Israel, you’ve got mojo, but where’s your Instagram?

Above: The curse of the small company

Israel’s start up economy is hotter than ever. But a question haunts entrepreneurs there: Why are Israeli start-up hits generally so small? Where is their version of Instagram, the Silicon Valley-based photo-sharing company that Facebook just bought for $1 billion within 18 months of its launch?

That was the question of debate during my visit to Tel Aviv two weeks ago. It’s not quite as bad as the Curse of the Bambino that haunted the Red Sox for 86 years, but the baseball analogy is apt: Israeli entrepreneurs are hitting base-hits all year long but they can’t seem to get into the World Series. In fact, they’re hitting lots of home runs, and occasional grand slams. Taken as a whole, Israeli entrerpreneurs are an awesome team, perhaps the best in the whole world league. Look at CheckPoint Software, the early security company, now publicly traded and valued at $12 billion. Or ICQ, the early instant messaging service, sold to AOL in the 1990s, and which inspired a  generation of IT entrepreneurs. I’ll say more about Israel’s prowess shortly.

But for some reason, the country never hits the big time. Huge successes on the scale of Facebook and Google, as well as amazingly quick viral hits of Instagram’s ilk, continue to elude it.

The good news is, Israel’s start-up ecosystem is still very young, especially in the area of the consumer Internet. Many entrepreneurs and investors I talked with vow things will change, but they caution it could take at least five or more years.

For now, though, several factors have conspired to keep Israel’s hits relatively small. Local venture capital firms, and some more engrained elements in Israeli culture, play a role here. Several entrepreneurs put it this way to me: The country started out poor, and still has far less wealth than other nations. It’s also small, and is surrounded by hostile neighbors. These factors push entrepreneurs to go for the small, safe bet.

Arye Schreiber, an entrepreneur who picked me up at the airport in Tel Aviv during my first visit to Israel (I attended the Innovation Marathon event hosted by BootCamp Ventures), explained to me that many entrepreneurs curtail their aims from the outset. If they can make a few million dollars first, that reduces the risk going forward, even if it means continued entrepreneurship. “Ask someone on the street, what’s the Israeli dream?” Sharon Tal, another entrepreneur asked me rhetorically. “They’ll say: It’s to open a start-up, sell it after one or two years, and become a multi-millionaire. Every small kid will say, ‘That’s what we want.’ … People are after the exits here. They’re less interested in building an established company and making money for the long-term.”

My stay in Israel, just three days long, was incredible. I met, or saw presentations from, at least 48 companies there (it was back-to-back for two days). I fell in love with the place, as I’m sure many foreigners do: I stayed out late one night in lively Tel Aviv, I explored the architectural and historical wonders of Jerusalem, including running through the underground Hezekiah’s Tunnel, and even got pulled over at a checkpoint in the West Bank and told by an Israeli officer to to delete a photo I’d taken of him. All this, after I was invited, quite by surprise, to a dinner at Ofra, one of Israel’s oldest settlements in the West Bank, specifically at Tanya, a winery partly owned by Benchmark’s Michael Eisenberg. Note: The Chardonnay and Cabernet Sauvignon wines they make there are truly amazing, and I’m saying that as a Napa Valley-frequenting snob (see picture of me next to one of the big bottles below).

Israel is a country on fire with entrepreneurship. After I got back last week, I read the 2009 book about Israel’s start-up ecosystem, Startup Nation. It lists some amazing stats: There are more entrepreneurs, venture capital investments, and research and development per capita in Israel in than any other country in the world — and by a large margin. A unique mix of the Jewish chutzpah gene, bonding by engineers during service in military units, the high priority on education, a strong Zionist drive, and the influx of diverse talent among Jewish immigrants from Russia and elsewhere — all have created an entrepreneurial culture that is second to none. Israel has more Nasdaq-listed companies than any outside country outside of the U.S. (…continue reading)