Reaching New Heights

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Bottles of brew and bubbly are stowed in ice buckets on the expansive terrace of the seaside Tel Aviv office of Wix, a global web development platform with 38 million registered users. There is a lot to celebrate. The company earlier this month filed with U.S. regulators to raise up to $100 million in an initial public offering.

It is yet another sign that Israeli is transitioning from a start-up nation to a scale-up nation. Wix’s IPO is one of a number in the pipeline. In the belief that a select group of Israeli companies has a shot to dominate markets globally, tier-one venture firms are lining up to fund huge new rounds for companies like Outbrain, MyHeritage, eToro and Gigya that are bulking up rather than selling out.

The shift to building big is leading some Israeli entrepreneurs to start to think like Sean Parker in the film The Social Network: a million dollars is no longer cool. What’s cool is a billion. And building companies to last.

There is no shortage of entrepreneurs in Israel with big dreams. About 1,000 of them are expected to join some 1,000 foreign visitors at the DLD Tel Aviv festival October 15th-17th, which is organized by DLD founder Steffi Czerny and Oscar4B’s Ruthi Koren and Orly Shani; and co-chaired by German Publisher Hubert Burda, a digital media leader, and Yossi Vardi, a highly-regarded, high-profile angel investor and promoter of Israel’s tech sector. This year the festival will feature 60 side events organized by marquee companies like Facebook, Google and Microsoft.

These U.S. giants want developers to build on their platforms. And they are on the prowl for the type of innovative early-stage companies that Vardi famously calls tomato seeds because there is a ton of good stuff packed in those little seeds but they need an experienced gardener to grow properly. The sale of such companies have helped create Tel Aviv’s vibrant entrepreneurial ecosystem. Their existence has lured U.S. tech giants like IBM, Intel, Microsoft, Cisco, Google to set up shop in Israel which in turn has drawn more locals to enter the tech sector, build companies or apps, sell them, and then go out and do it again.

“The evolution of the ecosystem in Israel is a natural one,” says Israeli serial entrepreneur Yaniv Golan, now a general partner at lool ventures, a $25 million fund created to seed the next generation. “The Internet, mobile and media space needed a few years to mature, and the local entrepreneurs needed in a sense to be told that they can. The external and internal criticism on the fast-and-small exits culture might have also helped. Now, with more second- and third-time entrepreneurs around to inspire and mentor, and several inspiring success stories behind us, I expect we will be seeing a series of significant exits and IPOs, and perhaps even companies built to last.”

While no one questions that the sale of Waze, a traffic navigation app, to Google for $1 billion earlier this year was a triumph for the founders and an inspiration to a whole army of techies in Tel Aviv, the challenge for Israel is to build companies the size of a Google, not just features.

Wix, which was founded in 2006 by brothers Avishai and Nadav Abrahami and Gig Kaplan, turned down the idea of selling its “great product” and instead raised money from Benchmark Capital, Bessemer Venture Partners, Mangrove Capital Partners, Insight Venture Partners and DAG Ventures to build their own big company from Tel Aviv. Wix is going public, say its investors, to build a great company and become an Israeli icon.

Outbrain, a content discovery platform that is installed on more than 100,000 blogs and websites and serves more than 14 billion page views each month, has a similar goal.

“I think the time is always ripe for companies to build their businesses where they can be most competitive from, and the time is always ripe for some of them to grow and become billion-dollar businesses that create and lead markets,” says Yaron Galai, co-founder of Outbrain, a seven-year-old company that originated in Israel and has gone on to raise $64 million in venture capital from GlenRock, Gemini, Lightspeed, Carmel, Index Ventures and Rhodium. “Not all businesses can become that, and for those, regardless of geography, it might be right to sell. The media might like the story of ‘too many companies here sell too early,’ but the only ones qualified to make that judgment are the founders and shareholders of the start-ups. I’ve seen no indication whatsoever that Israeli entrepreneurs systematically tend to sell earlier than their counterparts anywhere else in the world.”

That said, Outbrain, which has an estimated 400 million monthly unique viewers and whose technology is installed on over 100,000 sites globally, including more than 300 premium publishers, including CNN, Fox News, Hearst, Rolling Stone, US Weekly and Fast Company, has no intentions of selling early.

“We’ve set out to build a long-term sustainable business, which we hope will continue being the leader in content discovery for many years to come,” says Galai. “We’ve had absolutely no pressure to sell the business so far because our shareholders believe that being part of a sustainable market leader in a category that we created will likely present them with the best long-term opportunities.”

The same could be said for investors who have pumped $49 million into MyHeritage, a Israeli growth company (see the Top 25 list on pages 10 and 11) specializing in family tree-building software and services. In 2008 the company raised $15 million from Index Ventures and Accel Partners and in November 2012, the company raised $25 million in a round led by Bessemer Venture Partners. In an interesting reversal of the usual roles, the Israeli company has gobbled up nine competitors or complementary providers in the last six years — including Geni, a U.S. genealogy start-up created by Yammer Founder David O. Sacks.

Today MyHeritage has more than 75 million members, 27 million family trees, and 1.5 billion names in family trees.The company expects revenues to continue growing at year-over-year rates above 100%. “Our CEO’s vision is to build a sustainable big company,” says Ori Soen, MyHeritage’s chief marketing officer. “While we have no immediate plans the idea is to go public one day. We plan to be an independent public company and keep everything, including the management in Israel.”

That may not have been possible five to ten years ago, when Israel’s high-tech industry was still relatively immature. “People here now have gathered a lot of experience along the way,” says Soen. He spent a number of years living and working in Silicon Valley and has a successful track record in the mobile, web, enterprise and VoIP spaces. “People with the right kind of experience who know how to execute can be found in Israel today,” says Soen. “That talent finally exists here.”

The combination of talent and cash might just be enough to help Israel, which is considered the hottest VC market outside of Silicon Valley, produce more billion-dollar babies. Until the Waze acquisition by Google there had not been any billion-dollar companies built on Israeli soil since Checkpoint and Amdocs.

Why has it taken so long for the next generation? The theory is that just as Israeli VCs were learning how to accelerate and globalize Israeli high-tech companies the bubble burst. The VC funds were still relatively young and did not have the background and confidence that comes from having been through several cycles successfully. That created a lot of exit pressure on Israeli funds and the first young wave of entrepreneurs, who were too inexperienced to reject acquisition offers. The combination of a lack of accumulated experience on the VC side coupled with entrepreneurs not yet ready to go for the long haul held the market back.

But now Israelis who have been exposed to working at big tech companies and/or have built and sold their own start-ups for the second, third or even fourth time, want to leave a lasting impact and they are finding funding both in Israel and from big, deep-pocketed U.S. VCs willing to support bigger companies.

If they succeed in their quest to build world-beating companies out of Israel the start-up nation is likely to gain an even more prominent position on the tech sector’s global innovation heat map and an even greater number of people will be making the trek to the DLD Tel Aviv festival.

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