In Israel, a New Generation of Boutique Venture Capitalists Thrives

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Shimon Peres, the legendary Israeli politician who died last year, realized early in his career that Israel, lacking natural resources and friendly neighbors, should rely on its people for success. “Through creativity and innovation we transformed barren deserts into flourishing fields and pioneered new frontiers in science and technology,” he said.

Those flourishing fields have, in the past two decades, sewn one of the world’s most fertile tech markets. Israelis have pushed their way to the front of the tech queue, and brands like Waze, Mobileye and Trusteer have become household names worldwide.

They have been joined by major multinationals such as Intel, Microsoft, Cisco Systems and other tech firms, which have taken advantage of Israel’s large number of science graduates to open big offices in the ‘Silicon Wadi’. That has created a feedback loop of experienced tech professionals keen to move into entrepreneurship.

Last year Israeli tech exits totaled $10bn. The figure may have been significantly boosted by Playtika’s $4.4bn sale to Chinese firm Giant Interactive. But it is still a field in full bloom. (consider that, for example, the entirety of European exits the previous year totaled $145bn). And now, more than ever, Israel’s VC market is changing to cater for it.

Venture capital in Israel began in the early 90s through a government scheme called Yozma–‘initiative’ in Hebrew–which offered capital, tax breaks and other incentives to entrepreneurs. Even then, tech constituted a tiny fraction of the country’s economy. Today Israel’s services comprise 70% of its wealth.

Little wonder, therefore, that domestic venture capital has itself grown, and diversified. Many of Israel’s most active funds, including Singulariteam, Carmel Ventures, Innovation Endeavors and Magma, have spawned smaller, more boutique spin-offs formed of former executives and tech experts seeking the Next Big Thing.

Barak Rabinowitz is one of them. The Harvard Business School grad was a serial entrepreneur before joining early-stage VC Genesis Partners in 2015. Now he is managing partner of F2 Capital, which was spun-out of Genesis in November with $50m to spend on an early-stage portfolio coming from renowned accelerator The Junction.

Rabinowitz describes this proliferation of smaller funds as a “changing of the guard” for Israel’s venture capitalists. “Many of them have had great runs, and they’ve raised four funds,” he adds. “But they haven’t raised fifth funds. And now the younger talent has spun off to create something a bit more agile, or sector-focused.”

In a country full of corporates and multinational research centers, it is this “frontier” sector, as Rabinowitz calls it, which provides the biggest playground for smaller funds. High-tech fields like drones, AI, fintech and marketing tech are seeing big growth. F2 hopes to capitalize on that–cutting investment periods from months to weeks.

Avichay Nissenbaum is another Israeli tech vet who has joined the boutique VC crowd. His firm, lool ventures (‘lool’ is Hebrew for ‘hatchery’ or ‘coop’), is a “generalist” fund, he says–but it is grounded very much in the software field in which he made his name.

Zooz; MediSafe; DBMaestro and Tonara are some of the portfolio firms that prove this. And despite a boom in ‘innovation tourism’ where foreign VCs arrive in droves for two-or-three-day trips, local funds are best-placed to capitalize.

“The Israeli market is stronger that it has ever been,” says Nissenbaum. “Typically if you look at early-stage, it is dominated by Israelis. Foreign-based investors will not put money into early-stage. There are a lot of cultural issues, for example, including body language and due diligence. For a UK or US VC who flies in for a week, they cannot do that.”

Micro-funds, handling up to $70m, have, Nissenbaum adds, thrived on this nexus of entrepreneurialism and culture. That may have resulted in something of a ‘series A crunch’, where newly-established companies struggle to find series A cash (the average investment for which is $6m) to scale globally. But it is also allowing Israeli VCs to take its own entrepreneurs to the US, Europe and Asia.

“This is a great time for technology, and innovation,” says Vertex Ventures general partner Emanuel Timor. “We’re at an inflection point where we are leveraging technology. We have big data, and the cloud, and the ability to found startups at almost no cost because of open source. I think entrepreneurs are now in some kind of a golden era of opportunities.”

That innovation may be slowing. Israel ranked just 22nd of 141 countries for innovation in a 2015 report by the World Intellectual Property Organization (Switzerland came first). Fewer graduates are studying sciences than in previous years, and the Orthodox and Israeli Arab communities, who comprise 25% of Israel’s 8.06m population, are being left behind. The government, which has warned of this, is moving to counter it with state-backed tech plans.

But Israel is still producing plenty of key tech players. Nissenbaum credits much of this success to military service. All Israelis aged 18 who are Jewish, Druze or Circassian are required to complete up to three years in the armed forces.

It has been well-reported how graduates of the country’s NSA-facsimile 8200 Unit have gone on to found high-end cybersecurity and other startups. More generally, says Nissenbaum, military service teaches young Israelis, “a lot about leadership, about taking risk, working in a team. All those things are startup DNA.

“It matures them faster, because they take responsibility and leadership,” he adds. “For a startup to be successful, there are trillions of technologies out there but it’s all about team execution. I’m emphasizing the human factor here. The human factor in taking it to market, and packaging tech right. That is the skill set that is needed in this space.”

This army-taught human capital will not subside. And while the Israeli tech market will surely slow in accordance with global economic trends, it remains one of the world’s best places to found a tech company. And so long as it thrives, Israeli venture capitalists will continue to adapt, grow and take advantage.