Last month I attended the “Monetizing Car Data” conference in Munich, and Ben, a smart, Israeli, startup-founder, asked what I’d thought of Israel when I was there last year on business for Volkswagen. I told him that I loved it, and that I considered Israel a “blossom of systems”. He liked my answer but looked a little confused. In this blog post, I will examine Israel and what I mean by that phrase. You will learn why I am a big fan of Israel and how Israeli startups can leverage the current investment spree of big corporates by quickly detecting when an OEM is ready to invest in a startup there.
Why I love Israel
Like so many people, when I thought about Israel the first things that came to mind were religion, turmoil, and oil. I believed that these were the sole source of Israel’s wealth and contribution to the world. Although these things have been important, they are not the source of this culture’s contribution. After visiting Tel Aviv last year for an innovation journey on behalf of Volkswagen commercial vehicles, I discovered much more to this country than religion, turmoil and oil, and I have found a greater love and respect for the people. I came to realize that Israel is like a “blossom of systems”, since I believe that it is a unique place to do business due its customs and laws.
Born out of a need to survive, Israel has become one of the largest startup nations, second only to Silicon Valley in the USA. Shimon Peres, Israel’s ninth President, had been a key influence in the repositioning of Israel’s technological contributions, not only to its geographic neighbors, but to the world at large. In late 1985, a shift in what Israel needed to bring to the global economy became quite evident. Israel’s understanding that technology can and does touch every aspect of life has been the driving force in producing textiles, improving the economy, and revolutionizing how resources are used.
Although Israel is not known for natural resources, the country’s value of its people more than makes up for its lack of presence on the global scene. This actually makes Israel unique. In fact, the strength of its people is Israel’s natural resource. Their belief that every citizen has something to offer, has stimulated a strong sense of innovation, resilience, support and amongst the people. Simply put, Israelis believe that if anyone is to survive, everyone must be allowed to find and use their unique abilities to create resources that foster well-being for all. Though we may hear others speak idealistically about this type of utopia, Israel reflects this effort in reality. Everyone is encouraged to seek their contribution and then given what is needed to produce ideas, products and techniques that will strengthen the nation and offer services across the world.
These endeavors were first introduced in Israel’s military, then quickly spread throughout every service area in the small nation-state. These forward thinkers have, for instance, established a mechanism that supports an eco-system, which is fast becoming a model for others. Not only capturing the young, Israeli custom also incorporates the wisdom of the old and experienced. In addition, those who may be disabled, and even those who seemingly have little interests, are valued in an effort to establish how each individual effort can connect and come together to create the whole. Israel is a prime example of how we all are connected in life. Rather than separate us, our differences should cause us to build something stronger together.
Not afraid to fail and learn from one’s mistakes, Israel shows us that without failing we cannot truly know how to succeed. Using what is referred to as incubators, think tanks, and groupings, Israel has removed the hindrances that we often become preoccupied with that stunt creativity. By eliminating things like financial burdens, Israel believes that the mind is then free to function and develop concepts, technologies and tools necessary to maintain and improve life.
At the forefront, young Israelis are demanding ways to use resources to build their nation rather than tear it down. They believe that if we can use these resources in war efforts, surely we are able to use these same resources to preserve and improve civilization rather than destroy it.
When is an OEM ready for an Investment?
Every startups must eventually decide with which OEM they will cooperate. Usually it feels like a dream. I remember my first startup in the health sector in 2006. Several German health insurance companies wanted to talk to me. I could see millions of users on my website and billions of Euros in my bank account. Needless to day, it didn’t turn out this way. Starting a joint venture with an OEM or big company might kill your company by slowing down your development speed or eating up your cash and passion. The best way to work with an OEM is to:
First find your market of interest in the pre-seed or seed round.
Then either position your company as an IT capability of the OEM interested in you (in the seed A round)
Show that you can solve an innovation problem of the company when they merge with you (seed B and later).
Regarding your market of interest, you should already be actively looking for the honey pot in your market on your own. Maybe you have a clever business angel who knows how you can best sell your product. Nevertheless, in terms of exploration, it’s always good to have contact with big companies. Get in their radar and increase their interest in you as you grow and develop through your early stages. It is in your best interest if they see how your startup successfully evolves.
Portfolio Management Process
Regarding the last two points, it’s very important for you to identify if the company will be good for you. Even when a company, especially their management board, is interested in you, their corporate business won’t really care. The purchasing department, for example, won’t change their standard processes for you. The R&D department might hate you, since they tried to solve the same problem for years without success until you came along with your customer centricity, resources and talent. Even if there may be a good fit between your startup and the OEM, the timing might not be right. So it is of crucial importance for you to find out if there is a portfolio management process within the company. This process should have identified the field and market that you are in as an important growth sector for the company. Unfortunately for you, this should have happened the year before, and should have included the service or value that you bring to the company. If this didn’t happen, you can be sure that you’re not included in the goals and objectives of the management nor any of their departments. If this is true, it’s very likely that some of the company will ally with you while others will work against you. So try to find out what the company’s previous plans were. You will usually find this in the company’s annual report to its shareholders. Finally, the best advice that I can give you is to be patient.
There’s a funny thing about patience in this line of work because you also have to know when to act, when to cut ties. For example, you have to find out if there is an investment process in place. Is the investment done by the company, a sister company or the parent company? How much time does it take to invest? Look at previous investments. If there is no investment process, it is very likely that you will run out of money so find a better investment partner. Having a process is a sign of maturity of the company in its field. And cooperating with an immature company will cost you valuable time. I know I don’t have to remind you that time is money. You have to decide how much time you’re willing to invest, and how much time you can afford to invest in this cooperation and if it is really worth it in the long run.
Finally, if you’re an IT startup, which most startups in Israel are, you have to look at the IT readiness of the company. And the most important metric you should look at is if the company interested in you is ready to make a release at least once per day (over their entire value chain). If this rule doesn’t hold true, then their IT readiness is far from proactive. Rapid deployment is important for customer-centricity and is a remarkable sign of ability to adapt to the market needs, correct bugs and launch new features. Furthermore, it signals how fast the company will be able to integrate your product or offer your product (e.g. white-labeled) to their customers and align their legacy systems to your needs. If the company is IT ready, it can be a very interesting option for you to optimize your product in the A round. If you have a very strong IP or a patent pending, you can help them conquer a market that they won’t want to give up in the future. Having the product and monopolizing the market, the company would be insane to kick you out afterwards. To test how far the company’s IT readiness is, suggest to do 3 month long POC. Based on the outcome of these POCs, you’ll be able to evaluate the company’s IT readiness. If a big company is not IT ready, don’t cooperate with them. It will probably not pay off for you.
If the OEM is not IT ready, your only chance is to do a POC where no legacy of the OEM is involved. By this you can prove the quality of the product/solution you offer. But be careful, since the cost of changing the entire company to integrate you will probably be higher than the added value your solution will bring them. The company will still have an innovation problem.
Alternatively, if you are B- or C-seeded, with a significant market share, you should aim for an IT ready OEM that has an innovation problem. This is especially true if it’s important for you to continue to grow or eventually sell your company Such deals happen quite often in a disrupted market. Let me explain. As the beverage industry underwent a transformation with carbonated soft drinks, losing their position as consumers preferred “healthier” beverages, the cola giants focused their attention on other avenues to stimulate sales. This is why Pepsico bought Soda Stream at such a high price. Furthermore, Intel bought MobileEye for its existing business and majority market share in the autonomous driving market. Innovation problems can bankrupt large companies and they know it. That’s why they are eager to pay good money for a startup like yours that solves their challenge. Bear in mind though, that OEMs will only pay a good price for you if you have assets. If you do not then the OEM’s finance department will block your deal. Nevertheless, there are always absolutely desperate players. Have a look at companies like Continental with their recent investments and profits the bought startups made. But don’t be naïve. If the company has such a problem and over extends itself in acquiring your startup, it will serve to increase their problems more than solve them. This scenario may kill your beloved startup in the long run. So only chose this option if you’re only interested in the money.
Israel is a great country with unique circumstances and a distinctive structure in the world. This is why I think it has an exceptional proposition in the world.
If you’re one of the 5,000 Israeli startups out there, look carefully at potential cooperations with big OEMs. Although OEMs are on an investment spree now, you should especially look at their IT readiness (like their daily deployment rate) before signing on the dotted line, since an absent IT readiness will not only cost you time, money and patience, it may endanger the long term success of your startup.