Reports on the drop of local VC financing in Israel don’t tell the whole story. The latest IVC report reveals that in 2011, 546 Israeli high-tech companies raised $2.14 billion in VC funding, representing a 70% increase compared to the $1.26 billion raised in 2010 and almost double from the $1.12 billion raised in 2009. How can we explain such a big increase? Let’s take a look at how VC money was deployed in Israel 2011.

In “What next for the start-up nation?” the Economist observed that there has been a change in the Israeli startup landscape. Companies have shifted from producing pure technology to producing consumer products. Pure technology companies focus on IP, and need to compete with emerging markets, offering cheaper labor and potentially better economies of scale. Technology companies don’t have the relationship with the end-customer and therefore suffer from lower margins. However, Israeli startups are slowly making a transition – building larger companies and establishing brands.

In 2011, 546 Israeli high-tech companies attracted $2.14 billion from local and foreign venture investors, the highest amount in 11 years.

Israeli funds now account represent only 25% of the amount raised by the Israeli high-tech companies, down from 40% a few years ago. This is the lowest rate of participation by Israeli funds in the last decade. In 2011, Israeli venture capital funds invested $525 million in Israeli companies, an increase of 42% from 2010, and a rise of 28% from 2009 levels.

First investments by Israeli VC funds accounted for 31% of their total investments, compared to 29% in 2010 and 2009. The average first investment in 2011 was $2.21 million, while the average follow-on investment was $1.06 million.

Foreign fundshave stepped in to fill the gap in capital raising, which still exists in the bracket of $1-$2 million. In 2011, foreign funds invested $785 million or 37%, the highest percentage in the last decade. This compares with $269 million (21%) and $205 million (18%) invested in 2010 and 2009, respectively.

The Internet sector dominated for the first time in the past decade and saw a large increase of investment, attracting $482 million or 23% of total capital raised by high-tech companies (115 total investments), compared to $222 million or 18% raised in 2010, and $147 million or 13% raised in 2009. The communications and software sectors followed with 20% and 19% of the total investment respectively.

Mid and later stage companies attracted $1.48 billion of the total investment in 2011, a 90% (!) increase compared to 2010 ($781 million). Seed stage companies attracted 5%, a slight increase from 3% in 2010, and Early stage companies accounted for 26% of the investment, down from 35% in 2010 and 29% in 2009. Israeli companies are attractive acquisitions for International players such as Apple, HP, Microsoft, which contributes to their attractiveness for VCs. According to KPMG Israel:

“The significant increase in late stage investments indicates the strength of Israel’s technology industry, as well as its attractiveness to foreign investors. An impressive number of mature Israeli companies have reached substantial sales. A decade ago, such companies would most likely have gone the IPO route, raising funds publicly.  Today, due to changed conditions in IPO markets, these companies are relying principally on both existing and late-stage investors. As a result, we expect a large portion of these companies to be sold over the coming 24-month period.”

Overall, the average round was $3.92 million in 2011, higher than the $3.23 million average in 2010.

Hello smart entrepreneur. I know you’re a busy person, so I’ll be brief. Read this post NOW, if your startup involves convincing someone to do something. Your friends and competitors are reading it already. Years of research into human behavior and influence went into these insights by Prof Robert Cialdini, so read actively, and try to apply these lessons on your business.

In the process of acquiring new customers, startups need to persuade, convince or enchant the potential customer to sacrifice a resource, let it be time, money, access to their stream of information, in order to use the startup’s product. The persuasion process is very subtle, and most likely takes place in a matter of seconds: the user gets to the landing page, the user sees your icon in the app store, the user thinks about registering for a free trial… these seconds are going to determine the future of your business.

In Paths to Power, one of my favorite courses at London Business School, they brought Jim Alvarez, a hostage negotiator for a Kidnap for Ransom cases, to talk to us about persuasion. Very inspiring stuff, as his persuasion skills can make the difference between life and death. In his talk Jim referred to the guru of behavioral psychology, Prof Robert Cialdini’s “The Science of Persuasion“, which lists the six basic tendencies of human behavior that come into play in generating a positive response: reciprocation, consistency, social validation, liking, authority and scarcity. I found they all apply to tech startups and below is my effort to apply the theory to the practice of customer development.

Professor Robert Cialdini, author of the “Psychology of Influence”

The Six Tendencies of Persuadability – Theory and Practice

1) Reciprocation - All societies subscribe to a norm that obligates individu- als to repay in kind what they have received.

In other words, there’s no such thing as a free lunch, but with a positive spin. Your startup did something nice for me and I’m going to do the same for you. Offline, a great example of reciprocation is when someone cleans your window on a red light – they provided a service, and you, grudgingly, feel compelled to reciprocate. Online, you can use reciprocity to increase sales. For example, several Facebook games offer the option to send other users a virtual gift. Developers added the option to “gift back” and it works like a charm. Similarly, online dating sites enable users to send virtual roses. Normally, the male pays $1-$5 for the gesture, and the reciprocation comes in the way of attention – a thank you note that sparks a conversation.

2) Consistency -  the potent human desire to be, and to appear, consistent. 

The desire to be consistent with what we said we will do, has a powerful effect. Apparently, when you get people to say what they’re going to do, they are 16 times more likely to actually do it! Cialdini mentions the example of a Chicago restaurant, that had a huge problem of no-show reservations, which made it difficult to run the business, predict costs, etc. The owner managed to reduce the no-shows from 30 to 10 percent, by changing a two words in what the receptionist asked the diners when she called to confirm their reservation: from “Please call if you have to change your plans” to “Will you please call if you have to change your plans?” a question is much more powerful than a statement.

Zipcar.com’s homepage is filled with questions – “where can I drive?”, “Is Zipcar right for me?”, “How does it work?” – that gets our brains working and we have a clear call to action. Another practical application is closing emails with a question- “So is Wednesday good for you?”

3) Social Validation - If many individuals have decided in favor of a particular idea, we are more likely to follow, because we perceive the idea to be more correct, more valid.

This is probably the most familiar technique to use online, as it tries to capture buzz and word of mouth recommendations. Sticking in the 10,000 Facebook fans on your homepage, or seeing that a particular web result has 50 +1s on Google makes us generally more comfortable to buy or sign up. A product that executes beautifully on this predicament is GoGoBot, the social recommendation engine for travel started by Ori Zaltzman.  Despite that Facebook is not the place I would think about for booking travel, I find it comfortable to book my trips there since many friends have provided their recommendations.

4) Liking –  People prefer to say yes to those they like

Affinity, Rapport and Affection are all part of this feeling of connection between people. The textbook example of liking is Tupperware. The plastic containers were not sold in the stores, but were distributed in “home parties” which were organized by a a liked friend or a salesperson who hosted the party in their house own (also builds on reciprocity). Another example for likeability is Zappos customer service. If you provide your clients with great customer service (no scripts, no time limits on the call, flexible return policy), they will Tweet about it, Like you on Facebook and reciprocate in kind.

Research has shown that like-ability can take different forms:

a) Physical attractiveness - in the online context it really comes down to how pretty is your UI/UX or embedding beautiful images that help form your perception – event site Erly does a good job at that. In the physical world, good looking fundraisers for the American Heart Association raised almost twice the money. What sites or apps do you find yourself preferring?
b) Similarity - a connection between you and your customers. Today it’s relatively simple to find out a lot of information about the users by having them connect to one of their social profiles using OAuth. Pintrest for example, make users give them information about their tastes and interests before they display the homepage, etc.
c) Compliments- get trained in the use of praise. It’s so simple that you may wonder if it really works, but a sincere “Congratulations!’ from Klout on getting +1 scores, makes us  feel that the score must be important!
d) Cooperation - helps enhance positive feelings and behavior. You can imply cooperation online by fighting a common enemy: Virgin has British Airways, Weight-loss apps fight fattening food, productivity apps combat against procrastination – find your enemy and partner with your user!

5) Authority - People tend to comply with the wishes of those in authority. 

VC Cafe was voted a top VC blog by Obama and Oprah

It was found that a man can increase by 350% the number of people that would follow him across the street on a red light, when he’s simply wearing a suit and a tie. In comparison, on a website, showing off your experience, expertise or scientific credentials can influence users to use your product. Examples include celebrity endorsements, competition winning badges like RedHerring Winner, “As seen on” logos of TechCrunch/VentureBeat/GigaOm, Trustee Certified, statements like “The Leading ____ in the US” and so on. There’s no problem in using authority as long as you’re not cheating your users so this source of persuasion needs to be used responsibly.

6) Scarcity - items and opportunities become more desirable to us as they become less available.

Groucho Marx said  ”I don’t want to belong to any club that will accept me as a member”. The opposite is definitely true as well – we want to belong to clubs that don’t let everyone in. Limited supply, limited time only, apply to request an invite – all of these techniques make us wiggle our tails and stand in line for the great promise of the product. Offline, companies like Zara thrive on this, as customers know that a product that fits and is in stock probably won’t be there tomorrow. Online, examples of scarcity as  a persuader are many.

Having only one product on sale every day - Scarcity at Woot.com

One of my favorite shopping sites used to be Woot (bought by Amazon). It offered one product a day, that was updated each day at midnight with limited supply. A message board showed how many products were bought per hour since midnight, and almost every night products were sold out. I’ve never bought so much stuff I didn’t need, the scarcity element just worked on me. Google+ invites were a hot ticket when the product came out. aSmallWorld is a closed social network for jet-setters, and online veteran users have the ability to invite new members.  Many others have people tweet specific messages or “Like” a product on Facebook in order to get access to it or a special discount. And of course we have Groupon, Vente Privee and all the daily deal and private shopping sites, that offer limited-time deals if you ‘buy it now’. Also, Foursquare badges are a real motivator for some to check in again and again. Users become advocates of the places where they are “Mayors”, but there can only be one mayor at any given place.

Food for Thought

Information overload has made your users busier than ever. They get more email, read more news, watch more videos and use more apps than ever before. Think about that and put yourself in the shoes of the user that is checking out your product for the first time. Are you offering her any value? asking her a relevant question? connecting her to her friends? presenting her with something beautiful? comforting her with the security of the site and explaining why she should act NOW? If you have a moment, read the first paragraph of this post again. Did it make you dive in?

I hope the principles discussed by Cialdini help you look at your product in a new way. Those precious few seconds that she’ll dedicate to your website will make a difference between failure and success.

I’m currently at LeanCamp, the unconference that aspires to help people both learn and teach evrerything Lean Startup related. I must admit, I’ve been to my fair share of conferences in the past few years, some were exclusive and expensive events to produce, some were humble gatherings (maybe too humble at times). LeanCamp strikes the perfect balance between a well-organized event and a community meetup or gathering.

The agenda for the conference was completely crowd-sourced from the participants, with the exception of a few marquee speakers including John Mullins (my London Business School Entrepreneurship professor, author of “Getting to Plan B” and rapidly becoming the Steve Blank of Europe), Alex Osterwalder (author of business model generation) and Eric Ries (author of the lean startup).

Any time you start is right, whoever showed up is the right audience and the format is open – you define it at the beginning of each session. People are passionate about the topics, and it’s obvious that most of the questions are coming from practitioners, from a real pain point or interest.

Topics include sessions such as startup fundraising, customer development, business model generation, lean startup metrics, visual note taking and much more: http://leancamp.uservoice.com/forums/143388-leancamp-session-ideas.

Later on, I’ll be giving a session myself on Effective Business Blogging. If they don’t care about your blog, they won’t care about your startup. Hope you can join me at UCL room #G06 at 16:40 after Eric’s talk.

LeanCamp was created by my friend Salim Virani and Nicky Smyth in 2010 and this is its 2nd edition in London. Additional leancamps are taking place in New York and Barcelona – if you’re around, I’d recommend attending.

 
What is Leancamp?

Business model generation video:

As every month, VC Cafe is re-posting the “Invest in Israel” Newsletter, published by the investment promotion center of Israel’s Ministry of Industry, Trade and Labor, which offers many helpful tools for prospecting investors.  For the Invest in Israel archive, click here.

Below are the headlines for January 2012:

ESTIMATES SHOW ISRAELI GDP ROSE 4.8% IN 2011
According to preliminary estimates, Israel’s gross domestic product grew by 4.8% in 2011, following a similar rise in 2010, and a 0.8% rise in 2009, when Israel crawled back out of the recession. GDP per capita is expected to have risen 2.9% to $31,100.

MOODYS REITERATES “A1 – STABLE” RATING FOR ISRAEL
The rating is “underpinned by the country’s high levels of economic, institutional and financial strength and moderate event risk.” – Moody’sOne of the world’s three largest rating agencies, Moody’s, reiterated its A1 rating on Israel’s domestic and foreign currency bonds with a “Stable” outlook for the Jewish state.

“The Israeli economy is resilient and dynamic, and the macroeconomic policy framework is coherent,” the rating agency noted in the report. “The high-tech exports-based economic model underpins favorable medium- to long-term growth prospects, though it is subject to cyclical fluctuations in world trade.”

APPLE TO LAUNCH ISRAEL R&D CENTER
Apple Inc. has decided to open its first ever development center outside of its California headquarters in Israel. The new center in Israel will focus on semiconductors

Though a global innovator, Apple in 2010 only invested 2% of its revenue in R&D, much lower than other high-tech companies. The company currently has only one technology development center, which is at their headquarters in Cupertino, California.

Apple has hired Aharon Aharon, a veteran player in Israel’s high tech industry, to lead the new development center.

FLASH COMPANY ANOBIT TO BE APPLE’S FIRST ISRAELI ACQUISITION
Leading computing company Apple is acquiring Anobit, a developer of flash controllers and smartphone memory enhancement technology.

Anobit developed a chip which enhances flash drive performance through signal processing (DSP). Anobit previously supplied its technology to South Korea’s Hynix Semiconductor Inc., the world’s largest supplier of flash memory processors, and Samsung Electronics. Hynix’s integration of Anobit’s solutions, has allowed the company to lower the flash memory costs for smartphones, digital cameras, and tablet computers.

Anobit has two product lines: NAND-based embedded flash controllers for smartphones, music players, tablets, and other products; and flash memory Genesis Solid State Drives (SSD), which are designed to replace computers’ magnetic hard drives that are the current memory mainstay of PCs and storage systems, such as those developed by IBM Corporation and EMC Corporation.

AKAMAI BUYS ISRAELI COTENDO FOR $268 MLN
Akamai Technologies Inc., a Cambridge company that manages Web traffic for some of the Internet’s biggest sites, is acquiring website and mobile acceleration technology vendor Cotendo. Though a small competitor, Cotendo had been making big strides speeding up Web access on mobile phones, a fast growing segment of Akamai’s business.

Following the acquisition, Akamai will set up a research and development center in Israel.

“Cotendo’s employees will find their places as employees of Akamai, and thus we will continue to grow,” Ronni Zehavi, who is CEO of the company, said.

CORNELL, TECHNION WIN NYCTECH CAMPUS PROJECT
Cornell University and the Technion – Israel Institute of Technology have been chosen to build a cutting-edge NYC Tech Campus that will serve as a global magnet for tech talent and entrepreneurship. The NYCTech Campus will combine cutting-edge technologies to create one of the most environmentally friendly and energy efficient campuses in the world.

Cornell will offer Master and Doctoral degrees in areas such as Computer Science, Electrical and Computer Engineering, and Information Science and Engineering, and the campus will also offer innovative Technion-Cornell dual Master of Applied Sciences degrees.

New York City will provide $100 million for the site’s site infrastructure, construction, and related costs. Construction of the first phase of campus is scheduled to begin in 2015.

US DELEGATIONS TO ISRAEL SEEK STRONGER BILATERAL TIES
Two high-level American delegations reached out to Israeli business leaders in December as they explored cooperation in renewable energy, aerospace, medicine and other technologies.

The American Chamber of Commerce Executives (ACCE) brought 25 heads of business representative bodies from American and Canadian cities to Israel, while a separate group of seven elected officials from New York, Ohio, Pennsylvania and Hawaii also visited the country.

Both delegations noted that they see endless opportunities for business collaboration with Israel, and spoke with admiration of the innovations they saw during their visit.

ISRAEL CORP. ACQUIRES CHILEAN POWER COMPANY
Israel Corporation has acquired Chilean power company Central Tierra Amarilla SA, which owns a 155-megawatt power station that uses open cycle diesel generators.

Israel Corp subsidiary IC Power will own 75% of Central Tierra Amarilla and a Chilean company will own 25%. Located north of Santiago, the power station mainly functions as a reserve energy source for local mines.

Israel Corp. Power subsidiary Inkia Energy Ltd., based in Lima, Peru, owns power stations producing 3,000 megawatts in seven countries: Peru, Bolivia, Chile, Panama, El Salvador, Jamaica, and the Dominican Republic.

TOURISM TO ISRAEL IN NOVEMBER AT RECORD HIGH
Tourism to Israel in November rose 2% from the corresponding month in 2010 to 316,000 arrivals, and was the highest number of tourists for any November.

As part of an initiative to boost the tourism sector, including construction, renovation and conversion of existing buildings into hotels, six new hotels will open in Jerusalem, Haifa, Rosh Pina, and the Western Galilee and hotels in the Galilee and Tiberias will be enlarged. Two buildings in Haifa will be converted into hotels. The projects will add 470 new hotel rooms and see 300 rooms renovated.

In a world that suffers from content overload, personal recommendations are a bare necessity. Israeli startup Outbrain,  one of the leading companies in the recommendations space, has completed a $35 million in Series D led by Index Ventures and joined by previous investors Carmel Ventures and Lightspeed Venture Partners. This brings Outbrain’s funding to $64 million total since its inception in 2007.

Outbrain has been showing solid progress on its content recommendation plugins (also visible on VC Cafe). Outbrain’s plugins enable content publishers to provide related content recommendations that result in higher engagement by the user. According to the company,  these recommendations get 3.5 billion views a month, generating more than 200 million clicks a month for large content providers such as CNN, Fox News and MSNBC. Outbrain has also managed to find a business model with OutLoud, its sponsored recommendation product, which offers publishers a cost effective way to distribute their content on Outbrain’s publisher partners. 

According to the company blog post on the funding, the funding will enable Outbrain to expand its recommendation coverage into video and mobile sites, increase language coverage and grow the team in markets overseas. It’s possible that Outbrain will also continue to grow through small acquisitions, similar to Surphace, an Israeli startup in the content recommendation space that Outbrain bought from AOL in Feb 2011.

If you ask me, the deal was as much pull from Outbrain as it was a “Push” from Index. Saul Klein, partner at Index, has been living in Israel for the past year or so, looking for the Israeli companies that have a potential to exit for $1 Bilion. That said, Dominique Vidal was the lead on the deal, and will be joining Outbrain’s board of directors. Outbrain’s solid team, led by serial entrepreneur Yaron Galai (sold Quigo to AOL for approximately $340 million) and Ori Lahav, who is becoming a thought leader CTO in Israel.

The main challenge to Outbrain will come from smaller competitors like nRelate.com, who are reporting similar CTRs on their recommendations, have a growing number of publishers and much less funding.  eBay’s acquisition of Hunch for $80 million a month ago and this large round for Outbrain likely means good news for content recommendation startups, as VCs will ‘place their bets’ on other companies in the space.

Israeli startup BlazeMeter, a load testing in the cloud compatible with open source Apache Jmeter, has recently raised an undisclosed round from Yoav Leitersdorf’s YL Ventures. I’ve contacted Blazemeter’s CEO Alon Girmonsky, to learn more about the product and the load-testing market.

VC Cafe: In very simple terms, what is BlazeMeter and what do you enable customers to do that wasn’t available before?

Alon: BlazeMeter is the first testing cloud with a sole focus on load testing, designed to simplify performance and load testing for developers and QA testers.

BlazeMeter provides developers and QA tester’s self-service tools to build failure resilient applications by providing an out-of-the-box testing environment that dramatically reduces time-to-test from days to minutes, provides enterprise grade reporting and extra-large testing scalability.

B.B. (Before BlazeMeter) Large-scale load testing was complicated, expensive and time consuming. A.B. (After BlazeMeter) With BlazeMeter it is very easy, low-cost and still enterprise-grade.

For example-Users can begin running tests that simulate 10,000 simultaneous users in less than 5 minutes and still enjoy the benefits of the comprehensive scripting and the wide protocol coverage provided by existing JMeter scripts.

While traditional cloud testing vendors target the enterprise market, BlazeMeter plans to revolutionize the load testing market in the same way AWS/EC2 disrupted the virtualization market by introducing a self-service low cost cloud and Heroku pioneered the first Ruby cloud.

Blazemeter real time reports and monitoring

VC Cafe: The load testing market is pretty crowded. Where do you consider yourself better or different than the competition?

Alon: The market is crowded with testing-as-a-service (TaaS) vendors.
Until BlazeMeter, there was no self-service and comprehensive load testing solution, especially in a cloud format (i.e. do-it-yourself, full control over testing resources etc).

While today’s market is shared with a few companies like SOASTA, Keynote and Gomez who all offer testing as a service for larger enterprises, it is not adequate to meet the demand for a self-service solution.

The average Joe Developer/QA professional seldom opts to use one of the aforementioned vendor’s solutions, preferring to use a self-built solution, usually based on open-source JMeter. But, these homemade solutions often prove limited and tend to consume a lot more time and resources than originally anticipated.
BlazeMeter closes these gaps by allowing users to build their own testing environment on an out- of-the-box, testing solution, fully compatible with JMeter providing extra-large testing capacity using dedicated resources.
With BlazeMeter, the user gains complete control over all their testing resources without the need for downloads, training or external sources (i.e. added costs).

Users simply select dedicated testing servers from various types, sizes and multi-geo locations. Users can select when to start, stop, restart and re-size extra-large capacity tests at their sole discretion. Users can upload existing JMeter scripts and edit them in the cloud.

The do-it-your-self solution not only saves a lot of money and setup time but also enable the user to practice load testing on a regular basis. It’s quick, it’s on demand, it’s inexpensive – there is no longer a need to compromise on quality.

In terms of pricing, a user can start testing from $8/server hour – that’s it. $8 represents a load of 300 simultaneous users for a single hour. Want to run a one hour, 6,000 simultaneous users test? It will cost you about $160.

VC Cafe: Several hacking techniques create sever overload to bring down the site. Can BlazeMeter’s technology also be applied to protect the site if an attack occurs?

Alon: Excellent point! BlazeMeter can be used to simulate such attacks very easily and with extra-large capacity. A website can train itself and immune itself against such attacks using BlazeMeter.

VC Cafe: Like any enterprise business run out of Israel, the challenge is distribution. How are you planning to sell Blazemeter? Do you have any key partnerships with ISPs or enterprise software houses?

Alon: BlazeMeter targets the developers and QA testing market. We aim to sell through direct internet sales. Our marketing efforts are focused on content marketing and SEM. We will introduce open API so we can easily integrate to complementary products and allow them to integrate with BlazeMeter. We will partner with existing vendors of dev-test suites and obviously cloud providers.

We do have two business partnerships in IL, one in the US and one in the Far East. I can name Tescom and Tesnet in Israel.
BTW, most of the leading Israeli websites were tested for performance by our tool during BlazeMeter’s garage operation.

VC Cafe: Congratulations on the round by the way. Can you share how much funding you have raised so far and how do you plan to allocate the proceeds of this round?

Alon: The total round is 1.2M$. We plan to invest this in R&D and the continued development of tools that will enhance the JMeter and load testing community.
VC Cafe: You have quite a rich background in the Israeli high tech industry. Did you do anything different in Blazemeter as a result of that experience?

Alon:  a lot :)
Back in 2000 I followed the traditional VC trail, raised a lot of money to build (with a cofounder) one of the first interactive advertising companies.

Today I know that any entrepreneur that believes in his idea, should be able to develop it into a product and bring it into the market on his own before going out to raise capital (if ever).

An entrepreneur should be able to sustain most of the risk (technology and market) on his own before involving VCs or investors. This is basically what I set out to do and was able to accomplish with BlazeMeter. Prior to this round of financing we had a product that was fully functioning and had an established paying customer-base including big names from North America and Europe, all self-service paying via the Internet. During BlazeMeter’s garage operation 1,500 users joined and registered. Close to 100 are paying and using our cloud on a regular basis. Some of our paying customers include banks, government agencies, TV channels, online newspapers, gaming and more.

Only after reaching that pivotal point, did I feel comfortable enough to go out and raise money in order to expand the business.

VC Cafe: Tell me about a technology that excited you recently.

Alon: I’m a strong advocate and evangelist of cloud and open-source technologies. I think the two are changing the world as we speak- it’s a revolution!

VC Cafe: What advice do you have for early stage entrepreneurs coming out of Israel?
Alon: Well .. the usual..
1. Money usually runs out much faster than anticipated.
2. Focus, focus, focus … and don’t forget .. focus.
3. Don’t even think of taking this path if you are not in it for the long haul – i.e. money in the bank, supportive family and friends ,etc.

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