The Israeli startup community has had two big things going for it for nearly 20 years now: extremely talented and insanely driven entrepreneurs, and deep-pocketed financiers ready to fund them.

That’s apparent in the results of the just released Startup Genome report, which ranks Tel Aviv the No. 2 startup ecosystem in the world. Two main things pushed us above LA, New York City, and London — the sheer volume of companies that launch here, and the top ranking on the funding index (click on the image for a larger version):

While the talent and company output have only increased in recent years, the funding end of things in Israel is currently undergoing some deep changes.

Here as elsewhere, until recently risk capital was deployed almost entirely by venture capital firms. We’ve had our largish local VC players like Pitango, Evergreen, JVP, and Gemini (and a ton of smaller firms, many of which disappeared in the past decade), along with the big overseas guns active in Israel since the 90s like Benchmark, Sequoia, and Accel.

But with the VCs having all sorts of trouble with their own business models, who’s stepping up now to fund the firehose of Israeli teams at the critical seed stage? Increasingly, it’s an active angel crowd, which is reshaping early stage funding here just as much as in Silicon Valley — especially for the growing number of startups doing web services.

While many aspects of the Israeli angel revolution are similar to those Naval Ravikant eloquently described at the last PandoMonthly — most importantly, the dramatically reduced cost of trying something out — the dynamics of this shift are different here in some important ways.

There are three main trends you can observe right now in the Israeli angel scene:

1. The money, in jeans and sneakers

“There are a few main personas among Israeli angel investors,” says Gigi Levy, one of the most active and successful angels for consumer internet startups these days. “The building contractor (“hakablan”), the business generalist, and then guys like me.”

The contractor is a rich guy who read about big tech exits in the paper and wants in on the action. He makes only one or two investments a year and doesn’t really understand the risk element — that it’s altogether possible the company will close down in a year (his building projects don’t do that). He’s predisposed to drive Israeli entrepreneurs bonkers and has been doing so continually since the late 90s boom.

The generalists — like the Zisapel family, Zohar Gilon (the Ron Conway of Israel), or Guy Gamzu — made their fortunes in other spheres than they often invest in now. They’ll write their checks, let you run your company as you see fit, and will be happy to supply a much-needed high level business contact. But since they invest cross-domain, they may not have the specialized knowledge of those investing in the particular domain they’ve worked in.

Then there are the Gigi Levys — entrepreneurs themselves who have usually achieved one exit or more and bring invaluable domain expertise to the companies they invest in. These younger guys in jeans and sneakers are completely reshaping early stage funding here. Count Yuval Shachar, Yair Goldfinger, Eden Shochat, Yaniv Golan, and Roi Carthy in this growing category.

Levy, the former CEO of 888, says he gets pitched by about 10 companies a day. He’ll meet two of them and end up investing in just about one a month, writing a check between $50,000 and $200,000. He’s done about 50 deals overall and prefers to invest in companies in his direct sphere of expertise — online gaming.

Yaron Samid, CEO of BillGuard and the prime mover behind local founders’ club TechAviv, calls what this new breed of angels offers “EC, as opposed to VC. When you hit Paul Graham’s trough of sorrow and it seems the world’s against you, these guys can look you in the eye and say ‘Hey man, I’ve been there — it’s going to be ok, and here’s how we’re going to make it work.’ And when necessary they’ll also have the candor to say ‘You know what? It’s just not clicking — kill it and try something else and I’ll definitely consider investing in you again.’ That’s incredibly valuable ‘emotional capital’ for founders — and everyone wants it.”

2. The rich uncle from America

Samid began TechAviv Angels as a spinoff investing group. But it’s telling that these days, when a founder asks him how to approach angels, Samid encourages them to just get on AngelList to broaden their search and meet international investors. More and more American and European angels are investing directly in Israeli seed rounds through AngelList or other means.

The most interesting recent development in this area is Jonathan Medved’s Our Crowd – a recently launched Funders Club-like platform for accredited investors outside of Israel to invest in early stage Israeli startups with as little as $10,000.

Medved, a longtime VC and more recently the founder/CEO of Vringo, calls Our Crowd “my shoebox project.” For years, Medved’s been travelling around the States singing the praises of Israeli high tech, and wealthy Americans invariably ask him how they can invest in Israeli startups. “I’ve always had to say to just go buy CheckPoint on the Nasdaq. But online today, it’s possible to get to know and then select companies for a long distance angel investment — which is what we aim to do. I have a shoebox filled with business cards of accredited American investors who we’re now reaching out to — and the response has been very strong.”

Our Crowd — named after Stephen Birmingham’s book on the rise of the German Jewish banking class in late 19th century New York — structures each investment as a separate fund. In a typical $500,000 deal, Our Crowd vets the companies, its GPs (from their own fund) commit $50,000, then they open the remaining $450,000 to investors on the Our Crowd platform. Those investors become LPs in a mini-fund tied to that seed investment. Investors pay Our Crowd an ongoing management fee and 15 percent carry on the upside — not your typical angel investment, but you do get the local vetting and shared exposure.

Blumberg Capital and Eric Schmidt’s Innovation Endeavors are also part of this seed money-lobbed-from-afar phenomenon. Both now have local offices in Tel Aviv and are active in early rounds. Innovation Endeavors has recently done deals in some standout Israeli startups like Soluto, BillGuard, Any.DO, and Commerce Sciences (which I profiled here).

3. Your middle-aged parents trying to stay hip

While they still do the bulk of financing on a dollar basis, the big VC firms have lost their proprietary deal flow here just as surely as they have in the Valley. To maintain access to the best entrepreneurs and companies at early stages, the legend VCs are trying a couple things.

First, there’s the move to Tel Aviv’s Rothschild Boulevard, where the better Internet startups tend to hang their shingle these days. To get closer to the action, Benchmark Capital, for example, recently bolted their snooty Hertzelia Pituach office in favor of an open space on the roof of a historical Rothschild Boulevard building. It was like moving from a Park Avenue four bedroom to a Village loft to get closer to artists.

Pitango, meanwhile, just raised a new fund that will be focused on seed and even pre-seed deals. Skycure, a BYOD security solution, was its first investment.

But the big question with large VCs cozying up to founders for seed deals remains: Why would talented founders choose a slow-moving VC, who often lacks domain experience, pushes to write a bigger check for more equity, and requires a board seat, over a jeans-and-sneakers angel who — refreshingly — offers just the opposite?

From what I hear (and what IVC data shows), the VCs aren’t doing many seed rounds these days. The smart ones are happy to bypass them, avoiding the signalling problem if they don’t follow up on the A round and relying on the angels and the market for early vetting. But they now need relationships with top angels and entrepreneurs to maintain that access. This ecosystem still very much requires deep pocketed VCs for A rounds and onwards, but their displacement from owning this seed round changes everything.

Trends that start in the US tend to hit Israel a few years later. The rise of the super angel, with founder-friendly terms and support, reshaped Silicon Valley seed funding beginning a few years ago — and that’s landing with full force here right now.

[Image courtesy Wikimedia]