The life of Israeli startup entrepreneurs has changed drastically over the past few years. Prior to that, in order to build a startup company, one needed to rent offices, buy computers, servers and communications equipment — and lots of other expensive items — and hire lawyers and accountants to deal with all the bureaucracy.
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The road to a product was long, hard, and expensive. Today, too, success for a new startup is not at all guaranteed, but at least the road is much easier and better paved, thanks to a great extent to the new layer of high tech “seed accelerators” that have blossomed in Israel over the past three years — and have quickly become the first stop in the life cycle of new startups.
An accelerator is a general term used for a wide range of programs intended to promote startups within a short period of time through the use of guidance and mentoring. The accelerator industry started 10 years ago with the founding of Y Combinator in March 2005 in Silicon Valley. Among the many well-known companies that started off in the accelerator are Dropbox and Airbnb, each worth tens of billions of dollars today. Even though people dismissed it at the beginning, the accelerator model has proven itself.
Accelerator programs usually incubate up to 10 firms at a time for a period of three months. During that period, the startups’ founders must work at the accelerator site, where they are exposed to all sorts of educational components and mentoring, as well as receiving a package of professional services — including help from and meetings with investors and technology, business and marketing experts.
The three-month program culminates in a public pitch event, or "Demo Day," during which all the companies present their products to potential investors.
The definition of a seed accelerator is broad and fairly fluid, and includes a wide range of models for its operation: In a small number of programs, the firms receive a small investment from the accelerator in return for an equity share. In some cases the startup and founders are required to work full time on the accelerator’s premises; others only require attendance at weekly programs and meetings.
TheMarker found there are about 70 such accelerators in Israel today, compared to only a few in 2012. And this number seems to be growing quickly. Almost every week a new accelerator is announced. In the past few months, the additions have included TheNest, an accelerator in the city of Petah Tikva, as well as Yahoo’s Sigma Labs and Barclays Bank.
The accelerators can be classified according to the institutions behind them, and each has its own motivation for entering the business. The largest and fastest growing group is that of large corporations, usually multinationals, that establish accelerators in Israel. TheMarker has found that such corporations account for a third of all accelerators active in Israel.
The pioneer was Microsoft, which started its program in 2012, and originally did not focus on any specific technological niche. Citibank and Barclays built their own accelerators in Israel, which concentrate on fintech (financial technology) startups; and technology companies such as Samsung, Intel, IBM and AOL have joined in too. Even traditional industrial firms, such as Coca Cola, have taken an interest and started accelerators.
A number of Israeli companies have signed on too, and not necessarily ones in high-tech industries. They have realized that for a relatively low investment, they can set up such programs for startups and have access to breakthrough innovation at the earliest stages. Such companies include El Al Israel Airlines, real estate firm Shikun & Binui, Bezeq, Strauss foods and the travel firm Daka 90.
In some cases, the accelerators have replaced corporations' other business development programs. They are also different from the veteran business incubators partially financed by the government.
“’Accelerator’ has become a synonym for the business-technology development department,” said a venture capital investor. “It is a sign saying ‘We are open to ideas,’ for a budget of a room and a few pizzas. It is good for startups that at an early stage can already present a pilot of proof of concept to a large and well-known international corporation. It has raised the level of the companies and their ability to reach interesting milestones,” he added.
Another group of accelerators belong to venture capital funds and various groups of investors, who use the accelerator as part of their investment strategy. They support the company from a very early stage, are involved in product development, its adaptation for marketing, and matching the entrepreneurs with potential customers. In doing so, they reduce the risk involved in their investment. In this model, the accelerator generally receives shares in the companies, and has its own funds ready for investment in the firms in later stages. For the investors, one of the most important measures of these startups is their potential for a major exit.
Two programs that started relatively early are the Elevator, which now operates as an investment fund for early startups; and The Junction, which was founded by venture capital fund Genesis Partners in 2011 as an accelerator and workspace, without the fund receiving equity in the startups. The main goal was to connect the fund to the startup sector and allow it to discover promising startups at a an early stage, with the hope of investing in the most promising ones later. This year, Genesis decided to put $50,000 into each of the new companies it brought in — in return for an equity share — after investing in only two of the previous companies in The Junction. The idea is to pick “deep technology” companies with the potential to be major success stories.
Some of the companies behind accelerators operate only outside of Israel, but are still interested in finding promising Israeli technology. The best example is UpWest Labs from Silicon Valley. Another is IcoNYCLabs, from New York City, which specializes in Israeli startups. “From the first day, we were also an [investment] fund. We saw that three or four months is a good period to bring people into the framework. Our value is to help companies adapt their product to the market during the time they are in the United States, to find partners and customers,” says Gil Ben-Artzy, the founder of UpWest Labs, which has already launched two funds to invest in its accelerator startups. In the United States, as opposed to Israel, participation in an accelerator means an equity investment.
Another group of accelerators can be called specialist models, many of which were established by nonprofit organizations. They make up about 20% of the accelerators in Israel. Kamatech was set up to help integrate Haredim into the high-tech world, and its first program ended just this week. MindCET is run by the Center for Educational Technology, and focuses on education. EcoMotion is looking for startups in the transportation sector and TheHive is aimed at new immigrants. Each of these programs tries to provide unique tools and possibilities in its area of expertise. Other non-profits, for example the alumni organization of the elite Israel Defense Forces intelligence 8200 unit, have established more general accelerators. These non-profits do not have a real financial interest in the startups, and will not profit from a major exit.
A number of cities have joined in the party too, and have set up their own programs for local startups. Often they only provide relatively cheap workspace for companies the they want to attract; in other cases, such as Herzliya’s HAC, they are accelerators in every way — except that they specialize in companies interested in urban technologies, such as waste disposal, systems for managing the relations between the city and residents, or other urban issues. Nazareth, Haifa, Ra’anana, Modi’in, Beit Shemesh and Jerusalem have established such workspaces or accelerator programs. In Modi’in, the Hub accelerator actually started as a private initiative.
Universities and other research institutions have also taken part, often filling accelerators with their students and graduates. Most Israeli academic institutions, including the Technion – Israel Institute of Technology, Ben-Gurion University of the Negev and Hebrew University have such programs.
A dream — or a bubble?
The rapidly growing number of such programs invites the question of whether this is just another part of a high-tech bubble. The accelerators lower the entry costs for entrepreneurs founding new startups. Hundreds of new companies participate in these programs every year, and the question is whether they encourage a proliferation of sub-par startups — and keep the healthy effects of natural selection at bay. Are the accelerators flooding the market with dozens of startups that wouldn’t exist under different circumstances?
Since 2013, about 1,000 new startups have appeared in Israel each year, says the IVC Research Center, which specialized in information on Israel's high-tech industry. But there is little data on how many of them have passed through accelerator programs, and more importantly, what has been the effect of those programs — financial or otherwise — and whether they encourage the founding of more startups. A few such companies have been sold in rather small exits, but others — particularly those from Microsoft or UpWest Labs — have raised tens of millions of dollars.
In the industry, the assumption is that the accelerators have a positive influence, even in cases of “less good” companies, and they help startups reach real achievements earlier, and adapt themselves to the market more quickly. “When two geeks sit in a living room for a year, they have no clue they are bad because no one tells them. In comparison, when they are in a four month program, they have much more pressure on them, and if they are bad, they understand it from the feedback around them,” said a venture capital investor.
“The accelerator advanced us in a way that was impossible otherwise,” says S., an entrepreneur who participated in one of the programs this year. His startup entered a framework in which someone — who was on their side but did not let them off easy — pressured them constantly and told them to stop wasting their time and start doing something. “They forced me into much better market research and other discoveries that focused the startup. As a result of the things we learned, we made a ‘pivot’ in the middle of the accelerator,” he said.