Israeli Start-Ups Get A for Innovation, B- for Business

In a changing market which is more demanding and competitive, entrepreneurs don’t pay enough attention to their markets, investors say.

By DAVID ROSENBERG / THE MEDIA LINE
High tech world_58 (photo credit: Marc Israel Sellem)
High tech world_58
(photo credit: Marc Israel Sellem)
Two decades since Israel’s high technology industry took off, many of the country’s start-up entrepreneurs have yet to develop the skills to position their products in the marketplace, devise effective business strategies and develop the management skills to build large and growing companies, investors and industry consultants say.
Speaking at the sidelines of the High Tech Industry Association conference in Jerusalem, the annual jamboree of Israel’s start-up industry, investors were unanimous is praising Israeli innovation. But many cautioned that technology is only half the story and that start-up entrepreneurs often fail to size up the market and its needs, competing technologies and changing conditions before they try to raise capital and develop their idea.
RELATED:
Stellar Start-ups: An Israeli flag in the cloud
“There’s a huge amount of innovation and entrepreneur spirit, which we love to work with,” Jacques Benkoski, a partner in California-based US Venture Partners, told The Media Line. “But the signal to noise ratio – the quality level – isn’t as great as it should be. It’s start-up nation, but you have to do a lot of thinking before you start up.”
Israel has emerged as the one of the world’s leading high technology centers, with hundreds of start-up companies turning out cutting-edge technology in everything from mobile phone apps to biotechnology. But the failure to create successful business strategies means many ideas may never see the market.
Investment capital for the earliest-stage start-ups is the most scarce and competitive. Israel Venture Research said in the first quarter of the year, just 3% of the $479 million invested in high tech companies went to so-called seed-stage companies. Moreover, competition for capital is getting tougher as foreign venture capital funds with global portfolios, like US Venture Partners, have become major investors.
“Investors in the United States have higher expectations of where companies are at,” said Tali Rafaeli of Bootcamp Ventures, which helps start-ups get investor-ready with proper business plans and management. “They want companies making $1 million or $2 million on their own. The barriers are much higher than they were 10 or 12 years ago.”
Dror Nahumi, an Israel-based executive with California’s Norwest Venture Partners, said the problem is that few Israeli start-ups remain independent long enough to grow into industry leaders, as executive and backers usually opt to sell out to a larger, overseas rival. That means managers aren’t acquiring the skills of marketing, management and finance that come with running mature companies.
“Even the best and most successful entrepreneurs have never built companies that turned into big business,” Nahumi told The Media Line. “What we need is real serial entrepreneurs and people who’ve built big businesses.”
Nahumi and others said a big part of the problem is that Israel is so distant from its major markets in the US and increasingly in Asia, which makes it more difficult to keep on top of changing market conditions and what rivals are up to. The solution is to move the company’s sales operations abroad and in some cases its headquarters, as well.
Norwest, whose newest fund has $1.2 billion to invest in the US, Israel and India, is determined to stay with its most successful companies for the long-term. A fund of that size needs to show extremely high returns on its most successful companies and that can only come from holding a stake in them long enough for them to more fully realize their value.
“People are looking for billion-dollar companies and if you don’t create them it’s very hard [for venture capital funds] to show very competitive returns, “he said.
One investor who spoke on condition of anonymity said Israelis’ high standard of innovation may work against them on the business side by making them overconfident that a new technology will succeed by just being so clever. While many of the entrepreneurs he deals with acknowledge that great technology isn’t enough, many still take the attitude, as he put it, “’I have a great product that the market will have to accept’.”
Reshef of Bootstrap Venture recalls consulting for Israeli start-ups during the high tech boom of the late 1990s. Back then, before the bubble burst in 2000, so much venture capital was available inexperienced engineers and entrepreneurs could find backers. Many of them subsequently developed into seasoned serial entrepreneurs who have formed and managed several companies in succession, she told The Media Line.
The problem is the younger generations, people completing engineering school or, more typically in Israel, their army service in elite technology wings like Talpiot and military intelligence’s 8200 unit, popularly known even by non-Israelis by its Hebrew moniker, “shmona matayim.”
“You see kinds coming out of Talpiot and 8200 with great ideas, but they’re not in touch with the real world,” Reshef said. “Some are going to funds who say, ‘We love your idea, but we don’t want you to run the company.’ And, they resist that.
 
A budding entrepreneur dreaming of following in the footsteps of Facebook founder Mark Zuckerberg often will turn to smaller investors, like family or friends, or an angel. That means for settling for less money and lower odds of success.