Start-Up Nation? Why Israeli Tech Companies Often Fail

Start-Up Nation? Why Israeli Tech Companies Often Fail

startup nation

In the so-called “Silicon Valley of the Middle East,” start-ups in and around Tel Aviv are increasingly the life-blood of many global companies that operate in the high-tech sector. According to the authors of “Start-Up Nation” – former Bush-administration official Dan Senor and former Jerusalem Post editorial-page editor Saul Singer – these are a few of the reasons (via the Wall Street Journal and Freakonomics):

  • Government per-capita spending on civilian R&D is 4.5% of GDP – double the percentage of the United States, Germany, and South Korea
  • Per-capita venture-capital investment is 2.5 times that of the United States, six times that of the United Kingdom, thirty times that of Europe, eighty times that of India, and 300 times that of China
  • Israel has more companies listed on the NASDAQ than any other non-U.S. country (Canada is second)
  • The arrival of a large number of highly-educated immigrants from throughout the world in recent years, starting with the millions who left the former Soviet Union in the early 1990s
  • Mandatory military-service after high school in which the best recruits are assigned to technology-oriented units and then trained extensively
  • The Jewish personality-trait of “chutzpah,” in which “from the age of zero, [people] are educated to challenge the obvious, ask questions, debate everything, [and] innovate.”
  • “Adversity of all kinds, such as being under attack, small, isolated, and lacking resources, have forced Israelis to be resourceful, to do more with less, to innovate, and to be global from day one.”

In addition to these financial and cultural reasons, Israel’s economy has remained strong during the present economic-downturn as a result, in part, of banks that have had stricter lending-standards than many in Europe and the United States.

However, all of the trends outlined above do not mean that start-ups here are easy to create, run, and sell. To borrow a phrase from “Leviathan” by Thomas Hobbes, the life of running a start-up anywhere is often nasty (as far as competition), brutish (working at least sixty or seventy hours a week), and short (if one cannot secure VC funding).

In Israel, there are indeed country-specific reasons that start-ups here fail (as most do). According to Steve Duplessie, here is one:

…the belief that a company in IT/Tech over the last 20 years can be truly run from Israel.  They can’t.  I am an unabashed fan of all things Israel – but I’m a realist as well.  You can make great things in Israel.  You can sell to your army buddies in Israel.  You can raise money in Israel.  You can hire loyalists who will work like dogs and build stellar products in Israel.  But you can’t grow a big IT/Tech company of relevance in Israel (with very few notable exceptions, of course).

If you want to be in the IT space, like it or not, you need to be a U.S. company.

According to a recent Jerusalem Post report:

Two decades since Israel’s high technology industry took off, many of the country’s start-up entrepreneurs have yet to develop the skills to position their products in the marketplace, devise effective business strategies and develop the management skills to build large and growing companies, investors and industry consultants say.

Jerusalem Report business columnist Shlomo Maital asked this question (the magazine’s articles are not available online) a few years ago as well:

Israel’s busi­ness model was based on sell­ing its brains, as start-ups, at inflated prices. These baby com­pa­nies were “adopted” and their knowhow shipped over­seas, before they could mature and cre­ate well-paying jobs and incomes for middle-class Israelis. Why has Israel failed to grow global com­pa­nies in the past 10–15 years?

The reasons for the lack of patience among Israelis – particularly in their desire to sell start-ups quickly rather than build companies that exist for the long term – are complex ones that involve history, politics, and culture, so I will not address them here. (Anyone who has visited Israel will be familiar with the “personality” of the country.) Still, all of these reasons that Israeli start-ups fail contain a common theme: a lack of planning and positioning for long-term growth beyond simply, “We’ll sell to Google in a year and get $1 billion!”

I have always argued that holistic, integrated marketing-methods are crucial to the success of any product, service, or website – and each individual product will need a different combination of various traditional and online methods – but it is important to understand that the same principle applies to companies as well. Firms market themselves in addition to their products.

This is extremely crucial in the high-tech realm. A start-up may have the Next Big Idea, but if it cannot market itself to venture capitalists and banks in the proper way, the innovation will never see the financial light of day. A product that is perceived to be important but produced by a company that is perceived to be poorly run will not receive a dollar (or shekel).

For understandable reasons, VC funds and financial institutions are very risk-adverse in today’s financial climate. They are not going to throw money at ten random start-ups with the expectation that only one will succeed and still earn the funders millions of dollars in profits. VC funds are pickier now because of the ongoing financial crisis.

As a result, when start-ups enter the funding phase today, they need to be able to demonstrate or project that they will have stable, long-term growth – and that is an area in which too many of them, unfortunately, are lacking. There are inexpensive methods to gauge how the market will react to a new, high-tech product or service, but that is a lengthy post for another time.

For all of these reasons, start-ups today need effective planning, marketing, and positioning for the future months, quarters, and years. Even in the Silicon Valley of the Middle East.

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