Israel Start-Ups Need Change Again

If we can't make chips and iPod accessories, let's go to the beach! Tel Aviv beach with lots of skin and looks. End of summer 2010 / © 2010

In a recent article [here] Ha'aretz reports on failure of Israeli and American venture capital funds to keep the Israeli innovation engine going. To many this is shocking news. To the ones here "on the streets of Tel Aviv" or more accurately in and out of start-ups, this is not news. For a few years now, Israeli venture funds have stopped making investment in new start-ups. To some this is not such a bad turn of events. The attitude towards traditional venture capital has changed dramatically the last few years. From the 1980s to about 2005 American and Israel VC funds have been the most respected and adored organizations in business. But something happened from 2002 to 2007. From the investment perspective, VC funds suddenly "lost their magic dust". Suddenly, instead of making a great deal of money, they lost money. And LOTS OF IT! In a few meetings with small start-ups, most seem to think that Israeli venture funds are looking for safer, which means more mature start-ups. Today, it is harder to get funding for a company with a rough prototype and a good fresh team. Also, it seems like venture funds are avoiding the really new technologies until they are proven. So they miss the front edge of the technology cycle. This accounts for the very few WEB2.0, cloud computing, mobile devices (iPod/iPhone accessories) and display (LED, OLED) start-ups in Israel. The Israeli government, through innovation incubators and the office of the chief scientist have tried to get early stage start-ups going. They have programs for seed investment with almost no strings attached. As long as you have a good idea that you can get into a prototype form they will get you started.

What the overview and financial view cited in the Harvard Business school article (which is mentioned in the Ha'aretz article) do not take into account technology innovation, market/consumer behavior and development style changes. The new technologies on the Internet, portable devices, display devices, large enterprise software and many other domains are mostly not understood by the traditional (read older) investment professionals in VC funds. At least here in Israel, where engineers have been following world trend in innovation, the amount of change in so many different technology domains is staggering. You can see this by the large number of meetings and specialty groups in almost every new technology field. You can see this in the daily buzz in online forums. You can also see this in the changes of working style: more people work at home, meet in Tel Aviv coffee houses, and build prototypes in their spare time or on their own nickle. This is what was going in the 1970s with mini-computers and the 1980s with microcomputers. It is what has been going on in many places around the world with software (Scandinavia and the Asian rim.) Are we just going a full circle in how start-ups "behave"? It's hard to say. The interesting observation is how Israel is playing a part in this global innovation change.

Start-ups did not really exist in Israel with enough numbers in the 1970s and 1980s. Also, Israel did not have the wide range of people with broad range of skills and there was no support infrastructure. Most technology was developed by a few mid-size companies and the Israeli military companies. This is very similar to the situation in the 1950s in the US. Israel was just lagging by 30 years. Today, due to many factors, Israeli entrepreneurs, investors, marketers and manufacturers are in a very different position. Israel's geographic location and easy access to Europe and Asia is enabling people to do things they could not have dreamed of 40 years ago. But with that, there is the influence of these other cultures. European and Asian investors and manufacturers are a different animal than the Americans. They take lesser risks but also stick with things longer. This has benefited certain technology sectors. Certain end customers such as industrial and large corporate, are a better target to Israeli companies (and also have a better chance of long range survival.) You can almost play Darwinian guessing game in certain markets and probably be not far off. In the end, the old economist question: "what should a country make, guns or butter" (yeh I did read Adam Smith's The Wealth of Nations
Well, this was a rambling post. I guess it reflects the stream of changes in the Israeli technology / start-up world. I will try to report on more observations from the Tel Aviv perspective.