What does success even mean for Israeli tech firms?

TL;DR: Israeli tech businesses typically don’t grow into successful American corporations. Here’s how they can win in a different sense of the word.

The paradox

A veteran colleague of mine remarked a couple of days ago poignantly - “you do realize that all foreign corporations that I’ve seen hate the guts of their Israeli branches, don’t you?”

Many of the present agreed. As for me, it sent me to a train of thoughts - is that observation only correct for the corporate-branch crowd? Why do corporates even operate in Israel? Selling to the tiny and difficult local market is obviously not a sufficient answer. And if Israeli divisions of corporates are so obnoxious, how can the much edgier startups get any business at all?

And indeed, let’s ask a more general question – why is the Israeli tech industry so insanely valuable? Is it just some kind of a bubble? I’m no expert on bubbles, but I do know a few things about business value of technology. I would like to share some of the thoughts on this subject.

What major disadvantages do Israeli companies face?

Very little of the following is considered controversial by people familiar with the scene.

It is widely agreed that for most major kinds of businesses, success is determined by being able to sell well in America. However Israeli businesses face a severe handicap doing that. Selling well in a country requires a leadership that’s tuned into the local culture - especially for a highly nuanced and coded culture like the American one. The typical Israeli entrepreneur has simply never learnt to navigate that nuance. (As an example, just consider the email Noam Bardin publically sent when leaving Google - quite the bull in a china shop).

A common response to the above is that Israelis would run the tech while the Americans focus the sales. Tough luck though. The Israeli school of leadership looks down on investment in operations, planning and communications – typically to the point of shooting themselves in the foot. Since building a long-term viable geographically diverse company requires a deliberate and robust backbone made of the above, Israeli leaderships tend to not rise for the challenge, which means they lose and fade away when the going gets harder.

Perhaps then, have the senior management be foreign, and send the fabled Israeli engineers - ostensibly available cheaply at a dime a dozen - be sent in large groups to attack whatever goals the corporate tells them to? Nope. Many American companies successfully follow this playbook in India, but I’ve never seen it succeed in Israel. Good Israeli engineers are rare, expensive and tend to frown upon the kinds of folly that seems to permeate the aether of bigcorp life. Indeed, it is uncommon for Israeli corporate branch offices to host technically complex profit-center products.

As a side note, a rare and welcome exception to the above was Intel – due to a massive fiasco in the US development center, for about a decade Israel became the main location for Intel’s bleeding edge work on CPU architecture design; while Intel is no longer the sole market leader and Israel is not as strong in it, this has sprung a remarkable deeptech industry in high-performance compute design with exciting companies such as NextSilicon and Mellanox.

How do successful Israeli companies survive nevertheless?

The upside of the Israeli contempt for large organizations and whatever it takes to run them is the Israeli die-hard loyalty to small organic teams, and whatever product those small teams can support.

There are several models in which this ability turns out to be valuable - and worth a lot.

Build to relocate - this model means to bootstrap with a geographic pivot in mind - hack together a product with a small team in Israel, win over a niche and then transfer the bulk of the organization to America. This requires careful choreography and a properly calibrated set of incentives early on, but is doable as long as the head is kept level and the hands steady. I consider Sentinel One and Ultima Genomics as a examples of this pattern.

Going for the long-term with deep-tech - going a bit against the splashy zeitgeist of the 2010s, when a company has a deep technology but lacks a well-formed market, the strategy is to keep low, slow and stable until something changes and the technology is suddenly in a great demand. Such are the stories of Mobileye, Vayyar and Flytrex. This attitude requires persevering through years of austerity, or extreme luck being bought out early – one example of the latter being Alooma.

Build a deep-product company - this is similar to the deep-tech model, but here the play is to focus on a single, predetermined and highly fit product idea from the get go. For a product company, success involves growing organically to a medium size. To pull that growth off, the founders need to be professional managers, which is a rare sight in Israel and almost an impossibility given first-timer founders. Companies following this pattern are Lightricks, Gong.io and JoyTunes.

Project delivery space - likely the only way to genuinely “go big” while remaining mostly Israeli. The focus on repetetive, bean-counted, nothing-to-write-home-about projects is toxic to talent elsewhere but is tolerated in Israel. Indeed, a lot of Israelis genuinely like the short-term thrill of integrations and “professional services” dynamics. One category of companies that works in this space is IronSource, which runs an advertisement empire characterized by rapid, iterative integration with multiple partners. Another bigger, older and lower-margin company in this pattern is Amdocs, which focuses on the telecom billing market. In both cases the traditional Israeli weakness in managing large organizations is counteracted by the fragmentation of the development core across multiple somewhat independent projects.

A low-investment corporate branch providing great complementary value - a very frequent and rather successful model for corporate branch offices turns out to be to own important-but-not-core business lines in a larger corporate universe - this pattern leverages the fact that Israeli individual contributors can be highly motivated by the outcomes even where the American only sees an endless career-dulling execution quagmire. This pattern captures a lot of the projects going on in the Israeli MAGMA branches, for example the Microsoft Israel which maintains a security product core in Israel - that’s definitely a great asset for Microsoft, but hardly a cash cow.

Summary

A lot of people have the notion that Israel may just spring up an American-style large corporation that would be a major commercial success. I consider this notion to be fundamentally incompatible with the kinds of successful organizations that Israelis empirically manage to build. However, there’s a myriad of excellent business opportunities in which Israeli teams can win large rewards by playing to their strengths - and I certainly hope to see more of that going forward.