What makes (Israeli) startups succeed?

It has been a good year so far for our Israeli-based portfolio companies with four exits totaling more than $1.2 Billion. Early this year, Altair was acquired by Sony Semiconductor for $212M, which was the first acquisition ever for the Japanese company in Israel. Then Oracle announced the acquisition of virtualization company Ravello Systems, and Cisco confirmed it had acquired Israeli chip designer, Leaba Semiconductor. Last month, Cisco announced intentions to acquire cloud security startup, CloudLock for $293M. It might seem like the only common factor between these four Israeli-based startups is that they were backed by Bessemer Venture Partners and happened to be acquired around the same time. All four companies operated in different fields (semiconductor, cyber security, hybrid cloud, and communications), were at various stages of their revenue lifecycle, had different products and GTM approaches, and even had a 10-year gap between their launch time.

But a closer look reveals that there are several core capabilities that all four companies possessed. These are the strengths that helped pave the way for their success. These are also the attributes we look for in many of our global investments but even more so in our Israeli ones:

1. It’s not a single CEO but a team play. It takes more than a single leader to succeed. This is even more crucial for Israeli startups since the management team typically ends up spreading over two different continents. Leaba had no less than five co-founders who had been working together for a very long time. The company was led by Eyal and Ofer who already sold their previous company, Dune Networks, to Broadcom and have worked together for the past 25 years! Altair’s three co-founders came out of TI together (after selling their previous startup, Libit, to TI) and stayed together at Altair through a long ten year journey. Moreover, Altair experienced what is arguably one of the lowest employee turnover rates in the history of startups. Literally, no employee ever left willingly over a ten year period which demonstrates the strengths of the founding team. CloudLock was founded by three co-founders Gil, Tsahy and Ron, who met while serving in the Israel Defense Force and have stayed good friends ever since. One of the things that truly set CloudLock apart was the tremendous dedication of the three cofounders and their support for each other throughout a long and often bumpy ten-year journey. Ravello’s two co-founders Rami and Benny also had a long history of working closely together. Over the past two decades, they have alternated the CEO and President roles between them in the several startups they co-founded. All these founding teams trusted each other completely, they worked well together in tough situations, and had complimentary skill sets.
2. Technology is a core strength. One of the key strengths of Israeli startups is often the cutting edge technology. Without strong tech, it is very difficult for Israeli startups to compete with US-based competitors. All four companies’ main capability was the strong technology. Moreover, all four CEOs had strong technological backgrounds, and in another world could have even been the CTOs of their startups. Altair developed one of the world’s only communication chips that could support multiple standards based on a software-defined radio platform. Ravello’s technology was extremely revolutionary- the company has developed a new virtualization technology that allows any virtual machines to run as a guest on another virtual machine in the cloud. Leaba’s was most likely one of the only two teams in the entire world that had the technological expertise to build their product. The company’s tech was so disruptive that it stayed in stealth mode and never revealed the technology to anyone besides Cisco. Needless to say, all four companies were acquired mainly due to the strong underlying technology.
3. Move fast but adapt even faster. CloudLock originally launched as a completely different company, Aprigo, which sold on-premise data management software. Four years into their venture, the team realized it had to do a strategic pivot. The company shed the product and built a new one. It then ‘fired’ its customer base, and re-branded as CloudLock. Altair also went through several evolutions. The company originally built a WiMax communication chip only to realize that WiMax isn’t going to prevail. It then shifted its focus to LTE and later to IOT. It is very rare to see a semiconductor company make such drastic pivots successfully.
4. Target a niche market that grows fast. Large and mature markets are typically competitive and full of strong incumbents. A small, niche market is often a great place for new startups to emerge, but is often too small to build a large company. However, if the new market is growing fast- it can offer the perfect combination. Cloudlock helped enterprises secure data which resides on cloud platforms. When the company launched, enterprises were just starting to adopt cloud services such as Google Apps and encountered huge security obstacles. However, the traditional security vendors did not yet have a solution for this relatively new market. This allowed a crop of novel startups, including CloudLock, to emerge. When the new cloud security market became big enough, the traditional security vendors went on a shopping spree and acquired many of the cloud security startups to fill the holes in their offering. Ravello’s story is also similar: Large enterprises wanted to adopt the emerging public cloud but had complex software that was designed to run in their own data centers. Ravello helped these enterprise build an exact replicate of the data center application in the cloud within seconds. Oracle realized this was going to be a large and strategic market and therefore decided to acquire the company. Altair’s latest product was a dedicated communication chip for the relatively nascent, yet fast-growing, Internet of Things (IOT) market. Altair’s IOT chip is a key reason for their acquisition by Sony.
5. Be aggressive but scrappy. Startups have to be extremely aggressive and move very fast to succeed. However, doing this while remaining cost efficient is much more difficult. Cost efficiency is typically one of the main advantages Israeli startups have over their US rivals. It allows them to endure during tough periods and rely less on the funding environment. I wrote a separate post explaining how CloudLock’s cash efficiency was one of the main reasons the company succeeded while facing multiple competitors which raised and spent large amounts of capital. Leaba was one of the most cash efficient semiconductor companies and raised very little capital, especially considering the company’s ambitious product. The same is also true for Altair, which allowed the company to endure for ten years while re-defining the product several times.

Despite recent success, Israeli startups still have an inherent disadvantage when they compete with US-based competitors. Therefore, obtaining these core strengths is even more important for their ability to triumph. These are the kind of strengths we keep looking for in our Israeli based investments.