Israel Hype Cycle

By now, most Israeli related entrepreneurs and investors have read the article written by Sarah Lacy on Techcrunch. Clearly, Sara got everyone excited, as 346 comments were accepted (just as a comparison, a previous article on the failed online advertising world got 600 comments, but clearly that topic has a wider audience than Israel).

If you haven’t read Sara’s post, she basically provided data showing that Israel is a missed opportunity in the past decade, provide minimal returns. She had a lot of compliments about the overall tech scene, but a lot of criticism regarding the actual financial results.

2 key points regarding Sara’s post:

1. She got the facts wrong. Israel returned way more than $860M in the past 10 years. Gemini’s companies alone passed that number (any by a lot).
2. She got the message absolutely right. Overall Israeli VC returns are not good enough. VC backed companies are not big enough.

In the past I wrote (On Venture Beat) about the Israeli quest for a billion dollar company. Back in 2007, I thought that some major trends are going to help Israel produce larger companies. I still believe in those key trends:

1. The quality of life in Israel has gone up, and with it the desire for better financial returns. Entrepreneurs today are looking for more than $1M out of their company.
2. Investors are much more patient than before. I call it Israel Venture Capital 2.0.
3. Talent is returning to Israel from large companies, and those people are thinking BIG.
4. Finally, more Israelis have experience strong returns and are looking to do it again with improved results. Few examples (In Gemini’s portolio) include Dov Moran (Modu), Amir Ashkenazi (Adap.tv), Yaron Galai (Outbrain), and the Rakib Brothers (Novafora).

But there is one more thing that is important to point out. I think this is another great example of the Hype Cycle. Gartner invented the Hype Cycle a few years back. They called it “the technology hype cycle”, but in reality, it’s applicable to a lot of things out there (In the past I wrote about the Blog hype cycle). Specifically in this case, Israel seems to be going through the hype cycle as well:

• “Technology trigger”: Back in the 90’s, the Israeli startup scene (and VC scence) was invented.
• “Peak of inflated expectations”: Well, this happened twice, but Israel was inflated in 2004-5, when a lot of people thought Israel is soon to be the “next big thing”.
• “Trough of Disillusionment”: Today. Right now. Sarah Lacy’s post is all about the “reality”: Israel is now what we thought it was.
• “Slope of Enlightment”: This is where optimism comes in. I think that in 3-5 years, we will see Israeli companies emerging with amazing results, getting results across all tech areas: from media & internet to Medical IT & devices. everything.

As most of my close friends and colleagues know by now, I am returning to Israel next month (A dedicated blog post is coming in a few days). It’s not only because Israel is my home. I truly believe Israel is going to deliver big big time in the new few years.

Comments

[Adrian]

I have found that Israeli can be over-competitive amongst themselves (as can any group) and this can work against us. Here is an idea about forming that billion dollar company in Israel: http://tr.im/gFCq

I've just launched a new site: http://tr.im/hS6U

Welcome back.

[Shai]

She got the fact mostly right.
The larger exits made in the past 8 years are for companies funded before 2001. Newer companies might still suddenly do a 180 but I highly doubt it. VC's killed the investment possibilities in this country by financing purely ridiculous ventures and ignoring sensible businesses.

[Michael Kariv]

I am now completely confused
When reading Sarah, I assumed that the measurement is
for period X, sum Y was invested , sum Z was returned. Z was not supposed to be a return on Y. The only connection between Z and Y is the period of X. So, I told myself, it is only good for mature markets and steady markets. Because if W is your true ROI, and during X invseted Y is bigger then what W is return on, the result (Z/Y) is smaller then W. So, it would appear, Z to Y is only good to measure against some pre-set benchmark. When you compare two industries, or two independent regions, we have to know how investments behaved in the two during past X years and another say X years prior.
So here both Daniel and the anonymous commenter take different takes on the numbers. I side with Daniel, and not because his understanding of Sarah's facts is like mine above. And not because the measure is perfect, because, as I shown, it is not.
The reason is that, IMHO, we don't have a better measure. First, VCs will not disclose exact ROIs (Daniel, am I right?). But even if they would, investment in a big exit is spread over a period of time, how do you account for that? I am no accountant, nor an exceptionally gifted statistitian, may be there is a good solution, other then simple Z/Y during X. If so, I would be intrigued to learn what it is.