loyal customer base, which in turn will help build their brand and business. These companies understand that a great customer experience is paramount, and the result of a corporate strategy and culture that focuses on the customer, not merely the result of good product definition or an unbeatable price. I place a high premium on product perfectionist companies that can deliver a compelling customer experience, though it is far from sufficient to ensure success.
In contrast, money chasers are founded upon a belief that an effective monetization and distribution model can essentially define the product offering. These companies excel at driving traffic, accumulating users and raking in cash, but often at the expense of the end consumer (including the customers’ customer). While many entrepreneurs and investors are attracted to the money chasing model, there is a disturbing side to many of these businesses.