Wednesday, January 10, 2018

Three Unique Ways Israeli Start-Ups Dance with Gorillas

By Associate Professor of International Business & Strategy Shameen Prashantham

Israel has become to innovation what Switzerland is to chocolate. Israel spends over 4% of its gross domestic product (GDP) on research and has clearly developed expertise in an astonishing range of technologies. During a recent memorable week there, I attended a talk by a world-renowned molecular biologist seeking to extend life expectancy, learned about a social enterprise which is producing medical devices that reduce the risk of HIV infection, and met an entrepreneur gamifying the pursuit of happiness (literally).

Of particular interest to me was the intensity of engagement between corporations and start-ups in Israel, a concept I refer to as dancing with gorillas. Although some firms grew domestically first – like Netafim, which gave the world drip irrigation and has expanded to over 100 countries – most Israeli technology companies pay scant attention to their tiny home market. Instead, they seek to be as attractive as possible to large global corporations that will partner with, invest in, and – in a few cases – acquire them even before they generate any revenue. In Israel, dancing with gorillas is less of a means to an end than an end in itself.

Three aspects of start-up-corporation engagement in Israel stood out to me.

Accelerated Technology Acquisition. The urgency of entrepreneurs to exit via acquisition by a large corporation — which has helped spawn many repeat entrepreneurs — seems to be matched by corporations' keenness to identify start-ups with cutting-edge technologies while they are still under the radar. Working with a venture seed capital fund can be an attractive way for corporations to identify such start-ups, even when they have scouting programs and corporate venture capital arms of their own. For instance, in addition to their various other efforts in Israel, Qualcomm, as well as India's Tata and China's HNA, are seeking out innovative Israeli start-ups focused on the Internet of Things by participating in the i3 investment platform established by Pitango, a leading Israeli VC firm.

Sophisticated Partner Orchestration. Over the past decade I have witnessed the emergence (and growing sophistication) of corporate interfaces that are focused on engagement with start-ups, such as Bayer's Grant4Apps, BMW's Start-up Garage, IBM's Global Entrepreneur Program, SAP's Start-up Focus, Siemen's Next47 and Unilever's Foundry initiative. But in Israel I may have glimpsed the next step in the evolution of these interfaces. Orchestrated by third parties, they creatively bring together more than one gorilla with a start-up. For example, The Floor connects banking and technology giants with fintech start-ups. A particularly fascinating interface is the "joint lab" that brings together corporations from different sectors with complementary capabilities – such as HSBC and Intel – and matches them with fintech start-ups. Getting start-ups to work with a single corporation is hard enough; bringing together two gorillas to work with them is a lot harder. This changes the "dance" from a waltz or a tango for two to a group dance that requires more coordination but, potentially, greater happiness for all concerned.

Enthusiastic Community Engagement. I also sensed in Israel that there is a highly interconnected start-up community that allows corporations and start-ups to cross paths more informally. The community spirit is exemplified by Microsoft's start-up engagement efforts in Israel, which I have followed from afar over the past six years. Their accelerator is located within a WeWork space: dancing with gorillas meets the sharing economy. This opens up the possibility for a wider set of start-ups to informally interact with Microsoft's start-up-ecosystem and broaden "the spectrum of the possible" through serendipitous collaborations. Another interesting community setting is the SOSA platform in Tel Aviv. By partnering with SOSA, the Australian government's Landing Pad initiative offers opportunities for Australian start-ups to gain exposure in Israel and insert themselves into the stream of consciousness that large corporations are directing at the country's start-up ecosystem. In this way it is plausible that some of these Australian start-ups will be able to forge partnerships with large international corporations more readily than would have been possible back home.

A final observation: a recent trend has been gorillas (or "dragons"?) from China seeking to tap into what one venture capitalist described as Israel's technology diamond mine. These Chinese companies will do well to pay heed to the best practices I mentioned above. In addition, as China's involvement in their ecosystem grows, Israel's US-centric companies would do well to look East for opportunities to scale up – something at which they don't seem adept. On the wall of a meeting room I visited were three clocks, showing the local time for Tel Aviv, London and New York. The next time I visit there may well be a fourth, showing Beijing time.

This article was first published by The Economist Intelligence Unit.

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