When I sat down with Index Ventures partner Saul Klein on the porch of a Tel Aviv cafe on Sunday, the late winter Mediterranean sun shone so intensely that I could barely see him, squinting across the table. We ducked inside to a covered spot and Klein quipped, “There it is, Israel’s light onto the nations.”
We shared a chuckle — what would the prophet say about the hookers and junkies working the street corner ten minutes from us? But as became clear over the next couple hours, Klein was really only half-joking. In the almost two years since he moved here from London, Klein’s quickly become both a leading player in Israeli consumer Internet and so bullish on the emerging Israeli web startup scene that this low-keyed South African, part of the original Skype executive team, now seems positively dazzled by the Holy Land’s light.
If you want to understand what’s driving this new wave of Israeli startups, Klein says, take a look at Eyal Gever, an artist-turned-software CEO-turned-artist-again who produces stunning sculptures with bleeding edge 3D printing. (See the recent BBC profile of Gever.)
“That combination of technical and design brilliance, that left brain/right brain mix, I’m seeing that over and over again in this generation of Israeli entrepreneurs,” says Klein. “If da Vinci and Picasso were alive today you know they’d be integrating technology with their art, and the talent here expresses that mix in an incredibly compelling way.”
Wait, Israeli technology bearing some kind of holistic beauty? The first generation of big Israeli tech companies from the 90s was anything but that. It just had deep nerd appeal. With security software from Check Point or flash memory from M-Systems, the only thing normals could get excited about back then were the mounds of cash those companies threw off. But this time around, young Israeli entrepreneurs are producing innovative consumer Web products that are slick, super engaging and with real human resonance. Silicon Wadi’s gone sexy.
And they’re now getting the money too: consumer internet teams now garner the lion’s share of new investment flowing into Startup Nation. Israeli per capita VC and R&D as a percentage of the economy remain much higher than the rest of the world, and 2011 brought a big overall uptick in tech investment, with Internet services leading other sectors for the first time in the past decade, attracting $482 million, or 23% of total capital raised by Israeli tech companies, double the amount that went to Internet services in 2010 (data from IVC).
“When I told our LPs I wanted to spend more time in Israel,” Klein recalls, ”they said ‘what the hell are you going there for?’ But I had already seen with our investments in MyHeritage and Abe’s Market this new type of product-and-design focused Israeli founder and knew there was a lot more in Israel where they came from.”
The leader of the pack right now is cash machine Conduit, which did no less than $200 million of EBITDA last year on $500 million in revenue. A big chunk of Conduit shares were nearly sold last month to private equity firm Silver Lake at around a $2 billion valuation. And though that deal fell through, local press leaks got the whole ecosystem jazzed and solidified Conduit’s status as the most valuable Israeli Internet company for the past decade.
Behind Conduit are a slew of other Israeli consumer web services that have a good shot at hitting these sort of numbers: Kenshoo, Wix, PrimeSense, Gigya, Waze, Peer39, eToro, Fiverr, Viber, Seeking Alpha, BillGuard, Farmigo, Shaker, CrossRider – plus Index-backed Soluto, Outbrain, and Abe’s Market.
Promising stuff, but where are the venture returns? It’s now been about three years since Sarah poured some cold water on the ecosystem here, recognizing the disappointing liquidity since the late ‘90s (and getting completely undeserved, politicized flak in response).
While the numbers Sarah quoted were disputed at the time — she used Dow Jones VentureSource, whose method of defining an Israeli company understates liquidity as opposed to IVC reports — no serious participant in this community took issue with Sarah’s basic point: Overall venture returns for Israel were disappointing through the aughts, and Israeli startups really had kind of lost their mojo.
Klein, for one, is convinced that’s changing right now, before our eyes: “There’s no reason why Israel can’t turn out ten Internet companies in the next few years that are bigger than Check Point,” he says, and he believes the driver for that will be this new generation of Web-native, design- and UX-savvy entrepreneur.
It’s still the case, though, that the most valuable Internet companies in any Israeli VC portfolio right now are located in Europe — CliqTech (backed by Jerusalem-based JVP) and Wonga (Greylock) — and that big obstacles stand in front of Israel’s young consumer Internet companies.
As Klein’s fellow Israeli VCs Michael Eisenberg (in his Hummus Manifesto) and Adam Fischer recently lamented, it can be incredibly difficult for promising startups here to hire full developer and ops teams and remain risk-on in a way that lets them scale to significant size. Everyone around here seems to want to be a founder, not a team member. And at the end of the day only great teams build great companies.
Also, for these new consumer Internet services, there’s often a real issue of distance from their user base. That doesn’t necessarily have to constitute a major obstacle, but for Israelis in particular it clearly is a real business risk, as this culture hardly encourages the modesty required to listen well and closely to your users, then respond quickly by adjusting your product. That weakened feedback loop, Klein acknowledges, could actually become the biggest Achilles heel of this ecosystem.
In the meantime, though, the Israeli web startup scene is basking in the light and doing everything it can to reflect it back outward. And deep pocket investors like Saul Klein want to pour much more into this extremely talented new breed of fully human Israeli technologists, who really do seem to be bringing Israel’s tech mojo back.
[Disclosures: Saul Klein is a personal investor in Pando Daily, and I am a shareholder in Seeking Alpha.]