A Unicorn? In Israel?
The shock displayed by the British Officers at the thought of finding “a Tiger, in Africa?” in Monty Python’s “The Meaning of Life” is similar to the shock displayed by most members of the venture capital community at the Waze $1.15 billion exit. Israel had been written off as only being capable of producing small exits, security or chip companies — not global Internet brands.
Since then I have often been asked to speak in Israel about the venture industry and our experiences and have had the opportunity to reflect a bit on our adventure. I’m writing from the context of an Israeli entrepreneur of an Israeli start-up, but I would guess much of this feedback applies to other non-US based start-ups from small countries (i.e. not China, more on that in another post) developing direct-to-consumer brands.
Unicorns have been defined by Aileen Lee of Cowboy Ventures as “U.S.-based tech companies started since January 2003 and most recently valued at $1 billion by private or public markets.” And although we are the third >$1B exit from Israel, we are the first as a global, B2C, consumer brand. Unicorns are notoriously hard to find. In the last decade, the US produced 39 of them; that is 0.07% of start-ups (which hints at these companies’ irrational nature.) The US market is usually considered to be 50X that of Israel so if we normalize markets, one would have expected 0.8 Unicorns to have been founded in Israel to the US 39 (50X), so our “1 unicorn” exit makes sense. The problem is that after Silicon Valley, Israel is the #2 start-up market with over 6,000+ startups being founded in the last 10 years, which should have yielded 4-5 unicorns.
So we do have a problem. There is no lack of money, creative talent or risk taking in Israel. Two years ago the venture industry was full of headlines claiming, “Big Business swarms for Israeli start-ups, but has the interest peaked?” and looking back on Israel start-up exits or VC performance in the 21 century, it appeared to be true.
I believe we are in the beginning of a new era for Israeli start-ups, especially in the consumer tech space. Since our exit, Soluto and Onavo exited in consumer tech and Wix “Unicorned” through IPO and there is more to come.
It’s a fallacy that Israel cannot produce consumer brands.
This used to be the common wisdom about Israel: “As technology moves from application to content, the weakness of Israeli entrepreneurs is that they don’t get the American consumer”. We can do chips, security, telecom but nothing consumer related – we don’t “get” US consumers.
This may have been correct in the ‘90s but several trends have been working in our favor since:
The flattening of the user experience – Growing up in Israel in the ’80s and ’90s, I lived in a radically different world than my American cousins. We had one channel of black and white TV, music and movies arrived 10 years later, there were no fast food or American brands – we lived very differently.
Cable TV started flattening the consumer experience in the ‘90s. The Internet accelerated this change as people globally used Windows PCs and Explorer browsers to surf web sites. Social and platforms have pounded at it again, as today most users have the same Facebook account or Gmail interface and use it very similarly. The final flattening came from mobile. Anywhere you go in Israel you will see iPhones and Android Phones, same as in San Francisco, running the same consumer apps and delivering equal joy. On a family vacation with Waze management, it was amazing watching our kids, Israeli and American, naturally communicate and share apps without the need to speak the same language.
Israel has a new generation of product professionals that grew up in this flattened experience, with the same tools and culture as their American counterparts. Israelis are known for creativity in Technology, Art, Electronic Music, Film and Industrial Design – UI/UX and digital product design is a natural extension. In addition, a generation of Israelis have spent the first decade of the 21 century abroad working for American tech companies, advertising agencies and media companies are now returning to Israel and bringing with them that elusive key component for success: experience.
The Lean Start-Up movement embodies the Israeli culture – the fundamental principles of modern start-ups, loosely defined as the “Lean Start-Up”, seem to have been built for Israel’s strengths.
Rapid Iteration – Israelis are master improvisers and creative problem solvers. We would rather develop something and see what happens than debate its long-term logic.
Strong Analytics DNA – Israel is a hotbed for big data and analytics experience. We honed our skills in the military as well as the gray zone of the Internet – gambling, porn, affiliate marketing, adware, browser extensions etc. – regardless of what we think of these industries, these are all performance marketing technologies with deep analytics and big data expertise.
Direct Vs. Polite – anyone working with Israelis knows the often-criticized directness of our culture. We don’t care about rank, title, forum, edict – if we think it’s wrong, we will say so.
Modern platforms’ APIs replace the need for “connections” – we do not have the American networking infrastructure needed in the past to gain access to users. But we do have a maniacal focus on our technology and product. Modern platforms, such as Facebook or App Stores, allow us greater access to users through APIs and not our Ivy League college roommate’s father.
The Israeli Consumer Start-up niche – Waze has been at the forefront of a new category for Israeli start-ups – Consumer tech. We are consumer facing, enjoying our newfound product excellence, leveraging our deep technology expertise from day one and solving a real world problem that is easy to relate to. In other words, being able to wrap a very complicated technological challenge into a consumer friendly experience with clear tangible value.
As of late, American start-ups seem to focus on changing consumer behavior. Snapchat, Instagram, Twitter, Facebook – these have all created a new consumer experience, changing the way people interact but did not require any deep technology to develop from day one. The deep tech was needed for scaling. “The old Silicon Valley was about solving really hard problems, making technical bets. But there’s no real technical bet being made with Facebook or Zynga,”. If I only had one Bitcoin for every time I heard an Israeli say, “I could have built Twitter in a weekend” (and they are probably right) but seem to forget that no one would have used it. If American start-ups are uniquely positioned to define new trends, Israelis are better at solving existing, hard problems . Israelis are also too cynical to reinvent new ways to consume. Instagram could never have survived our cynical side, or explaining to your buddies in the army that “instead of hacking into Iranian nuclear plants you built an app for sending friends pictures of food??”
So what are our main challenges in world domination?
Dreaming big, executing small – start-ups win by dreaming big from day one, imagining changing the world but yet executing small, getting things done. As Israelis, we are very good at the “execute small” but really lack the “dreaming big”. This is a cultural DNA from a small country with lots of security issues and a fear of the future. This is one of the core areas Israeli start-ups need help from Americans (or Chinese). Compare an American and Israeli CV of two identical people with identical achievements – the American is full of “I spearheaded, I scaled, I grew” and the Israeli one is “I know Java…” – and they both are factually correct. This is one of the core skills of Silicon Valley and Israeli start-ups need to breathe that air and absorb the DNA (something every Israeli who moves to the Bay feels).
Frayer Mentality – the word “Frayer” in Hebrew refers to the “sucker”, someone who has been taken advantage of. This is the worst insult you can call an Israeli. Our whole culture is built on minimizing the chance of being a Frayer. This fear drives Israelis to sell early, when still small. Before we can build a large company, we will be a medium one and will get acquisition offers. The fear of becoming the next MetaCafe drives founders and investors to sell early. The biggest counterweight to this fear is experience – having seen a Unicorn before and knowing it can be done again.
Being far from Silicon Valley – what makes Silicon Valley so unique is its concentration of people who have lived through a success, actually seen a Unicorn in the wild. 70% of Unicorns were based in Silicon Valley. This eco-system of Entrepreneurs, Engineers, Product Managers, Marketers, PR people, Investors, Mentors – this, I believe, is the secret sauce of Silicon Valley. Israel is beginning to build this experience – through returning Israelies from the Bay, through tech acquisitions and start-up success (in a few years, Waze employees will spin out their own start-ups, after learning from our experience and working at Google for awhile). I believe that one of the key accelerators for Israel is to tighten and strengthen our two-way stream of people between these two tech hubs. A direct flight would be a great place to start…
Experienced investors – every founder anywhere has her share of investor horror stories – it is part of the reality of the investor/founder relations. That being said, Israeli investors have produced fewer Unicorns than Americans and do have some special traits. When I say Israeli Investors, I mean people working in the Israeli venture industry and geographically located in Israel regardless of the brand written on their door. US investors bring to the table their personal experiences and that of their peers; acquired by sitting on other Silicon Valley boards, they get to see many more Unicorns than the Israeli investor. They are in tune with the latest issues, trends, policies, successes, failures and can bring this real-time information to their portfolio companies. American Silicon Valley Investors are not “special” people; they just sit in a very special place. Being an American investor is not an ethnicity or place of birth – it’s the experience you gain from working in Silicon Valley. Just like being an “Israeli Investor” is no different from being a British or Singaporean venture investor. A great example is Houzz, founded by two Bay area Israelis and funded by a Bay area angel investor… yet I am skeptical that the company could have been founded and funded in Israel.
But being a Silicon Valley based investor is not enough, how many of them have actually funded a Unicorn in its A round? Have you seen the growth and dynamics of building such a company? Only ~25 investors in the US have funded one or more Unicorn A rounds in the last decade. Your goal as a start-up is to have your investors be one of them, or their partners, since they have actually seen a Unicorn, live, in the flesh.
At Waze, John Malloy from Blue Run Ventures was my mentor. He had been an early stage investor in Paypal and had seen a Unicorn in the flesh and could share that experience with me, as well as others, helping us understand how David beats, or competes, with Goliath. The Start-up genome research has shown that experienced Mentors are more important than active investors when it comes to start-up success. If you cannot get a Unicorn grower as an investor, you should find a mentor who has been there and has the incentive to spend time with you. There is no place with more experienced mentors than Silicon Valley.
Valuations and control – “76 percent of [Unicorn] founding CEOs led their companies to a liquidity event, and 69 percent are still CEO of their company, many as public company CEOs. This says a lot about these founders in terms of their long-term vision, commitment and their capability to scale from almost nothing in terms of money, product, and people, to their current unicorn company status.” – so who should control the company? VC or Founder? Depends if you are building a Unicorn or a small niche player…
For Unicorns – founder control is key. When negotiating with a top tier US VC, most of the issues are usually about the upside while an Israeli firm will negotiate about the down side. This makes sense since the Israeli investor has seen many more failures than success. An Israeli VC will give lower valuation, worse terms, will dilute to the max and will fight to wrestle control out of the founders – since she expects a small exit, below the preference cap and knows she will not be able to invest in follow on rounds if the company is successful (thus valuation is too high). I have had Israeli founders quote their Israeli investors (although they have a US brand on the door) complaining that the founder is asking for “an American valuation”… if you want American exits, you need to give American valuations. One of Waze’s mistakes was the valuation of its A round which significantly diluted the founders. Perhaps, had we held control of the company, as the Founders of Facebook, Google, Oracle or Microsoft had, Waze might still be an independent company today.
Competition – Another reality in the Consumer tech space is that if you are slightly successful, you will be competing with the Super-Unicorns (Facebook, Apple, Google, Microsoft). If you have done this before you are not afraid of it, as you know its possible for many reasons – if you have not, you fear their strengths and try and minimize confrontation. When Google came out with free Turn-by-Turn navigation, stealing our thunder, the response of our Israeli investors was that we should focus on Singapore or Romania instead of the US… to avoid the inevitable confrontation. We had a moment of fear and took our eyes off the ball, costing us valuable time. John, having lived through Paypal competing with eBay, gave us invaluable experience, something only a Unicorn grower would know, and helped steer us back on-track, getting us back to focusing on the US market and later success. In general, being successful in the US is a pre-requisite for being globally successful but success in any other country (like we had in Israel in 2009) is no guarantee of traction in the US.
Your Challenge – I would say that the most important thing an Israeli start-up must solve differently than a Bay area start-up is access to experience. Silicon Valley is by far where this experience is centralized. Your challenge, as a founder of an Israeli start-up, is to bridge the gap. To surround yourself with mentors, investors, managers and employees who have been there, have seen the magic, have lived through the challenges of creating Unicorns. Before you raise your seed round, choose a logo or a domain name – you need to answer how you are going to bridge this gap. Your competitors are in the Bay right now, better capitalized and with better access – its your problem to solve this problem in a way that is right for your company, while still being able to leverage the Israeli Technology, Product and Innovation advantages.
Photo: Monty Python’s “The Meaning of Life”