How to learn from Israeli startups' story and change things in 5 years

Israeli startups' history tells us a lot about how to make non-U.S. startups succeed. Pack your bag. Go looking for more significant markets—allies with U.S. VCs. Revolutionize education.

A lot of organizations and country governors, sooner or later, think to recreate the Silicon Valley ecosystem in their own territories. We understood in previous articles that there are multiple reasons why that’s something pretty hard to accomplish. The separations between Silicon Valley and any other innovation ecosystem in the world is about 70-80 of history and hundreds of billions of dollars invested by the U.S. government in advance R&D over the years. As a cherry on top, add a counter-culture cradle place, historically far from finance and politics. Things can change, of course. Silicon Valley was not the epicenter of electronic innovation before WWII. Boston and Philadelphia were the places to be well after the last world conflict. Today, the Bay Area took over the East Coast supremacy in innovation, and the best option that startups outside Silicon Valley have to succeed is to create bridges to the Bay Area. After all, for Israel, it worked pretty well. The collaboration between those two innovation hubs began in 1974 when Intel created its first development facility outside the U.S. in Haifa, in northern Israel.

Today there are some 220 US multinational corporations with innovation-related activity in Israel, while over 650 Israeli technology companies have offices in the U.S. The tech sector plays a vital role in both economies: in Israel, it represents 8.7% of the workforce, 12% of GDP and 46% of exports, while in the U.S. it covers 9% of the workforce, 17% of GDP and 60% of exports.

Forbes, September 2019

One of the most critical assets in helping Israel to achieve such fantastic results is its education system. It happened to California with Stanford, and in Israel has been the same. The tight connection between universities and business has been crucial. 

(Fred) Terman—Stanford Engineering Dean—encouraged his students to form their own companies and personally invested in many of them.

A second fundamental advantage in Israeli startups case has been foreign venture capital investments. A 2015 Harvard Business Review study highlighted that, even in an entrepreneurial country like Isreal, startups couldn’t scale without an outside big enough market to climb and massive foreign investments in their startups. At the beginning of the journey, access to local capital is a great plus, especially if national investors are more frugal and put less pressure on first-time founders. When the U.S. VCs come into play, valuations get higher, and the pressure to deliver to meet next round milestones becomes significant.

Israel’s experience in this area suggests that one of the main advantages of your country investors should be the ability to be less formal and make it easier for founders to access capital.

Lower valuations and less capital are ok, they all mean less tension. On the other hand, the lack of international experience of local investors might quickly become a limit to the expansion of the company market, and access to foreign capital. Investors and founders have to work together to avoid creating road blockers on the startup journey. Countries should work on making the fundraising process as smooth as possible and one hand, and creating the perfect conditions to access foreign capital in general and U.S. capital in particular. When we talk about experienced foreign investors, there's nothing they hate more than useless and uncontrolled risks and investing in a country when they don't understand the corporate laws system, afflicted by cumbersome bureaucracy and, maybe, financial instability is not something that can happen easily—probably it can’t happen at all. But they would have invested in the same company if it would have been a U.S. one. When I co-founded Sysdig in 2013, I asked our first investor: ”Would you have invested in us if Sysdig was an Italian company?”. His answer was :”No.”
The best option to access U.S. capital is following Israeli’s footsteps and connect our innovation to Silicon Valley and U.S. opportunities. It worked for them and might work for us as well.

Should you hire an American CEO?

Most often, startups outside the U.S.A. think that the best option they have to move their HQ to Silicon Valley is to find an American CEO. The Israeli experience says quite the opposite in this case too. Ten years ago, they used to follow this approach, but it failed. For them, an Israeli CEO was the best option to scale the opportunities in the U.S. market—as reported by HBR study:

Studying the liquidity events of Israeli firms valued over $150 million, Vintage Partners found that 81% were run by Israeli founders, while half of the remaining 19% were run by professional CEOs who were Israeli. In short, Israeli entrepreneurs are leading their companies to scale.

My personal experience tells precisely the same thing. It’s a huge mistake thinking that a U.S. CEO can solve problems that you first didn’t address personally as a founder. Before hiring a U.S. salesman, go sell the first million-dollar yourself to U.S. customers. Of course, foreign founders need to get their hands dirty and try to mitigate the risk of moving their company business departments to Silicon Valley. My suggestions, in this case, are quite simple:

  1. One founder should relocate to San Francisco ASAP. Having one member of the founding team in each continent is the best solution.

  2. Understand the dynamics that a distributed company imposes and learn how to get everyone on the same page. Don’t leave anyone behind.

  3. Work on company culture. Build a strong cross-continents company culture based on trust and proactive problem-solving.

  4. Find reliable advisors in San Francisco to get help in scaling the U.S. business and fasten your own network creation.

If the perception is that your country ecosystem has no clear plan about how to get big companies from young startups, then maybe it’s time to move on. Pack your bags, and go chasing bigger markets partnering with Silicon Valley VCs. Most of the non-U.S. countries have one or more venture capital funds in the Valley. Not necessary government-backed VCs, but private entrepreneurs like us that are eager to find compatriots hungry and ambitious enough to receive funding.

Do you remember the Israeli startup called Waze?

In December 2011, Waze employed 80 people, composed of 70 at Ra’anana (Israel) and 10 in Palo Alto (California). In June 2013, Waze sold to Google for around $1B. Everyone was thrilled by the news, and that valuation seemed unbelievable. Waze’s 100 employees received about $1.2 million on average. Things move forward since 2013. Three years ago, Intel bought MobileEye, another Israeli company, for $15.3B, about 21 times the expected 2017 revenue of the company. Intel paid a premium of 60 times Mobileye’s earnings. Today this company is an Israeli subsidiary of Intel, with more than 1,700 employed and a lot of R&D people in Jerusalem.

The Isreal model to export innovation to the world worked pretty well.

In Italy, we make ourselves proud of learning from history. We can do the same in this new world led by exciting technology development, even if the past in this case is just tens of years old. Israel didn’t try to replicate Silicon Valley’s success, but its entrepreneurs allied with U.S. VCs to make their R&D skills global tradable assets. It took them more than 30 years to get there, but now that we have a clear path in front of us, any other country can make it happen in the next 5-7 years. Italian researchers are definitely one of the most precious assets of the country, and I think that all they need is a little help to connect the dots.

We at LombardStreet Ventures are working hard to make it happen soon. Our mission is not just to invest in Silicon Valley startup. We aim to connect top Italian founders, entrepreneurs, accelerators, universities, and investors to the Bay Area. It's not just a dream, but a possible future just around the corner. We only need more people that can see what we see already.