3 Tweaks That Would Improve Israel’s Thriving Startup Scene

In 2016, then-Alphabet Chairman Eric Schmidt famously said of Israel, “I can't think of a place where you could see this diversity and the collection of initiatives aside from Silicon Valley. That’s a pretty strong statement.”

Indeed it is.

That Israel has a thriving entrepreneurial start-up scene is well known - and true. Last year, more than 600 deals brought $5.24B in funding to the country, a 9 percent increase over 2016, fueled in part by four deals each worth more than $100M, according to recent reports. Silicon Valley VC mainstays - Lightspeed Ventures, Bessemer Ventures, and Battery Ventures, to quickly list three - have invested in the country and also have long-established, in-country offices.

I'm long on Israel - very long. Through my fund, Heroic Ventures, I love working with and investing in Israeli start-ups on a 'first money' basis. The time I’ve spent talking and working with both Israeli VCs and founders has been a real pleasure. There's so much that’s going right. Terrific and motivated entrepreneurs. Strong tech savvy. An entrepreneurial culture. Exceptional engineering and product talent. Israel certainly ticks most of the boxes that are essential for technology development and innovation.

But - you knew there was one - there are things the Israel tech scene could adjust in order to build on and strengthen its success (as is true of Silicon Valley, by the way).

In Israel’s case, here’s what I’ve noticed as a first-money investor.

In-country entrepreneurs often (incorrectly) treat Israel as a leading indicator. It might be worthwhile to run perhaps one pilot in-country to get some directional feedback, but doubling down on more testing - and assuming it’s valid in other markets - could be disastrous for Israeli start-ups. Israel is small - just over 8.5M people - with a distinct culture all its own. The results don’t translate. Israeli entrepreneurs should play to their strengths by taking advantage of the great technical talent in their own backyards. Create killer R&D centers in country but turn to the market that matters for feedback, iterating, and testing: the United States for its diversity, influence, and scale.

Founders sometimes lack depth in three key areas. Often technical powerhouses, founders are not always strong in marketing, sales and product. They might spend three years building a hammer, and then think to look for a nail. Entrepreneurs need to be very, very honest with themselves on where their strengths lie. It’s not enough to think there’s a demand for your product based on, say, the feedback of supportive family and friends plus the enthusiasm of acquaintances. Marketers - those with real experience - will unflinchingly assess market needs and fit - plus build you a funnel and customer pipeline when the product is ready. The product people will take that customer feedback and help shape the direction and interface. And a true sales leader will craft an effective machine for nurturing and closing deals.

Play less defense. Israeli investors often draw up term sheets that contain strong defensive measures - for example, multiple liquidation preferences or blocking rights. There’s no question it’s important for entrepreneurs to protect what they’ve built - and for investors to want to protect that initial outlay of funds. But it’s critical to look at the long game. A strong start-up will, at some point, perhaps want to raise a solid - even stellar - round in the U.S. Too-stringent measures, especially those that were more common in the U.S. twenty years ago, are a turnoff for most investors to the point where they harm a start-up’s chances of raising a lucrative round in America. They simply fail the cap table test.

Israel is a strong center for innovation and growth in tech. That’s simply indisputable. But as Silicon Valley reckons with its own weaknesses, it may be time for Israel to do the same, if simply to enhance its competitiveness and build on its already-excellent foundation.