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Starting up in backpacks
By SHLOMO MAITAL
10/03/2012
They are Israel’s secret sauce for innovation. Many nations would like the recipe.
 
The dominant icon of America’s Silicon Valley is the garage. In 1975, 20-year-old Steve Jobs and his friend Steve Wozniak sold some of their possessions − an old Volkswagen van and a calculator − to raise $1,350 for launching Apple from the garage of Jobs’s adoptive parents in Los Altos, California. Long before that, in 1939, William Hewlitt and David Packard started HP in a garage in Palo Alto, California, near Stanford University.

By 1977, Jobs and Wozniak had $2.7 million in sales. Two years later, they sold $200 m. worth of Apple computers. Ever since, the garage has been a symbol of the bold creative entrepreneur. Apple and Jobs’s garage, and HP’s garage before it, have inspired generations of budding Silicon Valley garage entrepreneurs There are few garages in Israel. The icon of Silicon Wadi, Israel’s effervescent start-up culture, may instead be the backpack. With venture capital declining, more and more entrepreneurs are being forced to start businesses at home, working out of their backpacks, holding business meetings in cafés, nursing minuscule savings and desperately trying to get some cash flow before their savings run out.

The old start-up model in which entrepreneurs wrote a business plan in order to obtain millions in venture funding may be gone forever. Israel Venture Capital Research Center said in January that “with Israeli VCs continuing to downsize their investments… we believe annual (VC) investment can fall to as low as $1.5 billion [in 2012].” Much of that money will fund existing start-ups, rather than new ones.

Management consulting firm Deloitte Brightman Almagor Zohar recently surveyed VCs and found that 87 percent of them predict reduced activity in 2012; 40 percent said they would invest less in start-ups in the coming six months. Over two-thirds said it will be harder for start-ups to raise capital. The reason? In today’s uncertain global climate, risk aversion has grown and far less money is flowing into risky venture funds, which therefore have less money to invest in start-ups.

Many venture funds today put whatever money they have into keeping alive existing start-ups, in-stead of launching new ones.

About a fourth of all VC funding in Israel goes to Internet start-ups. But in a pinch, Web-based start-ups can be launched without outside investment money.

Lively, big and thriving

Israel’s self-financed backpack start-up culture today is lively, big, and thriving.

It functions largely underground and is known and understood mainly by those who are part of it. To understand it better, I spoke with Rumbletalk developers Eyal Misk and Yanir Shahak (both are 32) and with Oz Katz, 26, and Meidad Hinkis (another 32-year-old), whose start-up is Ripplify.

Rumbletalk helps people organize “social chat” on the Web. Ripplify provides simple, engaging knowledge management on the Web for small and medium-size enterprises.

Both are “bootstrapped,” meaning that they are self-funded, without outside investors.

We meet in a café in Tel Aviv. The day is sunny and warm; most people choose to sit outside. A few are working on their laptops, enjoying free wi-fi. Opposite the café, on the boulevard, is one of Tel Aviv’s trademark green rental bike stations. The bicycle is the preferred mode of transportation for backpack entrepreneurs.

What motivated the young entrepreneurs to leave well-paying high-tech jobs and launch risky start-ups? Katz and Hinkis worked for a large telecom company.

Though they worked on the same floor they never met until friends later introduced them to each other. Both found their previous employer unresponsive to their innovative ideas.

Their idea: To build knowledge management software for small and medium-size businesses that can neither afford expensive existing software nor master its fierce complexity.

I hear versions of this story very often.

High-tech firms grow into bureaucratic monsters that preach innovation but, in fact, squelch it.

Creative engineers quit and start companies to implement ideas rejected by their big employers.

What prepared them for their backpack start-ups? Hinkis has a BA in economics and an MA in finance from Tel Aviv University.

Misk also has an economics degree and an MBA, from the University of Manchester.

But Shahak and Katz are self-taught. Katz did his army service in a high-tech intelligence unit. Shahak served in artillery, but taught himself to write software and after military service got a job with Checkpoint, the global network protection giant. Shahak tells me he favors hiring people without college degrees or credentials. They are grateful, hard-working and eager to prove themselves, he says.

Hinkis notes that “in many Israeli hightech companies, you are pushed to work beyond your abilities and beyond your capacities.

This is a great ‘school.’ With this training, you can do the same when you launch a start-up.”

Hutzpa

“I lived and worked in Holland for eight years,” says Misk. “I was considered a ‘hutzpan,’ a brash person. The Dutch are more respectful than us Israelis. But innovation is breaking the rules, something Israelis love to do, and we will make sacrifices for it, when we are not allowed to do so by our employers. We have some arrogance, because we are certain we can − and we will – do it our way.”

I ask them where they got the money to fund their start-ups. The answer: Personal savings, spouses’ earnings and occasional jobs. Nearly everyone has some sort of side business to bring in cash for survival, Shahak tells me. One of them says he has a “money clock,” a clock that shows not the time of day but how many weeks or months are left until the money is depleted.

This desperate sense of urgency is common in backpack start-ups and is highly positive. As Apple marketing guru Guy Kawasaki has counseled, “Ship, then test.”

The backpack start-up credo is: Get your product to market quickly, before the money runs out, so that you can gain the valuable data only customers can provide.

Shahak and Misk’s Rumbletalk already has some cash flow. I always taught that it is highly important to generate cash flow fast.

But Shahak believes there is a downside.

Once you have some cash inflow, it’s harder to “sell the dream,” he notes, meaning that as long as there is no cash flow, you can “sell” visions of torrents of money pouring in, but once that actual money trickle begins, it suggests a rather different reality for investors.

I ask them where they did their work.

Like many backpack entrepreneurs, Shahak likes to work in coffee shops, such as Café Hillel or Zorik, near Milan Square in Tel Aviv. The other three prefer to work at home. Hinkis says there is too much distraction in coffee shops. Misk likes to work at his mother’s house.

They all hold business meetings in cafés.

They all work very long hours. Shahak says he rises fairly early, at 7:30, and walks his dogs, then works until the wee hours of the morning. So do the others.

The biggest problem

What is their biggest problem? Hinkis replies, “Quality. If you have money, you can hire the skills you need, the very best you can find. And today a start-up needs many different skills, because it generally combines several different technologies.

But if you lack money, you have to compromise on quality – you do it yourself or hire someone who is cheaper and less good. This is the biggest challenge we face.”

Bill Gates once put a check for $1 billion on the table, but Google founders Sergei Brin and Larry Page rejected it. That was a smart move. Today, Google may be worth 100 times that sum. Steve Jobs once offered $900 m. for Dropbox (cloud data storage) but founder Drew Houston rejected it. I mention this and ask the four, “If someone put a large check on the table, and you could do a fabulous ‘exit’ – would you accept it”? The loud, unanimous answer was, “Yes!” Why? Exit is “proof of concept,” they explain. If someone is willing to pay a lot for your idea, it means that it must have validity. This is important to all four.

“But, if your passion is not to be a millionaire, but to create something that changes the world, why accept an exit?” I ask.

Shahak explains his reality to me. “The first exit is for your family, to support it,” he says. “The second start-up is to change the world.” And, indeed, many backpack innovators, like Shahak, are serial entrepreneurs and continue to launch business after business. Shahak launched, then sold, a start-up that built simple, inexpensive websites for over 1,200 clients.

What does the future hold? I ask. And where will the (start-up) money be? Webbased businesses have evolved rapidly.

Web 1.0 was a library – a place to find information easily. Web 2.0 was like a big group of friends and acquaintances, whom you could reach anywhere. Web 3.0, now in its early stages, is like having a personal consultant, using the Internet to make personalized connections with information.

And Web 4.0? Katz thinks it will be “interconnected machines, where machines talk to one another, rather than people.” Hinkis sees the future Web in “integration of services… based on API (application programming interface), software that enables software developers to develop ‘applications’ quickly and easily.”

The resilience of the backpack start-up nation is remarkable. Like animals in the African veldt, faced with severe drought (in their case, of money), they adapt and survive in a newly hostile environment.

Many fail. A few succeed. None seem deterred by the tough odds.

They are Israel’s secret sauce for innovation.

Many nations would like the recipe.

But even if they had it, they would lack a key ingredient: Israel’s unique culture, history and personality.

The writer is senior research fellow, S. Neaman Institute, Technion
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