More Than A Start-Up Nation (Observations from Circle One)

Dear Friends,

Most people tend to think of the Israeli high tech scene in two different ways. Some believe Israeli entrepreneurs and investors are incapable (or not interested) of building significant companies in Israel. According to this school of thought we should only focus on technology and better the way we innovate – start companies, but sell them as oppose to grow them as a business for the long run.

The other camp believes we must build big companies and only then we can prove we have a “working model” for our high tech industry. Long ago, this group used to ask “when will we have an Israeli Nokia?” – Suggesting small countries, such as Finland, can introduce great global companies such as Nokia – and that is the ultra-test for Israel an empire of the mind…

However today, I believe, there is an emerging third school of thought, which suggests we should focus on building significant companies – which will be somewhere in between these two schools of thought. This is the group of companies that can be defined as “Category Leaders”. I subscribe to this school of thought.

Category Leaders are companies which grow their business in new markets. They scale revenues to levels of tens of millions of Dollars, and they break the“Revenue Glass Ceiling” as they grow to hundreds of millions of dollars. Through this process they achieve financial viability, as they become profitable, cash-flow positive, and turn into standalone businesses. They lead a certain niche market which is significant enough to allow for such long path of growth. These companies have a good chance to raise money in the public markets via an Initial Public Offering (“IPO”). Some of them will be acquired along the road, most likely after going public.

In Israel, there are 300 global R&D (Research and Development) centers. Among them, one can find names such as Intel, Cisco, Google, Microsoft, EMC and Broadcom. Many of them are growing, and in many cases they use the M&A (Mergers & Acquisitions) route for recruiting talent. In other words – they buy start-up companies, and integrate them into their organization, helping them to scale product and technology offering, and generate revenues on a global basis. Growing a “Category Leader” requires sometimes turning down an early stage acquisition proposals made by one or more of these global players. Still, many of the start-up companies prefer to go for an “Exit” and they end up being acquired by a strategic player.

We should not see that as a “negative”. I believe these acquisitions are healthy to our “innovative society” and they add to the “innovation cycle” flow. They allow us to create a community of serial entrepreneurs (people who start more than one company). It also strengthens the global technology players’ presence in Israel, and invites many more to set up a shop in Israel. One of the recent additions is Apple which set up their R&D center in Israel – first time out of the U.S. headquarters. The global R&D centers in Israel represent different technology verticals such as IT (Information Technology), Communications, Energy, Healthcare, Water and more.

Today we have some 5000 start-up companies operating in Israel. True – a Start-Up Nation. At the same time, our chances to build the next “Google or Facebook” in Israel are relatively slim for many reasons. Building such companies require the ability to assemble a massive pool of interdisciplinary talented people, raise significant amounts of capital, and scale a business in a short period of time – the way the “Next Big Thing” emerges in places like Silicon Valley. We lack the infrastructure and resources required to grow such “behemoth”.

As the number of customers (users) around the world grows and as more people consume technology services and products – the addressable markets grow, and with them the ability to create bigger companies.

I believe this is the opportunity for the Israeli high tech scene today- to create the new generation of companies – a generation of “category leaders”. In order to get there, we need to change our entrepreneurial culture. We need to mark “success” with building bigger companies, category leaders, side by side with achieving early stage exits. We need to adopt a long term view, take more risks, and strive to build significant companies.

I believe that after 20 years of venture capital investments, we are at a stage where we can add another dimension to our industry. Side by side with growing start-ups, it is imperative that we should invest efforts in order to grow category leaders as well.

I will be happy to learn from your comments and insights

May God bless us all

BEST

Chemi

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