My favorite flower is the hatzav (sea squill). In Latin: drimia maritima. For me, as a student of start-ups, it has special meaning.
This strange flower has no fragrance. It blossoms in August, September and October, mostly in dry, rocky regions.
Why flower in autumn?
All the other flowers have blossomed, got pollinated, withered, and dropped seeds in spring and summer. In spring, for example, the Negev is carpeted with bright red anemones, and people flock to see them.
But the tough, brazen hatzav sends up spikes almost as tall as Michael Jordan and blooms when almost nothing else does. It gets exclusive service from pollinating bees and insects and grows high to make sure they see it. It’s the only game in town. Its deep roots find moisture well before the rains return. It has no fragrance because – it doesn’t need one. Six feet tall – you can’t miss it.
Once long ago, perhaps a mutated gene let this flower bloom in fall instead of spring. And its progeny spread and prospered as a result. The wonders of evolution.
Start-up founders: Learn from the hatzav. Now’s your time to blossom when others are getting cold feet. Be like the hatzav.
Advice for potential Israeli start-up founders
What follows is an imaginary though fact-based conversation with a young Israeli potential start-up founder. According to a survey, reported by the business daily Globes, he is male, 25-35, married with two kids, lives in central Israel and dreams of an exit.
Much of my “be a hatzav” advice below originated with a real-life seasoned entrepreneur, now an active venture capitalist who enjoyed a profitable exit.
The Report: Hello, founder. Nice to meet you. Now, June 2023, is a great time for you to launch your start-up. As the Nike slogan goes: Just do it!
Founder: What? Now? Really? Are you crazy? This is the absolute worst time. I can give you many reasons why.
The Report: Okay, let’s hear them.
Founder: Last year, according to Start-Up Nation Central, investments in Israeli start-ups fell by 42%, falling from $27 billion in 2021 down to only $15.5 billion in 2022.
Fourth quarter 2022 was really bad. Start-ups raised only $295 million, down from a record $862 million in the same period in 2021. Cybersecurity was the hardest hit.
Cyber start-ups raised $3.5 billion in 2022, about half of the $6.6 billion they raised in 2021. And the number of new start-ups overall plummeted. Hi-tech layoffs soared.
All this was a result of the global drought in venture capital, in turn an offshoot of banks and investors tightening their lending as interest rates soared.
Then came the second half of the double whammy. The new Israeli government formed last December 29 pushed its judicial reforms that led to a capital flight from Israel.
And there was a start-up flight, too. According to the Innovation Authority, until January 80% of Israeli start-ups chose to register their businesses at home in Israel rather than, say, Delaware. But in March, about 10 weeks into the protests against the anti-democratic reforms, that percentage was reversed; between half and 80% of new start-ups registered abroad.
This is not just a technicality. Israeli start-ups and the entrepreneurs who lead them are migrating. This is a brain drain. But Minister of Economy and Industry Nir Barkat brushed it off. Barkat founded BRM, an anti-virus software start-up in 1988 and made a fortune, using part of it to fund Check Point in 1993. He blames the founders, rather than the bungling government he joined. He knows better.
The Report: Okay, I get it. The numbers are really bad. Now let me make the case for launching your start-up now – and how best to do it.
First, some history. Not the strongest point with you young founders.
The current venture capital drought is not new. It’s happened before. We had a dot.com bubble that burst in 2000-2002, two decades ago. It was terrible. The NASDAQ technology stock market had risen from 734 in 1994 to a peak of 5,048, then fell to 1,139, a near-80% drop! This came after investors poured capital into start-ups with no substance or business model or revenue.
The recovery began in 2002 and soon hit another disaster – the 2007/8 sub prime mortgage crisis. That, too, hit venture funding hard.
However, have you ever heard of Square, Uber, Airbnb, WhatsApp and Instagram? You have? They were all founded in the midst of that global crash.
Listen to what Avi Hasson, a star entrepreneur, former head of the Israel Innovation Authority, now CEO of Start-Up Nation Central, advises, as told to the business daily Calcalist: “[During the recent VC boom] there was a bullish market for a long time….there were many companies that should never have been founded… a lot of money will now be freed to enter the right places, and the coming years can also be positive for the industry.”
Founder: This is not helpful. Of course, all of us founders know too well that once we launch a start-up, we are on a roller coaster, with gut-wrenching ups and downs, mostly unpredictable.
What I need to know is how do I get the funds to get started and the resources I need to sustain and grow the business? Abroad, the NASDAQ tech stock market is up by 5% this year, 2023, while the Tel Aviv Tech Stock Index is down 15%. Investors are voting no.
The Report: Okay, founder, here is my advice. Swim upstream. But be smart and sink deep roots. Here are a few tips:
Lengthen your runway. That means stretch your timetable. If you have some early funding, stretch it, like Grandma used to stretch a chicken leg into soup for eight.
On the other hand, speed up the timetable for your MVP, minimum viable product. Get your product or service to market faster, to generate revenue, to demonstrate viability and establish fact-based valuation of your start-up.
Focus laser-like on a strong revenue model. The appetite of investors for risk has gone south. ‘Can you make money?’ they ask. If you can answer yes and bring evidence, you have greatly diminished their perceived risk and helped your cause.
But be cautious. When you show strong revenue early, investors will expect it to continue. Scaling up from where you and your cousin sell everything, to where you run an 80-person sales force, is expensive and massively challenging. Keep this in mind.
Establish hard proof points – points in time that verify that your technology works. From the start, show that you can scale up, and plan how.
You know those companies that survived 2000 and 2008? They all had strong revenue models.
When bubbles burst, survivors are the first to plant their feet solidly on the ground. Adjust your hopes and expectations. Data show that for all start-up stages, the negotiating climate for funding has moved strongly in favor of investors.
All funding rounds are negotiations between those who need money and those who have it. When there is a capital drought, you know who has the upper hand. You will have to offer more equity and get less money for it.
Focus on building your team. There have been massive layoffs in Israeli hi-tech. Superb talent is available. You can assemble a world-class team today quickly, when in previous years that would have been much harder.
Founder: All this is easy for you to say. Hand on your heart – would you found a start-up in today’s climate here in Israel? Truly?
The Report: Hand on my heart – yes. But I would first take the red pill. In the 1999 movie The Matrix, Neo (played by Keanu Reeves) can take the blue pill and live in sublime fantasy, or the red pill and live in painful, truthful reality. He chooses red. Choose the red. In the global capital drought and Israel’s anti-democratic chaos, your life has become much harder. You will spend a lot more time pitching to investors and face far fewer welcoming responses. Exits will be tougher, fewer, and doing due diligence (preparing the documents and data) will be much more thorough. Even if you raise initial (seed) funding, you will be far less certain of raising further rounds.
But droughts do end. When this one does, you will be farther along than other, less intrepid founders.
It is a proven fact. When start-ups choose to blossom at times when others sleep, they fare far better when times are good again.
Only 417 new start-ups were founded in Israel in 2021, according to Start-Up Nation Central. And at the end of 2022, there were only about 900 active start-ups, fewer than in the recent past.
So, be like the hatzav. Sink deep roots. Aim high. Be different. Be contrarian. Believe.
Founder: Hmm. Maybe. You know, sir, I had this idea for a scalable AI-based algorithm for managing complex projects…. ■
The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com.