This is a pessimistic post.

Last week Traiana made a fantastic exit. Interwise was sold a week before for about par value. Saifun was dumped roughly around that time for the cash register and change. 3 Israeli stories, different IRR, similar long term outcome. Founders walk out with money, companies merging with American entities to slowly fade out.

The Israeli high tech scene fails to produce sustainable, ongoingly growing, companies. The problem is not the Israeli landscape, the problem is probably with having a wrong dream.

When it’s all about the Exit, focus shifts from succeeding as a company to succeeding as investors, speculators. From creating to trading. Operational record is overlooked for dream weaving. This is why Boaz Eitan walks out with $100M for having successfully sold a multi billion dollar balloon to investors despite having no operational evidence at any point.

This is no news, but the big question is why. Why do so few Israeli High Tech companies stick to the gold old business of producing goods and generating a profit. Why do so many high tech companies think of nothing but the exit to a large, fat, rich, American uncle. Did we forget how Nokia started? how Samsung came about? Can’t we see how inspiring CheckPoint and Amdocs can be? Or more importantly, do we not understand that this exit frenzy will vert quickly dry out the Israeli high tech mud pool?

As a start-up-ist I’ve been thinking a lot about that issue. I find the major cause to be the financial structure of the Israeli start up scene. Most Israeli startups are funded by VCs, Israeli and American, who in turn get most of their funding from out of Israel investors. This is good and bad. The VC model is based on selling their share for the highest amount in the shortest time. The fundamental focus of a “business” is to create a profit. Unfortunately, these two foci’s correlate less often then they do. An IPO may mean such correlation, as the VC can sell it’s share and the company can grow. However, very few companies fit the IPO model, and most companies are forced to think about their “business” in different terms. Terms such as “comparables”, “size of the (exit) opportunity”, “exit strategy” and “fitting the investment portfolio” take precedence and management attention away from real business decisions. Innovation becomes more important than operations because ideas can be sold earlier in the lifecycle. This means the company must be sold to a company who believes it can turn innovation to operations. Sold to, not become one.

A Solid, profitable, growing business has many advantages. For one, it can finance itself. It can organically grow. It can always be sold. Maybe not always for $250M at a minimum (as if), but the opportunity is continuous. Anywhere else, most investors would fancy investments in such companies.

Contrary to popular belief, it is possible to grow a company without thinking about the Exit. It is possible to grow the business and to develop good operational practices. It is possible to compete for real customers and win. It is possible to grow a Nokia in Israel. The Israeli high tech ground will not stay fertile without a few of those. If you’re unsure, take a look and India and China and see why it is only a question of time.  As a startupist, this means you need to scrutinize your investors and not just “take money when you can from whoever you can”. easier said then done, I know. In away, this is contrary to the old text book approach. I just hope we all gather to update the text book before it’s too late.