Wednesday, October 8, 2014

1:57 PM

Simon travels to Israel to find an ancient land now fueled by entrepreneurs.

By Itay Hod

Download the pdf

Earlier this year, prior to the recent conflict in Gaza, 26 Simon Business School students embarked on the trip of a lifetime, as they boarded a flight from New York to Tel Aviv. This was not your average pilgrimage to the Holy Land. The trip was part of a new groundbreaking course aimed at answering the world’s most intriguing trillion-dollar question: How does a country so small manage to become a global startup superpower?

While courses about Israel are not exactly a new development, this particular offering was not your mother or father’s business class. As part of their workload, students advised an actual up-and-coming Israeli startup company on how to break into the American consumer market. At the end of the quarter, they presented their findings in front of the company’s CEO.

“This experience has been invaluable,” says Israeli-born Abraham (Avi) Seidmann, Xerox Professor of Computers and Information Systems and Operations Management and co-sponsor of the course. “Our students need to be exposed to real, world-class entrepreneurs.”

During their visit, Simon students were also invited to meet some of Israel’s biggest names in the business world. That, Seidmann says, was more useful than anything found in the pages of a textbook. “The students came back with sparkling eyes saying, ‘Professor, we love your country!’”

Meals to Maps: Israel Is Alive with Entrepreneurship

Nakarin Gai prepares a home-cooked meal
for EatWith guests visiting Tel Aviv.
On a warm January evening, Yariv Gai, a 42-year-old businessman from Tel Aviv, and his wife, Nakarin, a 33-year-old native of Thailand, are getting ready to host an unusual dinner for six. Nakarin has been preparing for days, going to the market several times, spending hours dicing vegetables, marinating meat, and sautéing four types of exotic mushrooms. Even their two-year-old son, Tom, helped with some of the preparations before going to bed. At T-minus zero, Nakarin scrambles to put the final touches on her elaborate four-course meal. Her husband fastidiously sets the table, making sure everything is just right.

As the guests start to arrive, Yariv hands each a tiny cup of warm lemongrass tea while greeting them with the traditional “Wai,” a slight bow, with his palms pressed together in a prayer-like fashion.

The visitors are then treated to a beautifully prepared meal, peppered with personal anecdotes of the couple’s life in Thailand, as well as intriguing facts about each dish.

While Yariv and Nakarin have had plenty of their friends over for dinner many times, this is no regular get-together. In fact, every person sitting at their dining-room table is a complete stranger and paying guest.

The dinner guests are all customers who booked a dinner reservation through a new startup company called EatWith. Dubbed the “Airbnb of food,” the site allows individuals traveling abroad to try authentic home-cooked meals. All they have to do is go on the site, pick a dinner, and enter their credit card number. For the most part, it’s cheaper than going to a restaurant, but the experience is the selling point.

“We can’t compete with the big restaurants and their huge resources,” says Yariv. “What we can offer is that human touch, and a very full stomach.”

At $37 per person, the couple isn’t expecting to get rich. But they do hope to earn some extra cash, and, perhaps, meet some interesting people in the process. “Nakarin loves to cook and I love to entertain,” says Yariv. “It was a win-win for us.”

EatWith is the brainchild of Israeli entrepreneur Guy Michlin. While vacationing in Crete, Michlin and his wife were looking for a good, hearty meal. They were tired of the fare at restaurants catering to tourists and were craving something a bit more authentic. When he asked a Greek acquaintance where the locals ate, he was told, “What do you mean where? We eat at home!”

Michlin, who was looking for ideas for a new startup company, felt a lightbulb switch on over his head. “I was invited to his house and it ended up being the highlight of my trip,” he recalls. “It was right after the economic crisis in Greece, and everyone was talking about it. I sat there listening to their stories in awe. It was fascinating.”

When Michlin got back home, he decided to do a little research. After asking his friends about their trips abroad, he realized the only meals they could remember were those prepared by ordinary people. “One friend told me, ‘When I went to Vietnam in 1998, the tour guide took us home and cooked us this amazing dinner.’ His eyes sparkled as he recalled every dish, every little detail of that night. But when I asked him what restaurants he went to, he couldn’t think of a single one.”

EatWith founders Guy Michlin (left)
and Shemer Schwartz
After spending four months (and most of his savings) putting the site together, Michlin managed to secure a $1.2 million investment from a local venture capital fund. Today, EatWith is available in 30 cities, including Barcelona, Berlin, Paris, London, New York, Los Angeles, and Miami. The company makes money by adding a 15 percent surcharge to the price of the meal. Hosts are carefully vetted on both their cooking and entertaining skills. EatWith already has thousands of applications from more than 110 countries.

Interestingly, what was supposed to be an alternative for tourists in search of an authentic experience has become a fad among Israelis looking for an out-of-the-ordinary night out. At least 50 percent of the company’s customers are from the surrounding areas.

“It’s something different,” says Daniela Bleishtein, who tried EatWith for the first time with her husband. Bleishtein, an Israeli, heard about the site through friends and thought it would be a new idea for date night. “We loved it,” she says. “There was something adventurous about the whole thing. We’d definitely try it again.”

EatWith is just one of thousands of new startups popping up in the Holy Land in recent years. A small country, with roughly 8.2 million people, Israel has been dubbed the “startup nation.” Although it’s tiny, barely the size of New Jersey, Israel is home to about 6,000 startup companies, more than any other country per capita, and second only to the United States in absolute numbers. Israel also leads the world in venture capital invested per capita, attracting $170 per person, compared to $75 in the United States. Not bad for a country that until 66 years ago wasn’t even on the map.

In February, Fast Company, an award-winning tech magazine known for its annual report on the
world’s most innovative sites, included a list of the top 10 most innovative startups in Israel.

“Israel has more companies on NASDAQ than all of Europe combined,” says Dr. Shlomo Kalish, CEO of Jerusalem Global Ventures, one of the top private equity firms in the country, observing that Israel’s lack of natural resources has been the driving force in its quest for innovation. Dr. Kalish says Israel’s dominance in the world of startups is nothing short of miraculous. “In the last 10 years,” he says, “there were $10 billion in acquisitions of Israeli startups, $2 billion in the last year alone.”

Last June, Google set its sights on the Israeli mapping service Waze, acquiring it for $1.2 billion, until then the most expensive buyout of any Israeli consumer app. Though there have been two other non-consumer Israeli unicorns (companies achieving an exit of more than $1 billion), as part of the deal with Google, each of Waze’s 100 employees received an average of $1.2 million, representing the largest payout to employees in the history of Israeli high tech. That move is what made headlines in both Israel and around the world—so much so that Waze’s CEO, Noam Bardin, famously received a phone call from Israel’s prime minister, Benjamin Netanyahu, the night the company was sold, to offer what seemed like a well-intended pun and congratulate him for putting “Israeli technology on the global map.”

Tel Aviv is an emerging Israel, with
a new and thriving economy situated in an
ancient and historical land.
Waze is a GPS-like smartphone app that provides drivers with up-to-the-minute, real-time updates on road conditions. More than 50 million subscribers use it to warn fellow drivers about traffic jams, accidents, and even the presence of nearby police. It’s become so ubiquitous that one out of three drivers in Israel is on Waze at any given time.

“Waze really established Israel as a force to be reckoned with when it comes to mobile application technology,” says Edon Ophir, a former marketing executive at Waze (and no, he wasn’t one of the 100 people who made $1.2 million; we asked). “Israel’s technology has always been amazing, but people were skeptical about the country’s ability to create applications that a mass consumer audience would use. Waze proved that with one of the largest mobile exits of all time. It’s really phenomenal.”

Ophir may have a point. Although Israel has had incredible success with Waze and other apps—such as ICQ, which was acquired by AOL in 1998 for $407 million and was the basis for the AOL instant messenger—it’s been slow to break into the billion-dollar club. Though Israel is second in the world when it comes to total number of startups, it has only three unicorns on its résumé, while the United States has had 39 and Europe has had 30. But now the word is out, experts say, and that’s all about to change.

Entrepreneurial Unicorns

In terms of startup companies funded by venture capital, a unicorn is defined as one that reaches $1 billion valuation or greater at the time of exit. 

Introduced into the business lexicon in 2013 when TechCrunch published Welcome to the Unicorn Club, author and founder of Cowboy Ventures Aileen Lee identified 39 technology companies founded since 2003 that have been successful enough to fit that description.

Beyond the rarified air that venture capital unicorns breathe, Lee and her team also discovered other key similarities among the members of the billion-dollar club. On average, Lee notes, four unicorns were born each year since 2003, with Facebook being the largest among them. In addition, enterprise-oriented unicorns have become worth more on average, raised much less capital, and delivered a higher return on private investment.

Lee also points out that the companies reaching unicorn status typically fall within four major business models: consumer e-commerce, consumer audience, software-as-a-service, and enterprise software. More specifically, three consumer-oriented companies, Facebook, Google, and Amazon, have created the majority of the value in the past decade. As for where most of these unicorns roam, San Francisco, not Silicon Valley, is their popular new home, with 27 of the 39 companies located in the Bay area.

Lee also points out that the companies reaching unicorn status typically fall within four major business models: consumer e-commerce, consumer audience, software-as-a-service, and enterprise software. More specifically, three consumer-oriented companies, Facebook, Google, and Amazon, have created the majority of the value in the past decade. As for where most of these unicorns roam, San Francisco, not Silicon Valley, is their popular new home, with 27 of the 39 companies located in the Bay area.

Since Waze, Soluto and Onavo, both Israeli startups, have had great exits in consumer tech, and Wix “unicorned” through its IPO. Experts say there are many more to come.

A Cultural Thing

One reason Israel is so successful in the startup world, says Ophir, is because its citizens are known for speaking their minds. “They don’t see arguing as something negative,” he says. “If anything, they see it as a necessity.” Ophir, who is American by birth, says he experienced a bit of a culture shock when he moved to Israel. “I had to throw out all of my American conditioning toward the workplace. I was told very early on that my chutzpah was an asset. I was encouraged to raise my voice and make my views heard out loud. I realized that I wouldn’t be respected if I raised my hand and waited for my turn to talk.”

Then, of course, there is the whole army issue. Israel has mandatory military service. Instead of heading to college, every 18-year-old must serve in the Israeli Defense Forces first. The law requires three years of service for men and two years of service for women.

“The military has become a good breeding ground for leadership and teamwork,” says Tal Brener, CFO of GetTaxi, the uber-successful Israeli mobile app for ordering cabs. Brener says the military experience fosters a sense of fearlessness that’s essential in the startup world. “They’re not afraid of making tough decisions and they are extremely resourceful,” he notes.

Brener should know. GetTaxi is another one of Israel’s blockbuster stories, with annual revenue of more than $100 million, according to the company.

Earlier this month, GetTaxi’s CEO said on Facebook that the company is growing at an annual rate of more than 400 percent, same as its arch-nemesis, the San Francisco-based Uber. Company executives predict an astounding half-billion dollars in revenue next year.

Interestingly, many of Israel’s startup legends got their big break in the military’s 8200 unit, the commando regiment of coders and computer engineers. Getting into the 8200 is akin to a letter of acceptance from Harvard. In fact, many of the unit’s graduates have been recruited by some of world’s biggest companies, such as Google, Apple, and Microsoft, all of which have offices and R&D centers in Israel’s “Silicon Wadi” (Arabic for valley), concentrated around the Tel Aviv metropolitan area.

Studying Startup Success

As part of their trip to Israel, Simon students
worked closely with Lexifone.
The Jewish state has become such a technological phenomenon that Simon sent students to Israel last March as part of an innovative new independent study program. “It was a tremendous addition to our profile for summer school,” says Seidmann. During the trip led by faculty advisors Dennis Kessler, Edward J. and Agnes V. Ackley Clinical Professor of Entrepreneurship, and Rami Katz ’03S (MBA), students focused on Israel and its startup dominance in the global market. “The students came back very excited,” says Seidmann. “Many of them told me it was the best trip of their lives.”

The visit was the culmination of an entire quarter studying the region and its culture, as well as advising a new Israeli startup called Lexifone on how to break into the American market. Lexifone, an app straight out of a Star Trek episode, translates languages in real time. Just talk in your native tongue, and Lexifone will transcribe, then translate into the desired language.

Simon students were divided into two groups. Each came up with its own strategies and ideas on how to sell Lexifone to American consumers. After working on their project for an entire quarter, students presented their findings in front of the company leadership. A job offer at the company went to the group with the best strategy.

Hands-on Learning for Global Business

At the end of the quarter, students traveled to Israel for work and a bit of sightseeing. Of the 26 people who went on the trip, only four were Jewish. “I was surprised at how many people signed up,” says Michael Lightman ’14S (MBA), the student who organized the journey and designed the independent study course. “Last year, we went to China and only nine people made it.”

Lightman, who works part-time for Excell Partners, the VC firm that invested in Lexifone, says the trip exceeded his greatest expectations. “It was a mix between spring break and a corporate trip,” he says referring to Purim, the Jewish carnival-like holiday. “We got to have fun, go to Jerusalem, and learn about Israel’s culture and history. Most important, we got an inside look at business in a place that is unbelievable at what it does.”

Simon students explore Israel.
The reason it’s so good, Lightman adds, is its people. “There are three things that you look for in a startup company as an investor,” he explains. “The market, meaning do people want to buy what I’m selling; the product, meaning can it do what I say it’s going to do? And finally, the team. Things are going to go bad; that’s a given. The question is, Can my team fix it? Can we work together without falling apart? Israelis have experience working together in high-pressure situations.”

More than just hands-on experience, the course was a good way to introduce students to major players in the startup world. “When you go to Israel you have a chance to meet people from Sequoia or Kleiner Perkins that would not talk to you if you flew to California,” Seidmann says.

The trip was subsidized in part by the Farash Foundation and a Jewish organization called Israel & Co., which also helped with background support, including introductions by Gregg Steinberg, the newly appointed entrepreneur-in-residence at Simon, to key players in the Israeli economy. They even organized a special visit to an Israeli Air Force base where students had an opportunity to meet a fighter pilot finishing his MBA.

“It was unbelievable learning about how his experiences, making life-and-death decisions from a very young age, helped him in the fast-paced, high-tech business world,” Lightman says. “It really helped drive home the point that Israeli citizens have an extraordinary ability to stay calm under pressure. They’re able to create order out of chaos.”

“Israel is doing what every brand has to do to survive and prosper in today’s world,” says Chad Kawalec, marketing expert and founder of The Brand Identity Center. “They’re exposing student leaders in top business schools all over the world to the Israeli experience, basically letting people sample the brand in much the same way you sample a piece of cheese at Costco on the weekend. The hope is that you’ll return and spread the word.”

Kawalec says studying a country for an entire quarter and then working directly with an Israeli startup help create a bond between the students and Israel that otherwise wouldn’t have been formed. “Israel is reframing and expanding its brand from a potent religious and tourist destination to a world-class hub of innovation on every level.”

And it seems to be working. Lightman, who just graduated from Simon, is now googling apartments for rent in Tel Aviv. “This trip was my first trip to Israel,” he says. “I went in with high hopes, especially having spoken with all the companies beforehand. Those hopes weren’t just met; they were exceeded. This is the sort of place I could see myself working and living.”

“I find it to be a fascinating place,” says Dennis Kessler, who co-sponsored the trip and joined the students on their program in Israel. “This was not just a tour to see the Old City or Tel Aviv,” he says. “It was 100 percent experiential learning.”

Professor Seidmann
Kessler says students were able to get their hands dirty rather than just learn theory, a must in today’s competitive market—and that Israel has proven effective at problem solving. “They don’t have oil like their Arab neighbors,” he says. “They don’t have water either, which has led them to become world leaders in water desalination. They created drip irrigation, which waters crops through perforated hoses, and are now exporting goods all over the world.”

Despite having less than optimal conditions, with half of the country’s territory consisting of desert land, Israel manages to produce 95 percent of its own food while exporting more than $2 billion in produce every year.

But perhaps Israel’s biggest asset when it comes to startups is its tolerance for failure—and resilience. “Israelis are not afraid to try and try again,” says Seidmann. As for EatWith, it’s anyone guess whether it “unicorns” anytime soon. But if it does, it will no doubt give global investors a lot more food for thought.


Post a Comment