Is Israel At 71 A Scale-Up Nation? VCs Talk About The Good, The Bad, And The Promising

Over the past several years, Israeli researchers have noted a certain maturity in the local high-tech industry corresponding with larger-scale investments in companies pursuing growth. Tech executives and observers have taken to referring to this trend as part of Israel’s evolution from the Startup Nation – a term coined earlier this decade after the release of the best-seller book bearing the name – to the “Scale-Up Nation,” owing to the increase in the number of investments of $20 million or more per funding round and fewer quick exits.

In this first quarter of 2019, for example, Israeli high-tech startups and companies raised $1.55 billion in capital in 128 deals, with those higher than $20 million making up 64 percent of the total amount invested. Two of the 128 deals were for over $100 million apiece.

Venture capital groups also play an increasingly significant role. Deals backed by VCs amounted to 71 in Q1 2019 and accounted for $1.3 billion of the total raised.

The trend, wrote Shira Azran, a partner at Meitar Liquornik Geva Leshem Tal & Co which co-released a separate report on Israel’s high-tech industry with the IVC Research Center, “highlights the fact that Israel is building a strong and significant infrastructure of companies that in the coming years will examine their ability to reach an exit that reflects a significant return to investors.”

Of the 20 companies listed on TechAviv’s list of Israeli unicorn companies (valued at over $1 billion) to date, 13 were founded over the past decade.

Noam Kaiser, an investment director at Intel Capital in Israel, tells NoCamels it’s clear that “Israel in 2010 and Israel in 2019 are not the same country” given the number of companies raising over $100 million, bringing in $100 million and more in revenue, issuing successful IPOs, and employing hundreds of people.

But where is this all headed?

To mark Israel’s 71st Independence Day, NoCamels spoke to some of the biggest venture capitalists in Israel on what we can expect for the future of Israeli entrepreneurship and the country’s booming high-tech sector.

The strengths: The Israeli character and exporting tech

Since its establishment, Israel has thrived on the self-sufficient, entrepreneurial spirit of its people. In fact, says Kaiser, the country’s survival depended on it: “When we made the navigation towards this geographical area, it wasn’t because of the natural resources. We are based in the one area [in the Middle East] that has no oil. It wouldn’t have worked without the spirit of innovation, and innovation happened because it had to.”

Jon Medved, the founder and CEO of OurCrowd, attributes much of the country’s success to Israelis’ perception of geographic, political, and economic obstacles as challenges to overcome, rather than threats.

“It’s what we do here. We turn our curses into blessings. We don’t have water, so we developed water technology. We don’t have a market, so we go global. Our kids have to go to the army, so we teach them skills that are important for the business world,” Medved tells NoCamels.

Kaiser of Intel Capital, the most active corporate VC in Israel, explains that Israelis’ global mindset – given the small local market – is a significant advantage, driving Israeli entrepreneurs to look at business through a wide lens.

“The fact that we don’t have a huge local economy is a huge plus because it makes our entrepreneurs think globally from day one. Israeli entrepreneurs seek out American, British, European, Chinese, and Indian markets and that’s the type of thinking that a founder of any startup needs to have,” he explains. Kaiser says this broad mindset is responsible for the creation of a unique economy built primarily on high-tech exports, and for which “there is no parallel [economy] anywhere on the planet.”

Decades into the emergence of Israeli startups, Yoav Tzruya, a partner at Jerusalem Venture Partners, believes companies are becoming more methodical, and subsequently, reaching further: “The Israeli startup market is maturing in the sense that both entrepreneurs and investors have longer paths for success and more patience, allowing their companies to be exploited to their full potential.”

According to Omry Ben-David, partner at Viola Ventures, “Israel will continue to lead the way in global innovation.” The anomaly of Israel’s tech industry, he says, is not only its creation but its sustainability going forward. “The entrepreneurial spirit and culture are stronger than ever. Add to that 2nd and 3rd timer entrepreneurs, experience in working abroad and working for global corporations here and abroad, and you get a hotbed for continued success.”

Ayelet Frish, a co-founder of New Era Capital Partners which invests in early revenue stage technology startups, says the country’s entrepreneurial mindset sets it apart from others.

“Israel is a fertile ground for cutting-edge technology, out-of-the-box thinking, and technologies that are ahead of our time. There’s a tendency to always think of how to go forward, improve and grow,” says Frisch, the former media and communications strategist for the late President Shimon Peres.

The challenges: Scaling, diversity and team culture

“I think the main challenges are to build really huge companies of scale. Israelis are really good at getting companies started, figuring out cool technologies and markets, and being very innovative,” says Medved. “Unfortunately, all too often, companies get bought early, before they have a chance to really build.”

Though Israeli companies have had some historic exits in recent years – Mobileye ($15.3 billion), Mellanox ($6.9 billion), and Orbotech ($3.4 billion) to name a few – Medved says smaller companies frequently sell early on due to the difficulty of scaling the business and fail to achieve their full potential in the process.

With increased experience in the startup community and more total capital invested in Israeli high-tech, the standard for innovation and effective business planning has risen. “We are, one could argue, in the middle of the fourth decade of startups in Israel. So, right now, you need to do more to make a dent,” says Kaiser.

Tzruya notes that a change in individual and B2B (business-to-business) consumer attitudes has driven a dramatic change in the market at large. “Four or five years ago, it was enough to come up with [some sort of] technology or base-solution that addresses a certain portion of the cybersecurity problem horizontally across industry, in a one-fits-all solution approach,” he says, giving an example. Now, “customers are looking to get solutions for their full set of problems rather than a specific piece of technology.”

As a result, startups are under more pressure and the challenge of scaling becomes notably more daunting. One of the key solutions, says Medved, is diversity.

“The issue of scale starts with being able to build that team, and for that team to scale, you need to add other DNA to it,” Medved tells NoCamels. “I think we’re doing a better job of bringing in the not-yet-fully mobilized populations of the Arab Israelis, haredi [ultra-Orthodox] Israelis, and women Israelis into the tech umbrella.”

Adam Fisher, a partner at Bessemer Venture Partners, illustrates another issue. For companies operating in markets abroad, “scaling from afar” can be particularly difficult. “Being far from our main market is less of an issue when getting started, but it is much more of an issue when companies need to scale past $10 to $20 million and maintain high growth rates. The issues are not simply about being far from your customer but being far from the people you are recruiting to grow your business and being far from the growth-stage investors that will fund you,” he explains.

Yet, perhaps most critical to a successful scale is a healthy team culture. Investors put their money in people, after all.

“You look for people who have passion, courage, lots of smarts, high EQ, the willingness to sacrifice, great team skills, and obviously people who have strong abilities in technology. But it’s always the team,” says Medved.

“You are seeking individuals that do not lose [it] when things go astray because things will go astray, for companies rarely end up executing exactly as they pitched to their investors,” Kaiser notes.

Whether a startup has 12 employees or grows to 400, he believes the company is still considered a startup. The only difference? For a startup the size of a corporation, there is an increased responsibility of preserving the culture that made the company successful in the first place. “You have to make sure that it trickles down through all of the levels down to the last, newest employee. I think that that separates the best companies, and this is a skill that, I am afraid to say, we in Israel haven’t integrated enough.”

Transformative tech trends

The experts we spoke to see a promising path for Israel in the following sectors:

1. Artificial Intelligence

Possibly the most transformative technology in modern tech, AI’s wide applicability has the potential to revolutionize any industry.

“AI will transform – through the utilization and analysis of data – all business. It could be travel, education, security, health care, agriculture, or transportation,” Medved tells NoCamels.

Israel is currently home to over 1,000 companies, academic research centers, and multinational R&D centers specializing in AI, including those that develop core AI technologies, as well as those that utilize AI technologies for their vertical-related products such as in healthcare, cybersecurity, automotive, and manufacturing among others, according to a recent Start-up Nation Central report.

“We are seeing a trend in Israel and globally, where AI and machine learning is increasingly vertical, meaning AI and machine learning is getting deeper into each sector,” Ran Simha, general partner at New Era Capital, tells NoCamels, adding that AI has opened up a world of attractive investments for VCs. “When we look at our investing fields, namely medical devices, digital healthcare, smart transportation and smart cities, and similar areas, we are more and more attracted to companies that are embedding AI technology, because we recognize this is the gamechanger in the short- and long-term future,” he says.

Ben-David, of Viola Ventures, also notes AI’s contribution to the budding sector of “enterprise automation.”

“Automation, broadly defined, is changing everything the way communications once did,” says Fisher. “Some call this AI, some call it machine learning and others just optimizing or algorithms. It makes businesses more profitable, disrupts labor-intensive processes and enables new services.”

With the endless opportunities of AI, Tzruya says Israeli VCs seek out hidden gems at the intersection of AI and specific industries. “We are aiming to identify those diamonds-in-the-rough companies that can potentially impact the world significantly.”

2. Automotive

Israel’s automotive tech sector has around 400 startups, many of which are focused on providing solutions for autonomous cars and securing the data of connected vehicles.

Israel’s automotive industry is booming despite the country’s zero total car manufacturing plants. Startups have taken their knowledge of hardware, sensors, and cybersecurity, and implemented it in the automotive arena. Israel’s largest exit to date is that of Mobileye, the developer advanced driver assistance tech systems, acquired by Intel for $15.3 billion in 2017.

“Some startups from Israel are managing to be on the radar of US conglomerates and show that we can provide solutions that can be really successful,” says Ben-David.

Kaiser, of Intel Capital, says autonomous mobility will go beyond personal use to driverless taxis as well as long-distance shipping and delivery businesses. “We are a few years away from seeing autonomous vehicles become a significant part of what we see on the road right now. This isn’t science fiction, this isn’t the Jetsons.”

3. Cybersecurity

Israel currently boasts over 400 cybersecurity companies, with the sector raising over $1 billion – a new record – in 2018 alone.

“Israel is known in the world for being a hub for cybersecurity innovation,” says Ofer Schreiber, partner at YL Ventures. “One of the main reasons for this is the IDF and its [units] – like 8200 and C4i – which are the best cyber security schools in the world,” he adds in reference to the intelligence corps and the IDF’s elite technological unit.

Israel’s cyber industry attracts 20 percent of global venture-backed cyber investments and is second only to the US.

Tzruya, an expert in cybersecurity, says “these numbers are amazing given Israel’s relatively small portion of global venture-backed companies.”

Cybersecurity solutions have become essential to any firms relying on any sort of technology to conduct business, which Tzruva explains, makes the most effective solutions a strong business asset.

“Cybersecurity is becoming a business differentiator. If you can guarantee to your customer that the production line is better secured and better equipped to handle the cyber-risks, then you are in a better position to win additional businesses,” he says.

Looking at the global market, Schreiber predicts that the US will continue to be the primary market for Israel’s cybersecurity companies: “US customers are more accustomed to working with early-stage products and are usually more likely to be early adopters than European enterprises, for example.”

Tzruya believes cyber insurance will emerge as cybersecurity’s next most relevant trend, stating that “solution-based approaches – rather than just the technological advantages – like cyber insurance will drive the next wave of cyber startups as has happened over the last two decades.”

Tzruya tells NoCamels that “in order for Israel to generate the next wave of categorial leader companies, we need to be much more fine-tuned to the market and align ourselves with specific industries. As a result, we are looking at the intersections between Israel’s competitive technology advantages like cybersecurity and vertical industries such as financial services, insurance and industrial automotive, where Israeli technology can meet the market’s needs.”

Subscribe to NoCamels weekly newsletter and get our top stories