Thursday, March 26, 2009

Firestorm

Sarah Lacy of TechCrunch wrote an article earlier this week 'Now that China Is the New Israel…What’s Israel?' that has evoked a firestorm of biblical proportions. At last count, 275 comments, ranging from the provocative to the racist have been posted.

Before I comment, let me share some of her thoughts:

1. Israel represented one of the first times the cozy boutique Sand Hill Road firms ventured overseas and made money as a result. For a time, Israel had more Nasdaq-listed companies than any other country in the world.

2. For much of the last ten years, investments in Israeli companies by Israeli VC firms has roughly equaled foreign investment in Israel, according to stats from Ben Gurion University’s School of Management.

3. Ten years after the peak of the last bubble, it’s clear that when foreign investment fell in Israel from about $4 billion a year to $1 billion a year, the country wasn’t just weathering a recession. Somewhere along the way, the entrepreneur scene here lost its mojo.

4. In sheer numbers, Israel’s place on the global scale of investing has been dwarfed by China, and matched by the United Kingdom. And after three days of talking to dozens of entrepreneurs and investors in Tel Aviv, this seems like a country wandering in the desert, looking for a new tech movement to own and dominate.

5. What happened to Israel is a bit like what happened to Boston—the story and opportunity moved away from what the city’s entrepreneurs were good at. In the case of Israel, security and encryption was always a strength, but that’s not the growth industry that it was. In the case of Boston, enterprise technologies and telecom were always strengths. Now, as media has become the story of the last boom, it’s not a surprise New York surpassed Boston in the amount of venture capital raised.

Now for my thoughts:

Despite her numbers on exits being drastically off (as highlighted by Yaron Samid here) I think the substance of her article, as noted in #5 above, has an important element of truth to it. Israel has produced a number of great security (and infrastructure) firms, but that's not the whole story. The Internet opportunity has grown so large and ubiquitous that Israeli's are also producing great consumer facing sites, SMB applications and serving a myriad of niche specialties. Some will have wonderful exits, but most won't. In a similar way, entrepreneurs in China, India, and elsewhere are doing wonderful things; some will emerge as major global companies; most won't. As the nuclear club spans three vast continents, we should recognize that brains know no geographic limitations.

In Israel, over the last decade, a wave of capital has largely cured the imbalance between the demand and supply for risk capital available to entrepreneurs. As such, the Valley/Tel Aviv arbitrage has disappeared. Of greater concern to many is that the pace of innovation seems sluggish. It seems as if the time between fundamental paradigm shifts seems stalled.

The PC software world had its shining 15 years in the sun between 1981 and 1996. The internet 'revolution' was kicked into high gear with Netscape's IPO in 1995. It's now been 14 years and, as you would expect with advanced adolescence, growth has slowed. Yes, bright starts such as Twitter and Payoneer are poking their heads through the clouds. But these apparent successes leverage an existing paradigm, rather than providing a new foundation (a la MSFT or Netscape) for others to leap on board. This slowing phenomena is not unique to Israeli entrepreneurs or investors; we are part of a global club.

Nevertheless, I am encouraged by recent and upcoming infrastructure developments that auger a wave of innovation. Advances in 4G, Fiber to the Home (promising 10x improvements in upload/download speed), an upcoming battle in the OS world, renewed browser innovations, stunning advances in the mobile form factor, and a relentless trend to lower costs and prices that opens vast new markets to applications that we can only dream of, and addressed at a fraction of the cost of today's sales & marketing expenses light my fire.

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