This is a post that has been in draft for almost a year based on hundreds of interactions I have had with start-ups and high tech execs in Israel and abroad. The issues are broad and provocative, and because a blog post risks being an oversimplification, I welcome my readers’ comments and critique.
If there ever is to be a sequel to the book Start-up Nation, Israeli high tech must become as serious about product design, customer experience, and business models as it currently is about technology and R&D. Over the last decade, Israel has mastered an entrepreneurial/venture model, which involves sourcing entrepreneurs from military technology units, creating cutting edge technology products and ultimately selling a company, its IP and personnel to one of many foreign multinationals that have come to appreciate the Israeli brain trust. While this model of start-up creation has served us reliably, it is vulnerable to macroeconomic headwinds and is increasingly unsustainable in the face of technology commoditization that is rapidly approaching our shores in the form of competition from China, Korea and Taiwan. As it turns out, our over reliance on technology creates an endless demand for more technology talent, which prevents us from nurturing vital competencies in product, design and business. The resulting ‘tech crutch’ is a self-perpetuating cycle that threatens the future of Israeli high tech.
CLIMBING TO THE TOP OF THE HIGH TECH PYRAMID
This challenge of moving beyond technology is more important than ever if Israel is to enjoy its rightful share of the high tech economic pie. The underlying reason for this is that Israel is stuck pursuing a goal of technology creation rather than technology application, and this mindset affects entrepreneurs, venture capitalists and government policy makers alike. As a result, we generally prefer to enable others to build amazing products, rather than to use the technology to build the products ourselves. We hesitate to touch the end customer and resign ourselves to being technology merchants, promiscuous with our technology smarts but timid with our business creativity. This is a problem, because increasingly the fattest margins and steepest barriers to entry belong to those who know how to apply technology to build a better business.
We too often overlook the fact that users of technology often enjoy a disproportionate share of value relative to the technology creators. This is because technology increases efficiency and reduces production and distribution costs, thereby enabling new business models to emerge, thrive and engage directly with their customers (think Netflix, Salesforce.com, Amazon and eBay, none of which were initially based on technological innovation). As the pace of technology commoditization hastens, the value of high tech is shifting even more to those companies that can apply technology to create or upend a huge market opportunity. These companies find a way to be as close as possible to their end customer, to maximize exposure and to extract the maximum economic value. This is a key reason so many venture investors favor companies that can leverage the Internet to reach consumers and businesses alike.
High tech in 2011 is about innovation, but not necessarily technology innovation. Unfortunately, too many Israeli companies seek shelter with their technical differentiation, and assume that distributors, OEMs and acquirers will recognize their unique offering and spare them the daunting task of building a business on their own. Of course, there are a handful of success stories where high tech companies have struck gold licensing their technology, winning the lottery OEM or signing lucrative and scalable revenue sharing deals, but these lucky few cannot be role models for the rest of us. And even though there will continue to be amazing technology companies emerging out of Israel, this is too small a base for an entire industry to rely on.
To reach the top of the pyramid Israel must now embrace product, marketing and business innovation, just like it has technology innovation. Such a shift does not require abandoning its technical roots, but rather using this technology strength to create higher order products, and mustering the talent and courage to bring them as close to the customer as possible. In some cases, the business innovation may even require providing technology products for free. Israeli start-ups can still use technology as a differentiator and competitive advantage, but long term shareholder value and competitive barriers-to-entry will ultimately be built on brand, loyal customers, and a profitable model. The shift in mindset starts with how we found, fund and grow start-ups. Israeli start-ups must identify a real business pain and solve it with a great product offering, rather than solving a technology pain with technology solutions. Our distance from many of these business pains makes developing deep industry understanding a challenge, but this distance also enables objective observation and analysis, which can itself fuel innovation.
STRENGTHENING OUR WEAKENESSES, NOT ACCEPTING THEM
We all recognize that Israel has both strengths and weaknesses in high tech, but for too long we have allowed ourselves, collectively and individually, to invest solely in our strengths, accepting our weaknesses as destined. High tech is a competitive sport, and just like athletes invest more energy in improving their weaknesses to remain competitive, so Israel must devote more attention to its weaknesses in product, design, marketing and business. The success stories that will come out of Israel over the next decade will be those companies that defy conventional wisdom about what can be done in Israel. Countries with great natural resources like oil need to develop capabilities in refining and distribution to reach their true potential as an energy powerhouse. It is no different with a natural resource like technology talent. Israel must avoid becoming an “oil state” in which only a small percentage of the population can participate, and where there is dependence on selling the natural resource to others who know how to extract value.
To address these challenges, we must stop thinking about our high tech industry strictly in terms of engineers and programmers. By emphasizing only the R&D side of high tech, we have in effect erected walls around the country’s only growth engine, which in turns only exacerbates the technical talent shortage we hear so much about. With the current model Israel may always face a shortage in technical talent, but it will face far more acute shortages in marketing, product and design talent. Therefore, we must encourage our engineers to explore and develop their latent creative and business skills. These multi-talented people are rare, but they certainly exist. We must also find ways to make high tech more inclusive and inviting for the less technically inclined and for those who didn’t have the privilege of serving in an army technology unit. In short, Israel’s natural resource is human talent, not just technical talent.
On a start-up level, my recommendation to entrepreneurs is the following:
1) Incorporate strong marketing, product and design skill sets at inception, including in the founding team. This cannot be an afterthought post development, and it really shouldn’t be outsourced either.
2) Innovate on the business/product side as well as on the technology side. Recognize that you are building a business, not a product and certainly not a technology, and practice pitching this business idea with minimal mention of technology. Technology innovation is great, but it can create tunnel vision for the creator, and confusion for the employees and shareholders.
3) Determine whether you could be going a step further in your product or business plan to ensure that you are getting the maximum value out of your innovation. Can you build a product based on this technology.? Can you build a service based on this product? Can you go directly to the customer using the web?
On a national level I have a few ideas for how to promote this change in thinking:
1) Bring high tech business into Israel’s academic system, not by offering internships for developers, but by exposing students to the non-technical side of high tech, whether it is business in China (Eastern Studies), online marketing (psychology), user interface and experience (industrial design), successful business models (economics), etc. Conversely, Israeli universities need to create more multi-disciplinary tracks that combine computer science and design, or engineering and economics/business.
2) Find ways and incentives to integrate the super creative talent in the Israeli advertising and media industry (which is already an export industry for Israel).
3) Expand the narrow mandate of the Chief Scientist Office (CSO) beyond simply creating R&D jobs, to include strengthening Israel’s non-tech weaknesses. The CSO should provide tax incentives for multinationals, which establish marketing, customer support and other non-technical functions in Israel. Most importantly, the CSO should provide grants to start-ups for the launch of their product or service, not its development.
Israeli high tech is in a transition, not a crisis. The proof is that many start-ups have already made this mental leap and are attempting to reframe Israeli high tech as masters of business and marketing, not only patents and architecture. Israeli high tech will be stronger in years to come as we hone the creative and business talents that so many in this country possess. But, too often, we leave money on the table. Not because we sell companies too early, but because in many instances we don’t take or are unable to take the extra step to seize the larger business opportunity. There is a lot of work to do, but it all starts with recognizing that high tech is not just about tech, and that our technology strength must not become a crutch.