The end of the startup era? Israel begs to differ

Lately, a sequence of articles has been published in major high-tech media outlets which concluded, decisively, that the golden age of Silicon Valley is over, ushering the end of the ‘startup era’. For us Israelis, located in one of the most vibrant startup ecosystems in the world (famously coined ‘Startup Nation’), we don’t really get what the fuss is all about.

The underlying thesis of the tech omens is that the ‘big 5’ tech giants (Apple, Alphabet, Microsoft, Amazon and Facebook) are “too big to fail.” They have turned into the five most valuable public companies in the world, accruing more power and attaining a monopoly status in various industries. They have created humanity’s largest social networks, utilizing them to accumulate immense amounts of data, human capital, and deployable cash (more than $500B). This allows them to either buyout their competing upstarts, control them de-facto, compel them to align with their strategy, emulate their value proposition, or put in place barriers that prevent them from scaling-up, leading to their eventual demise.

The Darwinian conclusion is that startups have almost no real chance to reach growth status without being devoured or stifled by the ‘big 5’ beforehand, as the latter’s unique reach, influence and characteristics in the age of AI and Big Data, prevent any potential contenders from threatening their dominance.

Do not linger over the question as to whether the current tech discourse is overestimating the perseverance and durability of existing tech giants (Nokia, connecting people?). It is plausible to imagine the emergence of technologies that might be detrimental to their dominance, such as creating large and effective synthetic data sets for artificial neural networks. And, yes, some pundits also overlook the emergence of US-based unicorns such as Airbnb, Uber and WeWork, and non-US giants such as Tencent, Alibaba, and Softbank (and its Vision Fund). Instead, it is more important to re-frame the conversation regarding the viability of the startup era. By looking closely into the Israeli startup ecosystem, with its steadily growing and vibrant startup scene, it is clear that the startup era is not on the verge of its demise, but in the midst of its revival.

Israel has been enjoying a renaissance in its tech scene since the beginning of the decade, as the number of startups, value of investment rounds and M&A deals, and presence of multinational corporations, have risen incrementally year-over-year. The most recent example is a massive uptick in the value of Israeli exits over the past year (the value of exits in 2017 skyrocketed to $23 billion). This rise was largely propelled by the acquisition of Mobileye by Intel for $15.3B, following a long-term growth process.

The startup era is far from over, for the following five reasons:

1. The ‘big 5’ are not always leading the pack: While these tech giants might be considered clear winners in some industries, they are lacking the focus, and in some cases the expertise and thought leadership, to dominate other domains that are rife with opportunities (not to mention the ‘Innovator’s Dilemma’ assumptions and its known implications on market leaders). This is true for different domains, from healthcare to agriculture technology, and it’s apparent in the type of laser-focused M&A deals they have conducted in Israel, that support their main line of business: the Semiconductor startup Anobit’s acquisition by Apple; mobile app analytics provider Onavo’s acquisition by Facebook etc.
2. M&As are spread out: While consolidation has been part of the business culture, especially in the U.S., it would be quite a stretch to infer from this trend that innovation will be the sole property of a few tech giants. In Israel, the ‘big 5’ are indeed considered by startups as a relevant potential acquirer (especially with their growing foothold and presence in Israel), but they are clearly not the only option. In many cases the ‘big 5’ are not the most preferable or relevant acquires. For example, only 1 out of the 5 largest cybersecurity M&A deals in the past year in Israel were led by a ‘big 5’ club member (Microsoft), as other US-based and Israel-based enterprises are considered a better fit (e.g. Symantec, a prominent security vendor, has recently acquired two Israeli cyber security companies for a total of half-a-billion dollars).
3. Many domains are still ripe for disruption: Pundits claim the new-generation of technologies that are changing the world, are not as accessible to startup disruption as the web and smartphones. What is entirely overlooked, is that the cyber security domain and large sub-segments of the AI domain, especially fields that require specific expertise and focus, do not have a major ‘big 5’ presence. There are other hotbeds of innovation other than large tech enterprises, such as universities and the government/security establishment, that have led to the emergence of a thriving auto-tech market in Israel, that stretches from computer vision to sensor development, with almost no footprint by the ‘big 5’. OEMs, tier-1 vendors and other high-tech multinationals are the real catalyst of this booming Israeli industry. 
4. Ecosystems are just as important as acquirers: Even when the ‘big 5’ decide to venture into new domains, it only cultivates a more robust M&A landscape, and serves as a catalyst for other enterprise incumbents that want to sustain their edge over ‘the big 5’. Even if companies will not succeed in the short term to walk in the “Elephants Path” and compete head-to-head with ‘the big 5’, there are ever-growing ecosystems around their products, services and platforms, that allow innovative startups to grow and thrive. While the global Ad-tech market is experiencing a stagnant period, partially due to the dominance of Google and Facebook, there are several Israeli startups that stand out in their ability to leverage these newly formed ecosystems and generate tens of millions of dollars (Taboola, Ironsource, YouAppi etc.).
5. Software is still ‘eating the world’: While tech-giants might have the upper-hand when it comes to sustaining large networks of consumers and producing solutions that heavily rely on complex hardware, their accomplishment of turning cloud-computing into a commodity, actually, makes it easier for new upstarts to establish non-capital-intensive ventures, reach global markets and scale up rapidly. It is by no coincidence that in Israel, with its small local market and lack of experience in developing consumer-based solutions, startups heavily rely on B2B models, creating an exit landscape that has been dominated by SaaS and Cyber Security solutions.

It would be quite hasty to declare that the new world favors the ‘big 5’, rather than startups and entrepreneurs, to own the next decade. A plethora of large enterprises in the US and around the world are still looking outwards for open innovation that simply cannot be organically grown in-house. The current trends in the Israeli ecosystem crystallize this underlining conclusion, shedding a light on the vast array of startups that enjoy the bright light of corporate America, rather than lingering in the shadow of the ‘big 5’. It’s still a golden age for startups, and that innovation torch is burning bright.