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This is the first in a multi-part series on the challenges facing the Israeli high-tech industry and how we can emerge stronger from both the global economic downturn and the challenges facing our tech economy.
We are fortunate that the two leading players in Israel's budget discussion, Professor Eugene Kandel, Chairman of the Prime Minister's Council of Economic Advisors, and Haim Shani, Director General of the Ministry of Finance, are so focused on the challenges facing Israel's technology industry. However, lost in the debate about how to best jump start the liquidity issues in the high tech industry is a focus on the core root of the problem. As the budget topic is hot now, I would just weigh in and say that dealing with the liquidity issue is insufficient. The fix needs to come through massive investment and not through re-allocating budget. It is the only way to build critical mass and turn the ship. We need to change the way the government looks at and invests in technologies of the future. Oh, and one last thing, kicking the can down the street through insurance will not change the dynamic on the investment side. More on the pressing topic of the budget in a coming post but now on to the Hummus Manifesto Part One.
Part One: Tomorrow's Technology

I love what I do. I consider myself incredibly lucky to get up every morning and meet incredible entrepreneurs in Israel. I am inspired by the innovation and opportunity to create jobs. We are the start-up nation for a reason. Our national chutzpa gene is incredibly strong and our will to win against the odds is insuperable. As Dan Senor and Saul Singer point out in Start Up Nation, Israel has excelled at multidisciplinary technologies and entrepreneurship in a way that many countries have not. We have created an entrepreneurial climate that is second to none and we have an esprit de corps that is infectious. We have turned military technologists into our core national asset and aspired for greatness. Heck, even our government in the late 80s and 90s contributed to the growth of this industry from cancelling the Lavi Fighter jet and freeing up hundreds of bleeding-edge engineers and then launching the Yozma Program that kick-started venture capital. For me and many others like me in our great country, this is exhilarating.

However, all of these great attributes are fast becoming irrelevant, as the world of technology is rapidly changing around us and we are not doing enough to address the challenges. We are in need of a wake up call, a call to arms to fundamentally retool our technology industry from the ground up. It has atrophied at all levels. Deep down, we all know this. However, it is tough to say and the implications may be painful but, without it, our industry is at risk and unemployment will follow. Here is why:

We have a dearth of talent.

Huh? A dearth of talent? How could that be? Well, we have tons of smart people and tons of entrepreneurs. We have lots of engineers. However, many are misplaced, scattered and focused on the wrong technologies. Here is why:

Firstly, there are too many start-ups in Israel. We are a small country whose plethora of large angels, individual investors and even VCs have seeded a ton of companies. In Israel, the two-man start-up is not a path to building the next Facebook but, rather it has become a path to a 5 person company who will try to sell its feature quickly. This is scattering our talent and preventing our more successful and growing start-ups from finding and hiring the talent they need in order to scale up to be big companies. The two-man feature-start-up creates unrealistic equity expectations, as these founders own 80% of their little companies (their angel owns 20% for a few hundred thousand bucks) and the founder asks himself "why would I go work at company X for 0.2% of equity when I own 80% of my own company"). This is a problem. Israel's great start-up companies cannot find great talent to recruit in ways that Google and Facebook have recruited in Silicon Valley because too many great engineers are scattered in tiny start-ups. Based on conversations I have had, Venture Capitalists in Silicon Valley have taken note of this.

Second, our talent is focused on the wrong technologies. I can't believe I am saying this but, as a country, we are developing yesterday's technologies or, more accurately, we are developing on yesterday's technologies. No internet-scale start up in Silicon Valley is developing on Dot-Net and C#. Yet, in the Zionist republic of Microsoft (NASDAQ:MSFT), all of our engineers are Dot-net addicts. The Israeli Army is a Microsoft colony.

This is what last week's New York Times has to say about today's engineers.

But the recent crops of computer science graduates and start-ups have tended to move far afield from Microsoft, Mr. O’Reilly said.

The vast majority of technology start-ups today rely on open-source software, distributed by Microsoft competitors, for the core parts of their technology infrastructure.

And so the technology-minded people coming out of college have started learning their craft on free software and betting their careers on non-Microsoft wares.

“We did not get access to kids as they were going through college,” acknowledged Bob Muglia, the president of Microsoft’s business software group, in an interview last year. “And then, when people, particularly younger people, wanted to build a start-up, and they were generally under-capitalized, the idea of buying Microsoft software was a really problematic idea for them.”

The loss of access to start-ups has already proved damaging to Microsoft as companies like Facebook and Twitter that rely on free software have grown from fledgling operations to Silicon Valley’s latest booming enterprises.

Don't worry Mr. Muglia, in Israel Microsoft smartly trains our soldiers in Army intelligence units on Microsoft technologies who then take the Dot-net gospel to the halls of government and start-ups. In other countries, the universities like Stanford, MIT and Cambridge are the main source of engineers so you can just open different courses. But not here. Because of our unique structure of army-bred entrepreneurship, the technology decisions made in the Defense Ministry and in the halls of government, dramatically impact the expertise of our developers. The Government is responsible for this problem and since there is no tech visionary in the government nor Chief Investment Officer with a holistic view of opportunities and challenges, this mismanagement will continue. Director General of the Finance Ministry Haim Shani gets this, I think. I hope...

The Army-led structure is why we excel at wireless and it is why we are a Microsoft-beholden tech industry. And that is not good news in 2010 and is why Israel's tech industry is starting to mirror what Techcrunch has said: that Microsoft's ideas are not the future. Try asking Seeking Alpha (one of our companies) or Fiverr what it is like to recruit Ruby on Rails programmers in Israel. A nightmare. Our government is a Microsoft addict. This year they canceled the paltry 1M NIS budget to fund the open source office alternative translation to Hebrew. Nobody in the government computer department can even spell open source. They prefer the Bill Gates or Steve Balmer photo-op rather than advancing technology. Ask Minister Micky Eitan what it is like to get an open source project done in the Government computer center, otherwise known as Redmond-East.

Italian strikes and immense pressure not to let open source inside the government cathedral is what our elected minister got. The bureaucrats and politicians don't want to miss that photo-op!

How about scalability? Well, since so many engineers are at two-person start-ups that never scale, we have scant few folks who have ever scaled big data centers or large numbers of customers etc. in an online environment. When scale is the name of the game in cloud computing, SaaS, internet and software development, we are a country of midgets. One of our companies, Conduit, needs to hire tens of internet engineers and is getting there because of their growth and size but it is not easy! It is a rate limiting factor on the scalability of a very high growth company and Conduit are the best at it in Israel. Facebook can hire at will in Silicon Valley but in Israel, we are talent constrained. Conduit's hiring success is very, very hard work and it is the outlier and not the norm. Avishai Avrahami, CEO of Wix (another of our companies) told me "My business grows at over 10% a month but my competitors will catch me because I cannot find Java and Ruby on Rails talent in Israel. I cannot find any engineers with experience in scaling big data centers for many customers. I am willing to pay top wages but I cannot find the talent. I am flying to Russia to find or buy talent."

Thank God that the tax authorities did not drive the online gambling companies to Gibraltar or there would be almost no scalability experts around. Frankly, with the exception of the semiconductor industry, we are falling behind in cutting-edge engineering talent. And this should scare us. You see, the reason we have not created big companies here in the last 10 years is because of all of the big companies like Google (NASDAQ:GOOG), Facebook, Amazon (NASDAQ:AMZN), Salesforce (NYSE:CRM), etc were built on non-Microsoft technologies and were built to scale massively and we are not in that game! My former partner and the best tech HR Person in Israel, Sigal Widman (currently at Gemini) told me last week that she has pulled out half of her hair looking for a VP R&D for scaleable web and cloud companies. "There just simply is not enough talent in Israel for this role," said Sigal.

How bad is it? I met a few weeks ago with a senior engineer who left Google to start a company. He is Israeli. I asked him: Are you setting up R&D in Israel. He said flat out "no." I asked why and his retort is shocking but not surprising: "The talent for core scalability and software platform development does not exist in Israel. Too few C++ programmers and no experience in scaling internet apps. I can even find more in New York (!). They (Israeli engineers) can prototype stuff in VB and Dot-net but cannot build scalable internet apps. Frankly, even side projects are not worth doing in Israel anymore because it is not cheaper." There you have it in a nutshell. We are going to miss this internet boat.
Our investment in yesterday's technology is also what is making it diffculy for great people that were laid off by Alvarion and Motorola (MOT) to get jobs in Israel (more on this in part 2).

Speaking of new technologies and next generation, ask yourself how come there were no Israeli companies or entrepreneurs with early apps on the iPad? Why were we not represented on those Apple ads for the iPad and its apps. It is because our Ministers and bureaucrats block advanced technologies at the border rather than welcoming them with open arms. Dear Minister Kahlon, here is a different idea for you: How about going to Apple (NASDAQ:AAPL) and asking to buy 10,000 pre-release iPads. You could give them out to entrepreneurs so we can be first to market with iPhone apps and offer to be the first country on the planet to convert its educational curriculum to the iPad. Now that would be forward thinking and visionary. But you, dear Minister, are incapable of that and our industry, the growth engine of the Israeli economy, is paying that price.

And, by the way, why the hell are there so many damn lawyers here? We need engineers and not lawyers. Why has the government not focused some attention on creating incentives for our smart young people to become engineers and not lawyers? I digress.

Source: The Hummus Manifesto: Part 1