The Truth Sometimes Hurts: The Dark Side of Startup Nation
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You may think that this post is negative, but I don’t see it that way. To be successful in any endeavor, it is important to know all of the facts, opportunities, and challenges that are in front of you. Let’s tell it like it is

Companies everywhere grow large, shrink down, and fade away. Israel, despite its reputation as ‘Startup Nation’ or ‘Silicon Wadi’, is no different.

As I have written, I see the glass half-full but also tell the brutal truth. I have worked in the Israeli market for fifteen years and have seen everything. You may think that this post is negative, but I don’t see it that way. To be successful in any endeavor, it is important to know all of the facts, opportunities, and challenges that are in front of you. Let’s tell it like it is.

First, it is important to recognize that, yes, Israel develops some of the best technologies in the world, has some of the best engineers, and most importantly, has entrepreneurs that are team players. iOnRoad, for example, was acquired by Harmon Electronics in April 2013. Medisafe won the fourth annual QPrize from Qualcomm Ventures yesterday.

There are countless startups, accelerators, incubators, and angels in the country. Here are just some of them:

  • Investment vehicles such as Our Crowd, who are doing amazing things to help Israeli companies get noticed and funded. (We need more funding innovators like Jon Medved)
  • My new fund INE Ventures that helps Israeli companies at seed stage come to NY and Philadelphia
  • VC firms such as Pitango and Magma
  • Accelerators such as UpWest Labs in Silicon Valley, Microsoft Accelerator, andElevator
  • Incubators like Explore and hiCenter
  • Micro VCs such as Lool, along with super angels like Gigi Levy

However, there is a dark side to the Israeli startup scene that gets far less press coverage than the country’s large exits. Forget about Waze, Trusteer, and Wix. Forget about the future IPOs of OutBrain and others. They are not as representative of Israel’s economy as many people think.

Here are the hard facts about “Startup Nation”:

1. Israel isn’t building large companies

As Eden Schochet from Aleph told an economic mission from Philadelphia with Mayor Nutter, it is time for Israeli companies to grow big in Israel and not sell too soon. Israel must build companies such as Teva or AmDocs — these help Israel much more over the long term. The vast majority of Israelis are nowhere near knowledgeable enough about programming, engineering, or marketing to be one of the few team members at a good startup.

Moreover, the main people who benefit from a startup sale are the founders, investors, employees (sometimes), and the government (via tax revenue). The more that Israel focuses on quick exits instead of also building companies and employing people, the more that Israel’s notorious levels of wealth disparityhigh prices, and poverty will worsen.

2. Israeli startups can’t operate out of Israel alone

While Israel does need large, domestic companies, those startups that specifically target a foreign market need to be located in that country or region. If an Israeli business’s core market is the United States, then it needs to be in the United States. But this is hard for many Israelis to accept – it’s difficult to leave one’s family, friends, and native language for a lengthy period of time.

3. The Office of the Chief Scientist’s assistance often hurts, not helps

The Israeli government helps to fund startups, keeping the intellectual property in Israel while getting them into foreign markets; it should be commended for the work. However, the government loses the investment when a startup fails, and Israel loses as a whole when a startup sells to a foreign company. Israelis, notoriously impatient, have a reputation of selling too early (even though I believe they are selling at the right time.) Matching money from the government through incubators gives the company a small runway, but not enough to get to the market and the next round of funding. Even the Chief Scientists are looking for ways to get their companies to the US market by exploring Israeli-funded incubators in the US.

4. Startup accelerators aren’t as effective as people think

Accelerators are not cure-alls or “magic bullets.” Startups will only get what they put into them, and many leave with nothing. From my experience, only about three out of ten succeed. The reason? Despite their seed funding, the ones that fail have weak CEOs, bad business models, and plans to stay in Israel until they gain Series A funding. Today, most of them are closing and selling their intellectual properties. The most important tip when contemplating an accelerator is whether you know how to get the most out of it or not.

5. Celebrity marketing is just that – marketing

 Celebrities such as Ashton Kutcher, Scarlett Johansson, and Will.I.Am. are either investing in Israeli startups or serving as paid brand ambassadors. This is great for Israel, but it actually means little in a practical context. The celebrity attention does not mean that Israel is the best start-up market in the world. Don’t fall for the hype.

Still not convinced? Let’s look at the data.

As Ben Lang of Mapped in Israel once calculated, many Israeli startups in certain verticals end up failing:

According to the IVC Research Center, there were 920 “deals” from 2004 to 2013 (the combined number of M&As and IPOs) for a total value of $50.4 billion. The resulting average is $5.5 million per deal, which matches the size of most of the deals:

It’s a far cry from the hundreds of millions or billions of dollars that most people see in the headlines following individual, rare deals. (And Israeli startup-life is certainly not a guaranteed way to get rich – especially after the investors and the government get their respective shares.)

In fact, Israel isn’t even the country with the largest number of startups. The top ten countries with the greatest per-capita number of startups and new businesses are Cyprus, New Zealand, Iceland, the United Kingdom, the Netherlands, Malta, Bulgaria, Canada, Singapore, and Luxembourg.

Anna Vital of Funders and Founders has researched the best countries in which to found a startup with one’s own money – and not one of them is Israel:

The Global Entrepreneurship Monitor compiled various statistics and data to list the top ten most-entrepreneurial countries: the United States, Sweden, Australia, Iceland, Denmark, Canada, Switzerland, Belgium, Norway, the Netherlands, and Taiwan. Again, a certain country is absent.

But for some reason, these countries do not make it into the headlines.

In the end, the major reason that Israel is not truly as great in the startup scene as people commonly believe is that while Israelis are creative and good at programming and engineering , they are horrible at marketing and have little patience.

Modern Israeli culture is prone to bluntness and Israelis are generally ineffectual at positioning and crafting good messaging. Israelis also unreasonably expect to have immediate success at very little cost. I have had countless experiences when Israeli startups select a marketing partner simply because the chosen company asks for a lot less.

But the old rule is true: You get what you pay for. If you pay crap, you get crap. Plus, nothing good ever comes quickly.

Ultimately, other countries may be beating Israel to the startup punch. Israeli startups have the potential to be even more successful than they already are – but they need to learn a lot of lessons to make that happen.

When all’s said and done, Israel is still the best place to look first. They have the best technology and even if a company fails, the intellectual property often will be part of the next $1 billion company.

Josh Cline is President and CEO of The Cline Group, President and CEO of Cline Ventures, and General Partner of INE Ventures. You can see more of his thoughts here.Follow him on Twitter.

This post was originally published on Josh Cline’s Blog

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  • Eddy Resnick

    Though I don’t criticise any of Josh’s data, there is nothing new in the article and it definitely does not point to any “Dark Side of The Startup Nation”. What Cline details is just many of the challenges that entrepeneurs face in Israel when their target market is elsewhere and the investor is the one looking for the 10:1 financial turnaround in 3-5 years. It takes years of personal commitment and fortitude to buil a successful venture and the real skills set that is lacking in Israel (even now after the many successes) is business acumen in bringing a concept from an idea to worldwide recognition.
    Maybe that is the “dark side” – huge emphasis on technology.