The following guest post was contributed by Adam Fisher, partner at Bessemer Venture Partners. It originally appeared on his blog Savants in the Levant.

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. 

The following post was contributed by entrepreneur-turned-VC Eden Shochat.

“There are lies, damn lies and then there is statistics”

– Mark Twain

One of the great benefits of being an investor is that I get the opportunity to work with people who are incredibly smart about running Internet businesses. Product and UX is still a kind of a black art in Israel and so I found myself writing this blog post on a cold Saturday afternoon.

I noticed that there is a common thread running through groups that are quick to iterate and have a track record of successful apps. These groups are very self aware – they measure everything about their applications, starting with user actions and ending with indicators measuring the success of their application and use it to drive their engineering. Strangely enough, the metrics are used to approximate the user, rather than traditional user stories and design personas.

Unlike an enterprise software company where sales-cycle abound and analytics boil down to an excel file with a weighted deal-flow, running an Internet company is great for a numbers person that loves statistics. There are really just two key performance indicators (KPIs) that you should be optimizing:

1. Customer Acquisition Cost: The amount of money you spend to get a user to produce income. Seems simple at first sight, but gets very complicated when one needs to measure word of mouth expenses and effects. If the source of each user can be tracked, then measure at a per-user basis, otherwise take the entire user acquisition budget and divide by the number of users. Over-time (more than one level) referrals are harder to measure, but it’s a close enough approximation even without them.
2. Life-Time Value of each user: The life-time value is hard to estimate before having the monetization machine run for a while, so you should usually focus on a different number here – the retention rate. Again, simpler said than done as you’d need to define what it is for a user to be defined as retained; what usually works is whether the user used the application during the past week.

That’s an over-simplication of course, as the means to get to the acquisition costs generally revolves not only around cost but also who assumes the risk for the traffic. Hence given the same cost, acquisition cost where all risk is taken by the traffic supplier (CPA) is better than where you assume the risk (CPM). When I evaluate investments I try to factor this into account as well as the “business risk”.

You must be pushing back at this stage, saying that this doesn’t take into account critical factors such as virality, engagement, monetization strategy, the number of active users or that magic ingredient that makes a user go wow. Well, it does. If you have a viral application (congratulations! that’s the hardest type to create) then your customer-acquisition costs will be marginal to zero. Engagement? same thing + lifetime value (if you keep the user, you make more money). Monetization strategy? lifetime value. It works so much better when you just need to look at a small number of factors in order to make the hardest decision of a startup: where to expend resources.

As a side-note, this is also a great way to manage your investors, if they have a clue. Send them weekly reports of the KPIs. Don’t bother sending weekly/monthly/before-useless-board-meetings update deck. If the KPIs you measure are descriptive of the business, it will be the best information you could share. This could be a fun post too: “Managing your investors”.

It usually starts with having a top-level requirement coming in. When practicing result centric product design you always start with the user, as the results are always about the user. This means that you should ask yourself:

1. Who is your user in general? What do they care about? You should already know this. Does this new requirement change it? Should it? Is this even a requirement this user needs?
2. What is the goal that the user is trying to accomplish with this feature?
3. Does this feature require them to interact with other users? Seemingly a second level question, but this is key to finding viral potential for this new feature. I still don’t understand to date why doesn’t Shazam allow me to tell my friends about this song that it just recognized?! That’s silly.
4. What will surprise them and cause them pleasure? When I bought my Macbook Air, the power cord being magnetic so that if someone stumbles on it the computer won’t fall delighted me. When I saw Any.DO for the first time and put in “Call” into a task, it autocompleted it from my contact list. That surprised me. I immediately told both stories to anybody who would listen. That’s reduction in customer acquisition costs right there.

This is mostly standard good consumer Internet product management practice. The key difference in result-centric product design is that you are shooting to get a specific result of the key KPIs with the product changes. What is the impact that you want this feature to have on your users? What’s your goal in term of numbers? It should be a something in the lines of: “increase retention by 20%” or “reduce acquisition costs to 25 cents by increasing virality”.

Yes. It’s hard.

Once you write it down, though, you can easily compare which features you should focus on. Yes, this assumes you are predicting correctly. More about that later.

Now translate this into measurable metrics. In a perfect world you could do specific A/B testing for each of the features you add. This means that for an iteration with any number of new features, you’d be running multiple tests, each with only one addition turned on, and measuring the impact of a specific modification. Fast-forward into the real world where there are cross dependencies between the different features, measuring the top-level KPIs doesn’t work. In such a case you look at 2nd level indicators.

• Soft indicators are the ones that don’t directly relate to the top-level KPIs but ones that should give a sense whether the “dogs are eating the dogfood”.

Is there usage of the feature at all?
Repeat usage? Is it tapering over time?

• Hard indicators are the top-level KPIs but split according to specific subset of users that actively used the feature.

Key for the success of this methodology is determining success KPIs in advance, including what they are, how do you measure them and what would constitute success. This seems simple enough, but if you don’t do it, you are susceptible to the greatest sin which is cognitive dissonance or “hindsight is always 20/20″. You convince yourself that the measurements which are (or seem to be..) improving are they ones that really measure the impact of a specific feature.

There are two by-products of this approach:

1. You will invest the time required to instrument your code to monitor these KPIs, so there won’t be an issue of data collection down the line when you actually want to understand whether the feature made sense.
2. By determining the KPIs in advance, you will have less arguments about adding more instrumentation and modifying the success evaluation criteria later, after you launch. Everyone interprets the numbers differently when alternate interpretation can support their opinion (hence, lies, damn lies and statistics).

Instrumenting always seems like a waste of time, but at the end of the day, the overhead on top of the feature implementation is marginalized when you want to know whether the primary investment (the feature) made sense.

Again, this is easier said than done for mobile applications. There are some unique considerations impacting mobile apps, mostly because this is a hybrid of client/server applications that have an auto-update mechanism, but where they users don’t have to upgrade. There is a delay in measurable impact caused by version up-take times. When deploying mobile apps, it can take a week before you have significant numbers, which underscores the importance of both instrumenting the app and choosing approximate soft indicators that you could use in the early days to evaluate feature success/failure.

For this approach to work you need to be brutally honest with yourself. Every feature should have a post-mortem (maybe a bad name, it’s not where all features go to die) where you compare the actual impact the feature has on your product vs. what you originally thought it would have. Even if it’s a feature with positive outcome, think back to the drivers of your prediction – did it not meet them fully? why is that? What made you mis-predict? How can you improve your prediction accuracy in future features? Or maybe, did it surpass them? WHY? This can be a great basis for making decisions for future features. Only if you do this process religiously can you use this as the basis for feature selection in the future. This also means that some features should be retired. Complexity is the root of many retention issues, and you shouldn’t be shy of killing/retiring features that don’t contribute to the top-level KPIs. Sometimes counter-intuitive but think Instagr.am/Picplz vs. the larger social networks.

One example of result-centric product design could be a new widget for an imaginary Android project management application. The primary goal for the widget would be retention, as it’s visible most of the time, unlike applications that require the user to launch them. Our users are people who have too much on their mind, want to get things done and need help focusing. Many of those users try to get organized in a variety of ways but aren’t necessary power users. For them, the widget should be a way to better organize a short-term todo list that they look at more regularly than the overall list of things they need to do within the project. Most of the task lists in our lives and projects quickly become unmanageable and become a source of discomfort rather than a tool that makes us feel better organized.

Google describes Android widgets as: “A widget displays an application’s most important or timely information at a glance, on a user’s Home screen. The most effective widgets display your application’s most useful or timely data in the smallest widget size. Users will weigh the usefulness or your widget against the portion of the Home screen it covers, so the smaller the better.”.

We want our user to quickly feel more organized when he adds our widget. Lets take the top priority and due date items and populate the widget for him or her with a short list of things that must be done today. Rather than simply providing another view of the same task list, the user will be able to determine a “cut-off” point after-which the rat race for the day will be over. This mental shift will help users feel that they accomplished something today. That, by itself, is designing for pleasure.

Estimating what kind of increase can we get will depend on how many users actually go ahead and add it, which in turn would drive our user experience design to have the application offer the user to add the widget to the home page. By having the user add the widget, users that install the application will be exposed to it at all times. There are a couple of KPIs of interest: how many users actually added it immediately after installing the application, how many added it from within the configuration screens or the Android menus and how many of these users kept it. These are all soft metrics. The overall retention % is of key importance and there we will differentiate between users that added the widget and those that didn’t (hard metrics). Before starting the coding we will predict that of the users that activate it (we predict 50% will add it assuming a way to automatically add the widget via the application), we expect a 25% bump in retention.

By monitoring the metrics we can know whether the widget is effective, and if it is, whether the methods we have used within the app to get users to use it serve their purpose. If the statistics don’t support the original goals, it’s likely you can better use your engineering on other features that can achieve that goal. There will always be fewer engineers than tasks; use them to make a difference.

Talk back below! I’m also on twitter @edensh and LinkedIn

The following guest post was contributed by entrepreneur-turned-VC Eden Shochat. It originally appeared in the discussion board of the Dec 22nd TechAviv IL meetup.

The we-do-2-seed-investments-alone-a-year-because-we-need-to-support-them model doesn’t work.

There, I said it. I’m a recent recruit to the VC world, most recently co-founder of Aternity (user experience monitoring) and face.com (massive face recognition platform). Being at the most recent TechAviv meetup, at some points I found myself glad not to be on the panel of VCs, and others where I felt I wanted to shout.

In my mind, seed investing is very different than round-A, B, C and beyond. It’s much more of a numbers and sweat game. The amount of support required is higher than subsequent rounds and too many companies fail at that stage; actually, one should assume more than 2/3 of the companies won’t raise an A round. So, the net effect is that if you only plan to do 2 seed deals per year, the odds are you will fail that year, reducing your incentive to make more seed investments the next year. It’s a catch-22.

When you are the founder of a seed stage company, there are three major issues you care about:

1. Product/Market fit discovery: You must find what’s the minimum viable product that serves your customer. Your customers need to be joyous. You need to delight them. We don’t have enough product talent in Israel – anyone that is involved with the company must be able to help, and not with pattern-based advice. Mockups, brainstorms, pushbacks, the works.

2. Hiring the right team: Roi will need to excuse me, but we do have hackers in Israel. We actually have quite a lot of them, but Yaron is also totally right – most of them want to start their own thing. Most seed stage startups need help to find teams that worked well together before, and in making these teams comfortable they should be working with them on this next big thing.

3. As little money-raising overhead as possible: It’s the time for you to be iterating on your product, to get customers to use it and find what works best. At this stage, there isn’t much due diligence to do: it boils down to team, scale of target market and competitive situation. Also, negotiating what will be the rights of preferred shares isn’t really what you should be doing.

The issues/risk/work (whatever you want to call it) don’t end there. Once you finally have a product with traction, most Israeli companies lack the network in silicon valley to promote it and make it front and center. It’s not a press thing, it’s a group of people who are extremely welcoming… if they know you.

The flipside is that one cannot escape that the burden of proof on a first timer is on the entrepreneur. More so, second timers will already know that they can get to traction pretty quickly. When you look at valley deal flow, you see that companies raising their first round of financing are already making money. It’s a small amount, it’s usually not repeatable, they still haven’t proven scale, but they are out there in the market.

Yes, costs are lower. There is the cloud and open source software that make capex and engineering expenses to a level where a 3 person team can create a real product. Yes, a major part of being an entrepreneur is the ability to convince your team (and many times their significant other) that the equity you are getting is worth fighting for in the day-to-day life, but my primary feedback to you is: “build a smaller product”. Understand where you want to get to, but go for product/market fit that is less certain and pivot from there. Really figure out what is it that would drive people to talk about you, come back and refer others. Yes, it’s risky. Yes, there will be competition – but at least you will have customers to compete on.

With all these hurdles, it manifests itself with an entrepreneur vs. VCs session at TechAviv. It’s startups from mars and VCs from venus.

So, what am I offering? Syndicate early stage deals. Collaborating with US-based angels on companies that are committed to developing killer products. Any.DO was raised in the meetup (thanks Ishay – I was the one clapping vigorously), and it’s a great blueprint of an early stage investment – awesome first time founders that bootstapped their company into 350,000 installs. I am proud to be part of that company, and for Genesis to have led the financing round.

There is a huge opportunity around consumer focused companies in Israel, be it mobile or Internet. Would love to work together to make it happen.

You can always reach me at eden@genesispartners.com.

Editor’s Note: This is a guest post by Lisa Damast of Israel Innovation 2.0. Follow Lisa @lisadamast.

Israel’s largest Internet conference, TheMarker COM.vention took place in Rishon Lezion yesterday and offered three tracks: digital marketing, mobile and technology. The technology track included panels on investing in Israel with members of different investment groups and different companies as well as the future of content distribution and what that means for traditional media.

Perhaps the most important session for founders was a presentation by Alex Maghen, the CTO of MySpace, who spoke about the right and wrong ways for small Israeli startups to do business with big companies in the United States and Europe.

Some of the key points he made included:

1. Understand their Business
When meeting with a big company, understand who owns the company, what sensitivities it might have about its competitors and what the benefit of your product or service is for them in specific.

2. Focus – What are we?
Be able to define your startup, including in terms of how its relevant to the big company and to the people you’re presenting it to.

3. Scalability and business maturity
Show them that you are prepared to and understand what it means to work with a big company. Explain your abilities and limitations for scaling honestly and mention key terms that the tech departments at big companies deal with, including data security, auditability, redundancy and disaster recovery among others.

4. Do the work for them
Define the product and integration for them. Offer wireframes and mock-ups, functional phototypes.

5. Friends in high places aren’t everything
Even if you have a friend at a high level, in the end, the tech decisions might come down to someone with a position lower down in the scale who can kill the project if he or she feels threatened. It’s important to have personal relationships with many workers in the company.

Other suggestions Maghen made included to be cautious about what other companies you work with to avoid any issues with the original company, to run your pitch by one of your connections at the company beforehand and to have a lawyer as everything in large companies goes through lawyers.

I am impressed by PLYmedia. I usually try to write about younger, newer, hipper, sexier companies coming unto the scene, and discover new players in the game, but sometimes the old guard still has one or two tricks up their sleeve. 

There are three integral parts of any startup: technology, product, and monetization. Israeli companies are usually strong in the technology sector. They figure out some funky thing that does something, and then they set out to create a company around that technology. But many times the company that they create may not actually have any public appeal or commercial value. Just because you can create a widget that will allow you to know how many breaths you breathe a day does not mean that anyone in the public sector will want to use it. Perhaps, if tweaked, it would be of immense value for the medical profession, but many companies don’t make that jump. Companies, quite often, feel that if their technology is slightly better than an existing one, everyone will automagically jump ship to them. I hate to be the bearer of bad news, but it ain’t true. Just ask Sony about Betamax.

PLYmedia figured out how to overlay content over existing video. They made it easy to do, even post-post-post production, and on the fly. That is called technology.

PLYmedia then figured out an end-user version of their technology called BubblePLY that allows people to overlay words, pictures and other things over their online videos. People liked using it.

They saw that people used BubblePLY for subtitles, both in the original language and in translation, and they responded by partnering with companies who can help them provide professional subtitling services faster and cheaper than the competition. Thus was born SubPLY.

The company applied a similar permutation of the same technology to overlay ads and other pertinent information to companies. Meaning, if I am watching a television show, and a song starts playing, using a mashup with song recognition software, they are able to identify and display what the song is and provide a link to purchase the song.

Thus, PLYmedia achieved the holy trinity of success: Technology, Product, Monetization. By staying true to the technology, they are able to offer more products and develop more monetization models.

It is no shock that PLYmedia has won accolades and awards from many different sources, in addition to funding.

The young, new, hip and sexy companies should watch closely and learn.