Israeli Venture Capital Start-Up Process Broken

Tel Aviv stock exchange dipped 50% during 2008-2009 (1,200 to 600 to 1,000.) Start-up activity still down and slower to recover

It is not a secret that the Israeli technology sector is taking a nap. A big component of Israel's success in the technology sector was start-ups. Israel's entrepreneurs and engineers got into the business of starting up companies and selling them to American companies. This business has been going for over 10 years until about 2005. American venture funds bring investment capital from Wall Street and American retirement funds. Israelis start companies and usually sell them to American companies. The return in this sector is usually higher than the stock market. Everyone is happy. Until something changed!

In 2006, 2007 and 2008 there have been very few "exits". 2009 is not much better. These are sales of companies or initial public offerings in the stock market. Exit(s) is a buzz word in the Israeli start-up sector. It is what Israeli entrepreneurs seek more than anything else: cash for a 5 to 10 year hard work. Selling a company brings good returns to the investors and does not involve the process of taking a company public. But the shift in technology from software and networking to Internet and software services has slowed down the investment-development-exit train. Established venture capital funds were dealt a blow, many small ones are completely gone. Entrepreneurs in many tech sub-sectors needed to reformulate their ideas and start working on new prototypes. What Israel can teach the world is how quickly change happens. In US and other large markets change does not have to happen as quickly. The market's momentum can hold up companies and financial pipelines. But then they eventually crash. In Israel small scale reveals quickly what changed and where the new developments are going.

Economies or parts of them going dormant are everywhere now. It's a global epidemic. Starting out with the US Real Estate, financial, automotive and now other sectors. Then like a virus the slowdown hit European automotive and financial sectors. In the mean time, smaller countries like Mexico and Iceland have been devastated financially. Israel is also going through Real Estate and technology down cycle. The state tried to help by funding early technology start ups, but they were not as effective as the private venture capital industry. Then came a few individuals, called "angel investors". To date there are very few start-ups who could gain enough momentum to get to the venture funds. The angel investors hoped to get a working prototype and excite venture funds to continue with a company. The problem is simply the scale of investment. The system created a 3 to 10 million dollar model. Start-ups are used to raising money and hiring 20 people for 2 to 3 years to get the first version of a product going. They don't know how to do it with half or fifth the money in a third of the time. Everyone has to figure out how to do things quickly and more efficiently. It is possible to start a product quickly and even attract users. The Internet has changed the rules in many ways. For example, a project like FaceBook got going and got noticed and used without a big investment. The same happened with Skype which was a small project among many to use the Internet for free phone calls. In Israel there are dozens of projects trying to emulate FaceBook and Skype. We don't have a success story yet. Let's hope we all figure out what is needed to live without the venture capital start-up model. Stay tuned, programmers are coding in PHP and MySQL in converted (closed) porches everywhere*.

---

* porches in Israel are equivalent to basements in the US, more on Israeli culture here... come back for more
** The Eggs in the title is for putting all your eggs in one basket. Israeli engineers, investors, entrepreneurs... you name it, have done that for the last 15 ~ 20 years.