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Why Israel Will Probably Never Have A Tech Giant And Why That’s Not Something To Regret

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For many years, Israelis used to lament that the local tech scene, while considered second only to Silicon Valley and generating many successful startups, has never been able to grow a world tech leader such as Nokia. Why don’t we have our own “Nokia?” people used to ask — while pointing a finger at entrepreneurs and investors alike.

Nokia has not been chosen accidentally. Originating in Finland, a country with a population of 5.4 million, it is an example that even small countries can grow a world tech leader. In its days of glory, Nokia was a global brand, had a market capitalization of €110 billion, employed tens of thousands of employees, operated in more than 150 countries and accounted for 16 percent of the Finnish export.

More than anything else, however, Nokia was a source of national pride to every Finnish person. Israelis, being very proud of their own tech ecosystem, were envious of the Finns for this achievement.

Nokia has been replaced by Apple, Google and Facebook as the embodiment of success — while totally missing the bigger picture. The U.S. economy is the largest in the world, and even Apple, the company with the highest market capitalization, accounts for just 0.5 percent of the U.S. GDP. Nokia, however, accounted for 20 percent of the Finnish GDP in 2011. It is no wonder, therefore, that the decline of Nokia had a profound impact on the Finnish economy and was described by some as going “from boom to bust.”

In his renowned book Antifragile: Things That Gain From Disorder, Nassim Taleb tells a parable about two brothers, a banker and a taxi driver. Because of the variability of his income, the taxi driver keeps moaning that he does not have the job security of his brother. Taleb argues that this is an illusion. It is this volatility that makes him resilient to a Black Swan, an unforeseen event beyond one’s control, that eventually brings the income of the banker to a complete halt.

Economies are likewise more stable and robust when comprised of a wide and diverse set of companies. An economy that relies on a few giants, let alone a single one, is fragile. When such a giant collapses, it has a profound impact on the entire economy. Israel, being a small economy, would become more fragile if a real tech giant were to emerge, and, hence, is better off with a more diverse ecosystem without any giants.

The fact that Israel never generated a tech giant has, however, nothing to do with fragility. Fragility only explains why we shouldn’t regret it. The reasons it did not happen are quite different, and are related much more to the Israeli culture and the maturity of the Israeli tech ecosystem.

Israeli entrepreneurs are often accused of being sprinters, as opposed to marathon runners. Which is to say, they aim at a quick exit, usually after 3-5 years, and a deal size in the range of tens of millions up to low hundreds of millions. They are scolded for not having the skill or the stamina to build a billion-dollar venture.

Very few individuals are capable of being both a tech leader and a business leader.

There is some truth in this statement. Tech companies are usually founded by techies who are great at leading a company in its early stages, but less so when it matures. When companies mature, technology takes a back seat and business acumen needs to be the driving force. Very few individuals are capable of being both a tech leader and a business leader. One of the most impressive and less noted actions of Larry Page and Sergey Brin, founders of Google, was at a very early stage to bring in Eric Schmidt as a professional CEO. That, however, rarely happens, in Israel nor elsewhere.

The Israeli tech scene has matured significantly in recent years. This is a slow and gradual learning process, which is slowed even further by the distance from the major markets. Most Israeli tech companies end up moving their headquarters to the U.S., and rely to a big extent on local U.S. skills to take the company to the next stage. Yes, there are more and more counterexamples of great companies that are being run from Israel, with mostly Israeli management — but they are still the exception rather than the rule.

Having a mid-sized exit is, however, not necessarily the wrong choice. The tech world is very dynamic, and timing is everything. Recent history is filled with examples of companies that turned down an acquisition offer hoping to continue growing but eventually collapsed and were either sold for a fraction of the original offer or were shut down. Calculating this risk is very hard; a bird in the hand is worth two in the bush. Mid-sized exits are often in the comfort zone of Israeli VCs who, on average, run smaller funds than their U.S. counterparts and who are very experienced with mid-sized deals.

When taken to the extreme, entrepreneurship creates an over-competitive environment.

A lot has been said about the entrepreneurial spirit of Israelis. Entrepreneurship is a great trait, as it leads to innovation and the establishment of many fascinating ventures. However, too much of a good thing is not always good. When taken to the extreme, entrepreneurship has a darker side that makes building large companies very hard. When taken to the extreme, entrepreneurship creates an over-competitive environment.

Israel is notorious for innovating and dominating a domain that holds a big opportunity. Instead of generating a single world leader, Israel often ends up being comprised of multiple smaller ventures, cannibalizing each other and failing to reach a critical mass. These competing companies are many times founded by former employees of the original innovator or by envious colleagues from the local tech scene.

Outbrain and Taboola, both Israeli, are competing with each other in the content recommendation market. NICE and Verint, both Israeli, are each other’s main competitor in multiple domains. SundaySky and Idomoo, you guessed it, are both Israeli, and are competing with each other in the video personalization domain.

At the time, all three companies offering cellular transcoding services were Israeli. Palo Alto Networks, one of the main competitors of Israel’s cyber giant Check Point, was founded by Nir Zuk one of the first Check Point engineers. These are just some examples of Israeli over-competitiveness in action.

A competitive environment is obviously not a bad thing, and there’s a fine line between being competitive and being over-competitive. There’s also a difference between what’s best for an individual and what’s best for an entire ecosystem or economy. For small economies like Israel, there is a lot to gain by being more aware of these trade-offs.

Featured Image: Steve Allen/Shutterstock