Considering opening a front office in the US? Agonizing over whether CA or NY is the best option? It’s a very valid question these days for promising young Israeli startups with NYC quickly catching up to the bay area in terms of investment and advertising dollars, a hotbed of new startups and an entrepreneur-friendly ecosystem. Here’s a useful interactive infographic to help you think thru it:

Via MBA@UNC: Online MBA

Last month at the TechAviv Founders Club meetup in Herzliya we held our first session of “TechAviv Office Hours‘. Inspired by Paul Graham’s take on rapid startup mentoring, we had five brand new startups on stage getting quality realtime feedback and advice from Saul Klein, founder of Seedcamp, partner at Index Ventures, angel investor and serial entrepreneur. Unfortunetly he was not mic’d up in this video so turn up the speakers and listen close. It’s worth it. Show starts at min 43:00. See photos here.

Participating Startups:
SleepRate – Uri Keren, Founder & CEO
Gigantt – Assaf Lavie, Founder & CEO
Grippity – Jacob Eichbaum, Founder & CEO
Clipop – Moshe Friedman, Founder & CEO
BitMint – Gideon Samid, Founder & CEO

Eran Ben-Shushan, Founder & CEO of Bizzabo

Last night at the Aug 2011 TechAviv Founders Club meetup 150 of Israel’s startup founders and investors got a chance to take our at-event networking to the next level thanks to a new iPhone app by members Bizzabo. Bizzabo puts an interactive attendee list in your hands and helps you identify and connect with the right people in the room to achieve your goals for being there. The experience and on stage demo was enough to win Founder/CEO Eran Ben-Shushan and team this month’s TechAviv Peer Award for top demo. Congrats guys, we hope Bizzabo will become a fixture at TechAviv and a standard at events worldwide.

TechAviv Founders Club Aug 2011

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. 

Imagine being able to point your phone at your TV to buy products you see or chat with other viewers of the same show in realtime. Sounds cool huh? It was cool enough for TVTak founder & chief architect Adi Shavit to take this month’s TechAviv Peer Award for top demo at TechAviv’s NY’s July meetup. This company has tons of potential and we’ll be watching closely how well they can execute on their grand (and fun) vision. Congrats guys on the well deserved peer recognition.

The other presenting startups were the impressive Dealery and BiteHunter.

Congrats Hemi Weingarten and Team Fooducate on getting the nod from 150 fellow founders and investors as the top demo of the April 2010 TechAviv Founders Club meetup. Besides Hemi being one of the most selfless entrepreneurs in Israel, Fooducate has a special place in TechAviv’s heart in that it is the first seed investment made by a group of TechAviv Angels (Yaron Galai, Yaniv Golan, Jeremie Berrebi, etc.). This is one of those feel-good companies with a great sense of purpose and inspiring leadership. Hemi is a master of presentation. Fooducate is a personal grocery advisor app for your phone that helps you make informed purchase decisions at the store. You scan a product’s barcode and Fooducate tells you what’s really inside and what might be a healthier alternative. Grocers should take note, this app is going to move more product off the shelves.

Also demo’ing in April were the impressive Plnnr and First Life Research.

Last month’s TechAviv Founders Club meetup at the IDC Herzliya showcased some of the most promising young startups in Israel, with Taykey, Fiverr and Onavo demo’ing. That makes it all the more impressive for Onavo (Formerly Vircado), the less known data-shrinkage startup, to take the top demo nod from 200 fellow founders and investors. Founder/CEO Guy Rosen delivered one of best demos of a mobile app I’ve personally seen (video soon) and the bottom line is that the product will save you tons of money on our mobile data bill. Check please. Congrats Guy and team on the well deserved vote of confidence from your peers and best of luck building a great company.

Thanks also to Amit Avner (Taykey) and Micha Kaufman (Fiverr) for inspiring us with your stories and meteoric early success.

What were you doing at 20? Tal Flanchraych was co-founding a hot startup in LA; Cabulous, the mobile app that lets you hail a cab with a click. Now back in NYC, Tal demo’d their latest version at the Feb 2011 meetup of the local TechAviv Founders Club. Video above, sorry about the poor quality. Congrats Tal and team on taking the monthly TechAviv Peer Award for top demo, edging out worthy competition from AllofMe’s iStreamer and Fitango.

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

There are two styles of consumer Internet ventures emerging in Israel: product perfectionists and money chasers. Despite our tendency to celebrate and learn from both of them, one of these has a darker side we should be cautious of.

Product perfectionists are founded upon a belief that a unique and differentiated product will create an avid and loyal customer base, which in turn will help build their brand and business. These companies understand that a great customer experience is paramount, and the result of a corporate strategy and culture that focuses on the customer, not merely the result of good product definition or an unbeatable price. I place a high premium on product perfectionist companies that can deliver a compelling customer experience, though it is far from sufficient to ensure success.

In contrast, money chasers are founded upon a belief that an effective monetization and distribution model can essentially define the product offering. These companies excel at driving traffic, accumulating users and raking in cash, but often at the expense of the end consumer (including the customers’ customer). While many entrepreneurs and investors are attracted to the money chasing model, there is a disturbing side to many of these businesses. Money chasers often prey on naïve consumers with aggressive marketing and monetization methods that often have nothing to do with the product they are providing, including changing your default search engine, gleaning your personal details for affiliate sales, or signing you up for a subscription you weren’t aware of. To be clear, most of these companies operate legitimate businesses within the law, but push the bounds of acceptable behavior in order to generate profits, or let affiliate marketers do it for them. In the process, they ensure an awful user experience, weaken their brand, and hurt shareholder value.

Like in any attempt at categorizing, there is oversimplification in what I say about product perfectionists and money chasers.  Internet entrepreneurs are pioneers, and many of the rules and standards have yet to be written.  However, lately I have seen a new generation of money chasing companies, which seem to have learned their craft from the veterans of Israel’s forex, affiliate marketing, toolbar and gaming titans. Product perfectionists have much to learn from these talented individuals, who understand the math and economics of customer conversion like nobody else. But there are some unsavory practices that are also being transferred, and it is a dangerous path to be on.

A Review of the Unsavory

Some companies deliberately mislead the consumer into thinking that he is receiving something more significant than he actually receives, which is the case with several Israel-based sites that provide “services to assist” foreigners to fill out simple, seven question green card lottery forms.

Other times, it is more sinister with marketing tactics that deliberately mislead consumers into signing up for a survey or game and unknowingly committing to monthly subscription of some sort (often on mobile phones). This method, known as cramming, takes advantage of affiliate agreements companies have with cellular operators, which simply add on fees to you monthly phone bill.

(the small print of this common quiz in Hebrew says 30 shekels/week subscription)

And finally, sometimes the consumer is very much a party to his own exploitation, which is largely the case with forex trading companies which make money only as fast as their customers lose their money(though this is in contrast with gambling sites, which at least allow people to win and have fun in the process). The prior “tricks” should perhaps be obvious to the consumer, and one can argue that such consumers are responsible for being so trusting. But there are additional methods that are much less obvious, but no less sneaky.

Monetization Models Prone to Abuse

When monetization models are divorced from the core product value, there is a greater tendency to exploit consumer ignorance. This occurs in business models where the consumer doesn’t pay for the product or service directly, but rather indirectly through search advertising or affiliates. I don’t have a problem with either of these monetization models per se, unless they are non-transparent to the user, which is too often the case.

Siphoning Search

Downloadable software that installs a browser toolbar that then changes the consumer’s default search engine is simply obnoxious (they generally use an aggressive ‘opt-out’ installation process).  These companies operate as affiliate partners of one of the large search engines and are paid a cut of the resulting search engine revenue. Most of these publishers also change the consumer’s home page to a modified version of Google or Bing. How common is this? Just last week, it was revealed that the third largest advertiser on Facebook is a website site that forces the visitors install “a browser plug-in to present an enhanced experience.”  Make-my-baby.com is a Microsoft Bing affiliate and gets paid a hefty bounty for each install. This company’s deal is not unique, and it now widely known secret that Bing is paying such bounties in a land grab against Google. Forget the fact this is artificially inflating advertising revenues across the industry. Such bounties bring out the worst in publishers which are suddenly motivated by installs and altered home pages, not active or quality users, and certainly not happy users. This leads publishers to optimize consumer confusion by tricking the consumer into installing the search toolbar even when the consumer thinks he/she has chosen the opposite!

In most cases , there is little doubt that the consumer was not in the market for a new search engine, and probably reached the said software publisher or website just fine via his/her current default search engine. Furthermore, the consumer may never know that the publisher has forever altered his search experience with 10 sponsored ads above the first search results instead of the typical two(and some sites work hard to hide the fact they are even sponsored results). Worst of all, uninstalling the software or the toolbar often leaves the hijacked home page in place until the next toolbar equipped piece of software changes it yet again! The search engines themselves are complicit in this behavior, but presumably hold their noses when signing search affiliate agreements. Recently, Google has been so appalled at how affiliates trick their consumers that they have tried to enforce certain standards around modified Google home pages. But this is like a drug dealer pushing back on his heroin addict for fear he will die and cease to be a regular customer. Some have complied, while others have moved to Bing or to super affiliates of Google like Ask.com.

Question: Which is search experience is more transparent?

Customized-Search Results Page

Google Search Results

Abusive Affiliates

In principle, the affiliate model of monetization is less devious, although many websites have begun to push the envelope in what is an appropriate use of customer information. The infamous case of Offerpal signing up consumers for subscription services they weren’t aware of is an extreme example of abuse because it was illegal, but there are numerous other examples of legitimate, yet unfair tactics using the affiliate model. For example, some large Israeli software publishers require the user to input key personal data like a phone number, which is then forwarded to a call center for use to push third party products unrelated to the product the consumer downloaded. There are others, which lure consumers to provide personal data with promises of guaranteed prizes like free iPads. It’s one thing to turn a blind eye to third party sites which are violating your own policy, like Facebook did, but much worse in my opinion to predicate your business on deceiving your own consumers.

Regardless of the source, it should be clear now that growing revenues and usage is not necessarily an indication of customer satisfaction or brand creation.  The Internet affords businesses great leeway in how they communicate with consumers and such freedom can be easily.  Net Promoter has its method of measuring customer satisfaction, asking the simple question of “How likely is it that you would recommend our company to a friend or colleague?” You may ask whether I am jealous or frustrated that I am not invested in some of the outstanding companies which operate in this way and which today are printing cash. Perhaps, but then I remember how difficult it is to believe in your investment and potential, when you are hesitant to use the product yourself.

If you are an entrepreneur or investor, I suggest asking yourself a slight variation of NetPromoter question: “Would you recommend the site or download to your own mother?”  I am deliberately being provocative here, but that is how I think of my own investments. Would I let my mother use their product or service without any caveats?

So, why are money chasers bad for Israel?

Well, first off we are training a generation of Internet product and marketing experts to exploit the consumer, rather than serve the customer. We are becoming masters of deception, which is quite convenient when you are anonymous and can hide behind cute websites, big name search engines or a web of little known affiliates. Secondly, few of these companies will ever have long term strategic value because their monetization methods are will not endure in their current form forever.  Affiliate search via toolbars is in decline, with Chrome, Safari and the new Firefox dropping support for toolbars (and Google stepping back). Additionally, privacy hounds, security sleuths and legal experts are looking out for abusive affiliates, and have proven they can shut companies down overnight.

Some money chasers are led by entrepreneurs who have made a tactical decision to generate revenue as a way of sidestepping angel and venture financing, which is fair enough. But when “product innovation” is merely a euphemism for squeezing more profit from unwitting consumers, the monetization model has in effect become a drug. It is difficult to slow down, let alone stop or reverse. Most often, it’s a slippery slope as companies push the limit of what is acceptable until someone exposes them or pulls the rug out from beneath them.

A sustainable business must be built on a great product and satisfied customers. I understand the need to optimize, test and influence consumer decisions, but companies should never such clever tactics become their overall strategy. As a VC, I too need to go where the money is, just like the entrepreneurs I back. But sometimes we also need to step back and question what value our investments bring to the world.

Ori Zaltzman has been a TechAviv Founders Club regular since we kicked off the Silicon Valley branch a couple years ago. We knew him as the chief geek behind Yahoo Answers, Yahoo Boss and a mix of upstarts. He’s the kind of rock star hackers admire and execs fight over to hire (yours truly included). Ori’s got a new gig; gogobot. Joining forces with Travis Katz, former head of MySpace International, put them on the map before anyone knew what they were up to. Buzz is one thing, raving early alpha testers and viral growth is another. You’ll notice by the amount of new gogobot follower emails you’ll get once registered that they’re on to something special.

gogobot is one of those “I can’t believe that didn’t exist already” ideas. Simply put, its Social Travel done right. If you like to travel, you’re going to love gogobot. Travis and Ori demo’d their current MVP version and some yet-to-be-released features at this month’s TechAviv Founders Club CA meetup at Stanford Univ. Video above. They won our Peer Award for best demo handily and got some great feedback on their design. Seem’s TechAviv members have a good eye because last week gogobot took home the 2010 Crunchie for Best Design.

This is one to watch folks. Congrats Travis and Ori on the early momentum and to TechAviv sponsor Battery Ventures and TechAviv CA members Dror Berman of Innovation Endeavors and Oren Zeev of Primera Capital for the foresight and fortune to back these guys early.