So Whose Fault Is It?
by Aner Ravon

The Israeli high tech scene is going through an interesting shaping debate. A lot has been argued about why Israel has not been producing “a Nokia” or “a new CheckPoint” during the past 15 years. I have put most of the blame on the financial structure of the Israeli start up scene, Shai Tsur and Daniel Cohen wrote their own pieces and have argued that the overall atmosphere and entrepreneurial motivation contribute to early exits even more. The bottom line, though, is unanimous - Israel is underselling its high tech potential and this is a very dangerous trend.

As much as I’d like to blame the overall atmosphere, geography, management and personal greed, I just can’t. These criteria are not new. As a matter of fact, Israel’s situation has never been better in terms of ease of global reach and of management maturity. The “get rich fast” motivation of Israeli entrepreneurs is not different than anyone else’s. What has gone to extreme is the dependency on VCs.

Here’s a fact - a typical Israeli start up must get VC money and usually at an early stage. In order to satisfy the VC benchmark for the definition of potential, the typical Israeli entrepreneur must come up with a ridiculously ambitious dream - one that usually contradicts every bit of operational and marketing common sense.  A dream that factors exponential year by year growth, global market reach, horizontal AND vertical relevance and most importantly - unique and patentable technology. She needs to present as many “$250M+” exit scenarios even if the company has yet to produce a single dollar or customer. Now, everyone knows a company can’t discuss billion dollar dreams before having created hundred dollar realities, but If the dream is too small, it’s not a VC company and if it’s not a VC company, there ain’t no start up. So instead of focusing on the future one can actually see, the debate shifts to whether the company can break the glass ceiling of a “$50M exit bracket”. This is, well, stupid. Nobody, not a single person on earth, has any idea of what company will be a billion dollar company in 5 years. Your guess is as good as anyone’s.

In reality, the entrepreneur doesn’t care about the grand scheme at the moment of marriage to a VC. She cares about getting through the first year so she doesn’t have to fire anyone and go back to moon-shining. So she is pushed to producing a plan of very little merit hoping that things somehow work out. The plan, needless to say, never materializes. The entrepreneur busts her ass and, if lucky talented, gets a few big customers which create growing revenue. Then, all of a sudden, it becomes evident that sales and delivery cycles are much longer than expected, that costs are much higher than planned and that the actual niche is really, really smaller than envisioned. The entrepreneur starts feeling the pressure of having failed to deliver and is developing hypertension. After all, the mortgage may not be paid in full after all and if “only the VCs would understand that this takes time”. Friction is imminent and when an exit becomes the only way out and the focus shifts to ”getting a $200M exit as long as we can”. An effort that usually ends up resulting with a $80M- $120M exit at best, after which everyone happy its over.

Sounds familiar? While this is schematic, shallow, cynical view with a lot of exceptions, I’ve been seeing this happening time and time again, like foretold chronicles. I have many entrepreneur friends and as may friends in the VC circle - all of them are usually very smart - why does this keep happening?

The missing piece, in my humble opinion, is with two elements. One is the creation of growth funds. A fund that invest in growing businesses and not in developing an exit. A fund that looks to solve mezzanine type stages when companies reach the stage of having real, not virtual, potential.

The other piece is with rewarding entrepreneurs so they can be personally calm. Here’s a big secret: if the founders get comfortable when the company is already half successful, chances of real success grows dramatically. They won’t be tempted to dump their shares before it’s too late and they won’t be facing all or nothing situations. Need an example? Take a look at Mark Zuckerberg. He’s a rich a guy but he ain’t going anywhere soon.

Aner Ravon
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