Endangered Species- Fewer Tech Companies Reach $250 Million in Revenue - Levi Shapiro - MediaBizBloggers

Israel has a robust infrastructure for early-stage technology ventures. In fact, $212 million was put to work in early-stage companies last quarter, an increase of 21% from 2009 (Dow Jones Venturesource). In the past, some of those start-ups, like Teva Pharmaceuticals and Amdocs, matured into billion dollar businesses. These days, that scenario is far less likely (see below) to occur. Israeli technology companies with annual revenues of $250 million are now an endangered species. One person working to address that imbalance is Moshe Lichtman, President of Microsoft Israel. "We want Microsoft to be the best school for software engineers as business leaders. They are learning scale and how to lead the next generation of global businesses".

After 17 years with Microsoft in the US, Moshe Lichtman faced a decision familiar to many Israelis overseas. "Our daughter was 16. If we were going to return to Israel, it was now or never". Moshe proposed to "bring the Redmond experience to Israel and create Israel's crown jewel for software". Four years, 6 acquisitions, 12 global product launches and 600 engineers later (200 in Haifa and400 in Herzeliya, Moshe acknowledges that "we are not there yet". Unlike the plethora of start-up opportunities, Moshe has made the concept of SCALE central to the Microsoft Israel experience. This helped Microsoft score #2 'most desired workplace' in the Israeli software industry. "We are thinking BIG and targeting green-field opportunities that will change the world".

The limited size of Israel's home market forces Israeli start-ups to quickly become what Hal Varian, Chief Economist at Google, calls "micro multi-nationals". According to Varian, "you have companies that are born global from the very beginning. Even the smallest organization has access to global infrastructure that was only available to large companies 15 years ago. This helps to expand overall productivity". In fact, the technology sector may comprise 16% of Israel's GDP but represents a whopping 25% of exports.

During a keynote presentation at the Israel Conference (www.theisraelconference.org) last month in Los Angeles, Moshe challenged the Israeli investment and entrepreneurial community to prioritize scale, in addition to IRR (Internal Rate of Return). "Young engineers need chances to run an end-to-end, global business. I see a lack of patience by many VC's that is holding back the industry".

Rony Ross, Executive Chairman and CTO of Panorama Software, understands why management would choose the certainty of an exit over a Dividend Strategy. "Management is influenced by the risks inherent in the technology industry- you had better cash in as fast as you can or you may lose the opportunity". Rony herself sold the company she founded to Microsoft. "Most investors like to bring in a more seasoned management team once the business reaches a certain level of complexity and scale. So what incentive is there for a manager to wait?"

Many of the more patient companies are still controlled by the original Founders. Rony adds, "I think many of the billion dollar, dividend paying technology businesses are still controlled by their original founders / founding families. They are much better incentivized to keep growing the business".

Moshe believes that a dividend strategy can be learned, and billion dollar businesses built, in an environment that encourages leveraging the entire software industry value chain to achieve scale. That includes fundamental research, in partnership with universities, and disciplined "Innovation Labs" with clear business objectives. Finally, it is important to incorporate innovation from within the start-up community.

Fundamental research at Microsoft Israel includes seven full-time researchers and collaboration with a network of mathematics & game theory professors across Israel. Applied research is focused on brining ideas to market through the "Innovation Labs". A team of fifteen people annually develop about 30 prototypes and launch 1-2 new Microsoft products. All projects are overseen by a business manager, with P&L and clearly defined bottom-line responsibilities.

Finally, Microsoft seeks to learn from the larger start-up community. This includes the "Think Next" event which took place in April, in which 2,000 entrepreneurs gathered in a large hangar at the port in Tel Aviv. 40 start-ups are selected from among hundreds and each given five minutes to introduce their products.

Although Microsoft Israel has now developed a variety of products for online advertising, online privacy, database quality and Xbox, Moshe views the creation of a seasoned pool of business and technical leaders as his greatest achievement. "Becoming Israel's Software Crown Jewel is still a dream in the making. I think we can get there with the help of the entire industry".

Levi Shapiro is a Partner at TMT Strategic Advisors, a research and strategy firm focusing on the technology, media and telecom sectors. He can be reached at levi.shapiro@tmtstrat.com or via twitter: @levshapiro

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