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. 

Editors Note: The following guest post was contributed by Genesis Partners partner Eden Shochat. It originally appeared on The Junction blog. Reach out at @eden.

Taking an investment is getting into a long-term committed relationship, which like any other relationship needs to be cultivated, nurtured and managed. Funny enough, many of the entrepreneurs I meet have this perception of investors coming in and taking over their companies, with the founders losing control through the investors getting veto rights. The reality of it is that the company founders and management are much more informed about the day-to-day and are so much in control, that there is a whole area of studies around the “Principle-Agent Problem”.

One key point even before managing your investors is selecting them. I particularly like this list as a sanity check for an entrepreneur talking to a VC. Much like any relationship, you need two to tango, and startup life is hard enough without being stuck with, well, an asshole investor.

I am writing this more of a sanity check for me and as a note to companies that I work with. Hope someone else finds it useful, but YMMV.

Many of the following “how not to” indicators should be warning signs for early stage startups. Not “run to the hills” signs, but definitely pointers that something is wrong with the relationship:

• Demand for constant updates: A typical scenario is getting a call from your investor complaining that they are out of the loop and feel that once you got their money, you don’t call or write. Generally, this is exactly the investor that doesn’t provide you with enough value that you feel you should keep him up to date.
• Waiting for board meetings to “discuss” status: This is the other extreme, where either because of lack of capacity or desire, they don’t keep an on-going communication channel with you. The risk here is twofold: they are likely to be surprised with the board presentation, or worse off, will be less dependable to help the company when things go out of whack. And they will, they always do.
• Too active of an investor: You know how is it like. Your investor made an introduction for some reason, and now the overhead is on you. Or, crisis mode introduction to a VP of Marketing of whateveryoucallit.com because there was a slide about viral distribution in the last board slide deck. In hebrew we call it “full gas in neutral”, I wonder what’s the english comparable.
• Raising hell the first time you don’t meet predictions: Shit will hit the fan, be at at the first board meeting when the investor becomes an insider and starts grasping the nitty gritty of the business, the second board where it became apparent that shorting on your Q results predictions would be a sound investment strategy or if you just don’t get along well.

The reality is that an investor has one primary “stick”, which is replacing the CEO. When the CEO is the founder, who is (at least in my mind) the heart and soul of the company, this can be disastrous.

You need to realize the basic issue is information asymmetry. It’s not (I hope) that your investor is looking to nag, be shallow, take over your precious time or harm the company, many times it’s them feeling out of control and not having access all the information. The easiest way out of this is keeping a proactive communication channel with them, and defining very clearly what is expected of you and them. Notice yet another similarity to marriage?

So, how could you empower your investor to be more helpful, or in other words, how I would like to be managed by you:

• Expose KPIs (all the time!): The hardest part about exposing KPIs is defining them. What are the key performance indicators you’d like to judge where you company is at? An example for a consumer product could be: # of users that joined last week, % retention, average acquisition costs and average life-time value per user. For an enterprise sales company it would be average deal value, duration of POC, % of close. Email these in a tabular format that includes past weeks results, say what are your thoughts about the change and whether you are changing anything as a result. Be transparent.
• Tell them what you need (and what you don’t): I ask companies for my top-3 goals for that company every month. What should I be working on? Hiring, Intellectual Property, Monetization? This way I know what’s expected of me and you know that I won’t bombard you with things you don’t need. Understand your investors deeply. Do your homework so when you need something you know which ones to go to when you need something done for you. Don’t blast out emails to everyone you’ll end up the spammy entrepreneur and people will start to ignore you.
• Don’t wait for board meetings to meet and consult: Doing the day-to-day execution is demanding, but find the 10-15 minutes to call, ask what’s up, tell them the latest good & bad. You’d be surprised, sometimes just a good sounding board can make all the difference in that lonely life called being a CEO.
• Forward focus: When in board meetings, don’t spend more than 20% of the time reviewing the past. The rest should be devoted to how (if required) you are going to change what needs to be changed and what goals do you want to achieve moving forward. Plan your execution and execute your plan. Many founders do the opposite split in feeling they need to “present” to their board.
• Be direct, don’t be optimistic, or “manage expectations”. Tell it like it is. Treat it as a partnership, exposing good & bad so you can both put your thinking cap on and work through issues. The worst thing that can happen is having a positive outlook (remember, this is what they updated their partners with!) while issues start cropping, only to realize you are running out of cash in a couple of weeks (true story).  Ben Horowitz had a great post about this: CEOs Should Tell It Like It Is

Taking an investment is getting into a long-term committed relationship. Most important point is that it’s ok to ask for help – no one does it alone. Always make sure one of your investors is a person who you can call at 3am if you just need someone to chat when you’re at your lowest. startups are hard! You can’t always be friends with them, but it’s a long ride, might as well do it with someone you like.

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.

A little over a year ago the TechAviv Founders Club in Israel convened a “group therapy” session between startup founders and VCs to get even the most taboo subjects of business building and funding out of the table. The result was one of our best meetups yet.

To close off an exhilarating 2010 tonight we’re holding a similar town-hall style conversation with over 200 startup founders and investor members discussing the current state and future of Israeli hi-tech. Whats working, what’s broke and how can we all build disruptively better businesses together. Kicking off the discussion is Benchmark’s Michael Eisenberg with a talk summarizing his now famous Hummus Manifesto. That talk will lead into an open discussion between members and a panel of some of our top local VCs:

VC Panelists:
1. Michael Eisenberg, Benchmark
2. Gili Raanan, Sequoia
3. Adam Fisher, Bessemer
4. Avi Zeevi, Carmel
5. Scott Tobin, Battery
6. Noga Kap, BRM
7. Yoram Snir, Greylock
8. Adi Pundak-Mintz, Gemini

Repeating our tradition from last year, founders were asked to submit anonymous questions for the VC panel. Should be a lot of fun. We’re way over capacity and as usual this is a closed members-only event but everyone is welcome to watch and chat live at www.techaviv.com/videos starting at 7PM Israel time tonight. We’ll update this post with pics/video after the event.

UPDATE: Photos

Lot’s of Israeli VCs talk up the importance of early stage investing but how many first investments do they actually make in seed stage startups and which VCs lead the walk rather than the talk? The IVC Research Center has released the results (membership required) of their 2009 VC survey and we’ve got some good and bad news to share. What do you want to hear first?

Ok, the bad; 2009 saw an overall 50% drop in dollars raised by Israeli hi-tech companies and a 35% drop in the number first investments by Israeli VCs. Israeli VCs made 77 first investments in 2009 compared to 119 in 2008.

Now the good; 38% (the majority) of those 77 first investments where made in seed stage startups compared to 28% in 2008. Internet, Software and Life Sciences sectors took in the most checks. Each took 22% of the overall annual first investment pie. Internet? Nice.

Most Active Israeli VC Funds in 2009
So which VCs made the most new investments? Surprisingly Terra Venture Partners, a tiny $25M cleantech fund, leads the pack with 6 first investments. Tied for 2nd with 5 first time investments are Carmel, Giza, JVP, Magma, Pitango, Sequoia and TriVentures. Gemini and Genesis made 4 first investments. Check out who they invested in and the stage and sector breakdown below.

Early-stage startups should keep these numbers in mind when pitching Israeli VCs. The most active of the bunch make 2 to 3 early-stage investments per year after seeing hundreds pitch. We hope to see these numbers increase in 2010 and that more Israeli Angels and micro-funds will step up to fill the seed gap but rather than just hoping investors take more risk, let’s get out there and build more sustainable Israeli businesses that merit the early financial support.

Two years ago we set out to bring Israeli hi-tech startup founders and investors closer together and to harness our collective experience and contacts to help fellow Israeli hi-tech startups succeed worldwide. Today we’re over 1,600 members meeting monthly in Israel, Silicon Valley, New York and Boston. I have the privilege to meet and befriend some of our industry’s sharpest and most creative minds on both sides of the table. It’s truly an honor.

Facilitating TechAviv has also exposed me to many of the inherent flaws in the relationship between founders and venture capitalists. I’ve also experienced them first hand as a VC-backed entrepreneur, a board member and as an advisor to investors, but not on this scale. Here’s the bottom line; while we ideally need to be as tight as co-founders, our jobs and who we are as people are often radically different:

• Entrepreneurs, at least the successful ones I know, are driven by ideas and passion, have super-human stamina (never accepting “no”) and a love for problem solving. Their job is to create new value for customers. They’d like to be rich so that they can do whatever they’d like in life, but they’re already doing that now.
• Venture capitalists, at least the successful ones I know, are driven by money and discipline, have uniquely accurate insight (knowing when its not the usual “no”) and a love for deal making. Their job is to create great returns for their limited partners. They need to be rich because most of their friends are, and well, its good to be rich.

At different stages of a startup these differences, ideally meant to compliment each other, often cause great friction, fundamental misunderstandings and even total meltdown. Throw in a global recession and the new economics of starting-up web businesses and you’ve got yourself the makings of one fascinating and desperately-needed group therapy session.

It’s time to “invest” in our relationship. First step is communication. We need to get some things out on the table. Those taboo subjects between founders and VCs that we talk about behind the other’s back. Those questions we’ve always wanted to ask. What’s working, what’s broken and how can we make things better moving forward so that the Israeli hi-tech ecosystem as a whole succeeds. In a time when the business and economics of building and investing in hi-tech startups is changing so dramatically, its more important than ever that we get on the same page.

UPDATE: Results of the pre-meeting questionnaire appear below:

On September 2, 2009 from 3:00-6:00pm at the IDC Herzliya the TechAviv Founders Club will convene the first in a special series of smaller town hall style meetings between founders and investors to candidly discuss our working relationship and practical ways to optimize it. We’re now over 400 strong in Israel but will limit attendance to keep the conversation as intimate and candid as possible. Priority will be given to VC-backed startup founders that can speak from experience. 20 of Israel’s top VC have also been invited. TechAviv Israel members can RSVP here. If you’re a founder of or investor in Israeli hi-tech startups and based in Israel, you can apply for membership here (free).

Thanks Danny and Adi. The idea for this meeting was inspired by conversations I had recently with Danny Cohen and Adi Pundak-Mintz of Gemini Israel Funds. They’ve been think about ways to bring investors and entrepreneurs closer together and have been doing so regularly with their excellent round-table events at Gemini. I’m proud to have them as sponsors of TechAviv. These guys embody our spirit of paying things forward. I’ve known Danny for a while. He’s one of those rare VCs that tells it like it is and sincerely cares about entrepreneurs and Israel. He’s doing something right but will be the first to admit he’s gotten lots of stuff wrong dealing with entrepreneurs. Danny recently returned from a 3 year stint at Gemini’s Silicon Valley office and gave a talk on Israeli venture capital at TechAviv CA on March 30th, the day before his last in CA. Here’s the talk with some good data and topics for the meeting on Sept 2nd. Enjoy.

UPDATE: Pic from the event: (Thanks @OurielOhayon)