Why Israel should reconsider too much high-fiving over Waze

By Sarah Lacy , written on July 5, 2013

From The News Desk

Earlier this week our wonderful contributor from Israel, Mick Weinstein, wrote a story about a new fund launching and he lead with this:

While the Israeli startup community basks in the glow of Waze’s recent $1.1 billion sale to Google, most of the discussion has focused on how Waze validates Israel’s effort to create hugely valuable, globally scaled consumer internet services — a relatively new field for an ecosystem that previously excelled in semiconductors and enterprise software.
I have no doubt that's what people are saying but….um…what?

The only thing "new" about the Israeli consumer Web scene is that it finally had a globally recognized hit. There's been nearly a decade and thousands of attempts in the country beyond Waze that have mostly missed the mark or been acquired for less than $50 million by the West.

One $1 billion hit in a decade of attempts doesn't prove a country as a whole can do consumer. That's the case even if it's a monster hit; a stand alone company that redefines an industry. It's certainly not the case when it's a still-early, product-oriented company that many people feel was wildly over valued at just over $1 billion.

Chicago has had a sizable hit with Groupon. Even weakened, it's worth several times Waze, and Google once offered it five times as much. Chicago also has strong up and comers like Braintree and Belly. Still, no one is saying that Chicago as a city has mastered anything. It's merely three strong data points in what will hopefully be a positive trend for the city.

I've had an ongoing contentious dialogue with Israel's tech scene about returns for several years now. It's a place close to my heart where I've spent a good deal of time on the ground reporting. My tough love reporting-- always couched in facts and data-- has gotten me no shortage of hate mail, death threats, and accusations of being anti-Semitic in the past. What it hasn't lead to are many strong data-based argument to the contrary.

I have always rooted for Israel, I just don't believe delusion is a good way to go about building an ecosystem. And the harsh reality is that Israel has underperformed dramatically since its tech hey day in the late 1990s. Per capita it is still one of the leading places in the world for startup formation and dollars invested. But the returns have suffered since Israel's days as a major cryptography, security, and enterprise hub. As a result, many major VCs like Benchmark Capital have continually lessened their commitments to Israel-- while a few continue to thrive in the region like Sequoia Capital and Index Ventures.

The Waze acquisition is a massive win for Israel-- no doubt. And Israel needed a high-profile win. It proved the company could leverage its mathematical big data chops and still manage to build something with a decent interface-- the latter is where many of the country's entrepreneurs have suffered during the Web 2.0 era. You can't underestimate the psychological uplift of that, beyond even the angel money that could flood the region as a result.

But while people are high-fiving all over the place about Waze, they'd do well to at least give a glance to a company that I feel the country should be even more proud of: MyHeritage.

MyHeritage is one of the leaders in the online genealogy space, but where it really excelled was in being one of the first Israeli companies to continue to fight and win when a well-heeled, well-funded, glitzy Valley competitor was launched. Now it's fighting it out with Utah-based for family tree and family social network dominance.

MyHeritage hasn't had a splashy $1 billion acquisition like Waze. That's because its founder Gilad Japhet is still grinding it out everyday trying to build a globally significant company, not just a sexy product. So far it's raised a whopping $81 million trying to get there, gobbling up smaller competitors all over the world on the way. It has 75 million members, 1.5 billion names in its collective family trees, and users have uploaded 180 million photos. It also has a freemium business model, so like LinkedIn it doesn't have to rely on getting to a billion users to create a significant company.

MyHeritage has never been part of the Tel Aviv tech "scene," and that may be part of why it has a different mindset. Yossi Vardi-- Israel's angel godfather-- has long argued that Israeli entrepreneurs shouldn't try to build globally dominant Web companies from Israel. Instead, they should try to build great products that Valley companies want to buy. He compares these products to "tomato seeds"-- there's a ton of good stuff packed in that little seed, but it needs an experienced farmer to grow it properly.

If you share Vardi's belief that that's the game Israeli entrepreneurs should be playing, Waze is the exit of the decade. Resume jumping up and down and high-five away.

If I were in the Israeli tech scene, however, I'd believe we could create actual companies.