Israel

Israeli High Tech Gets Aggressive

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The New Fast Food

Editor’s note: Adam Fisher is a partner at Bessemer Venture Partners, where he manages the firm’s Herzliya office focused on investments in Israel and Europe.

Israel has always taken a disproportionate share of global media attention. This has long held true in international politics, where Israel would prefer a little less attention, but also in high tech where the media attention on startup success has often been overstated and anecdotal.

For the better part of a decade, Israeli venture returns have been disappointing, frustrating many who were once convinced they had found the next big thing. But more than a decade after the last bubble burst, the Israeli venture capital industry has steadily matured, reaching a turning point over the past year.

The return profile in Israeli high-tech investments is improving remarkably as entrepreneurs build stronger, more ambitious startups with eyes on a much bigger prize and a higher probability of success. The Israeli tech industry may not be advancing at the pace that impatient investors and reporters demand, but the last decade has also proven that Israeli high tech is far from a fleeting trend.

As a fund that has been investing in Israel since 1992, with a dedicated office there since 2007, we at Bessemer see a stark difference today versus what we found in the Israeli startup environment 10 years ago.

Heightened Ambition

Israeli entrepreneurs have always been ambitious, but the maturity of the Israeli entrepreneurial ecosystem now gives emerging companies a better chance to deliver on big dreams and therefore a better chance of raising money to pursue them. Today’s crop of entrepreneurs has grown up in the startup ecosystem and seen peers disappointed by selling too early or shutting down only a couple years after raking it in. This means not only more serial entrepreneurs, but more maturity and experience in the first 50 hires these startups make.

The perspective shows. Venture-backed M&A and IPO exits have grown each year since 2011; Waze (Google) was the largest venture-backed M&A deal in 13 years, but so was Intucell (Cisco) when it was acquired earlier 2013 and XtremIO when it sold in 2012.

Wix, which started trading on NASDAQ late last year, was the largest IPO of a venture-backed Israeli start-up ever…and has since been followed by Varonis. But companies such as Mobileye, CyberArk, Outbrain and others will likely file this year if they haven’t filed confidentially already. And I am increasingly confident that in the near future, the first results of a Google search for “Israeli IPO” will yield links related to public offerings rather than the acclaimed Israel Philharmonic Orchestra.

Israeli high tech

In most cases, these successes come years after rejecting otherwise lucrative offers, with management choosing an independent path despite higher risks. Remaining independent is generally much harder for Israeli startups relative to American peers.

To start, emphasis on cutting-edge tech and strategic partnerships triggers interest at a very early stage, well before a proper business has been built. And because scaling an independent business 6K miles away from the customer base is always daunting for the Israeli founder, accepting an early acquisition offer is often a very rational decision.

Direct Customer Acquisition

Startups become large, independent success stories when they “control their destiny,” which requires owning the distribution channel and, most importantly, owning the customer relationship. Historically, Israeli companies and their venture backers thought it sufficient to be the owner of unique and proprietary IP. For this reason, Israeli startup success typically hinged on building strategic partnerships and OEMs that could bring strong technology to far-away markets at a relatively low cost and low risk. It’s often forgotten, but this is how Checkpoint (Sun), Amdocs (AT&T), and Gilat (GE), became success stories.

Twenty years later, Israeli startups now know that such partnership shortcuts come at a profound cost to the company’s ability to stay independent long-term. Unfortunately, Israeli startups still tend to hire biz dev well ahead of sales, but the successful ones stand out for making every effort to own the means of customer acquisition as well as the resulting relationship.

This industry-wide transition is exemplified by the rise of Internet, SaaS and mobile companies — something once thought unthinkable in Israel. Wix, Waze and Outbrain each devised a method for scalable direct customer acquisition, whether it was through advertising channels, mobile platforms or sales reps. The same is true with many enterprise-focused companies, which increasingly eschew the “white knight” OEM and build an independent go-to-market strategy.

ShakeUp in the VC Landscape

American VCs first entered the Israeli market in the late nineties, focusing primarily on follow-on financings in startups originally funded by local Israeli funds. Over the last five years, the traditional roles of early-stage Israeli funds and later stage American funds have become blurred. Six American VCs with deal-makers residing in Israel, including BVP, are among the most active early stage investors in Israel and at least four newly established Israeli VCs are focused exclusively on later-stage opportunities.

The resulting American imprint at the early stage has been substantial, further fanning the flames of ambition and independence of Israeli entrepreneurs. American investors have brought not only larger checkbooks but a better read of the U.S. market and competitive landscape. American VCs have also introduced a more aggressive set of venture tools aimed at helping Israeli start-ups grow faster including growth equity financings, acquisition strategies and previously shunned founder liquidity. It’s American VC influence that’s behind the direct customer acquisition strategy and the spurning of strategic partnerships.

The Future Is Rosy

Recent high-profile exits have investors once again focused on Israel. Active VCs are reaping the rewards after much patience, and institutional investors – who were heading for the proverbial door – have paused and are taking a second look.

Some see these startups as not yet polished enough to warrant attention, but they do themselves a disservice. Israeli high tech has matured to a point where we will continue to see a steady stream of large M&A exits and IPOs for years to come. Israel is the only real technology rival to the Silicon Valley, and the Valley know this well. Just as political observers no longer view Israel as the underdog, few tech giants and investors are willing to underestimate the potential of an Israeli startup.

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