In the first nine months of 2016, Israeli high-tech companies raised a total of $4 billion, a year-over-year increase of 27%. Increasingly, these funds are geared towards long-term growth as Startup Nation is shifting into a Scale-Up Nation mode. The shift reflects a new attitude by Israeli entrepreneurs who are now interested less in a quick exit and more in building and running large companies.
The new time horizon is driven in part by home-grown VCs and increasingly by global VC firms. 83North is one such firm and is focused on backing European and Israeli entrepreneurs with an eye to creating global businesses, many of whom end up with headquarters and focus of operations in the US. In late 2014, “83North stood out with its quick closing of $204 million, a third fund for the team, but the first under the 83North rebranding of Greylock Israel,” says the IVC Research Center which tracks and analyzes the Israeli high-tech sector.
“83North” is the sum of the latitudes of Tel-Aviv and London and it captures the unique investment vision of the firm. “We are the only VC firm with offices in Tel-Aviv and London and the only one committed to leveraging investments in both Israel and Europe,” says Erez Ofer, 83North partner. Ofer and the other partners—Laurel Bowden, Arnon Dinur, Yoram Snir and Gil Goren—manage more than $550 million of multi-stage investments split between Israeli and European startups in both the enterprise and consumer sectors.
“In the Israeli part of our business we are moving beyond the startup-nation phase. It’s time for the scale-up phase,” Ofer summarizes the current state of the Israeli high-tech market. “Israel used to be known as a singles and doubles type of startup place. It’s now going for the home run type of outcome,” he explains, adding “people are not rushing to the exits anymore.”
The shift to Scale-Up Nation is driven by both Israeli entrepreneurs and by investors. Many of the people running the current crop of startups are seasoned entrepreneurs with one or two (or more) successful exits in their past and they are looking for a new experience, that of running a large, public company. Late-stage investors are increasingly looking for startups with the right management team and mindset and the potential to become large enterprises. “Funding rounds larger than $20 million were a rare event in the Israeli market prior to 2013. Today, Israeli late-stage startups raise larger financing rounds and are willing to take the longer-term view and swing for the fences,” says Ofer.
For 83North this means, for example, investing in startups that have the potential to become “platforms” in the enterprise IT space. While the startup may focus initially on a very specific customer “pain point,” it must have the vision and the strategy in place to eventually expand to adjacent areas of customer needs. It must also develop and pursue a go-to-market strategy that links it closely to other vendors selling to its targeted customer base, so it can become a strategic component of its customers’ IT ecosystem. “Build a business, don’t build a startup,” is Ofer’s advice to entrepreneurs.
The big ideas, visions, and strategies advanced by entrepreneurs, go hand-in-hand with investors’ big ideas about industry shifts and market dislocations. At the 2009 VMworld, Ofer had an epiphany while listening to a keynote on computer storage. Within the context of the IT industry’s “fundamental shift” to virtualization and the cloud, there was going to be “much friction between the compute layer and the storage layer,” as the former was moving much faster that the latter. That revelation drove Ofer to look for startups with ideas on how to virtualize and bring the storage layer up to speed with the compute layer. Finding the market dislocations, says Ofer, has the added advantage of playing where typically “the big guys, the incumbents, are not paying much attention.”
At 83North, “we search for companies with a big differentiated technology idea and implementation plan. Otherwise, they will get crushed,” says Ofer. The firm differentiates itself from other VCs by conducting this search across two geographies, looking also for synergies and ways to leverage the relative strengths of Israel and Europe. While both geographies have leading startups in both the consumer and enterprise sectors, 83North has found it could bring Israeli expertise and experience in enterprise IT to bear on the development of the sector in Europe. Similarly, it has found it can generate synergies between the hot European Fintech market and the emerging one in Israel. Bringing Israeli security know-how to Europe or European Fintech expertise to Israel is made easier by their proximity. “Guys in the U.S. take longer to fly between the West and East coasts than it takes us to fly between Tel-Aviv and London,” says Ofer.
While casting its net wide over Israel and Europe and helping its portfolio companies establish presence in the U.S., 83North has focused its investments in a number of market segments or clusters of expertise: Enterprise IT, Fintech, eCommerce and media, SaaS and DevOps. AI, Big Data Analytics, AR/VR, automotive and drone companies are emerging areas of interest for VCs and entrepreneurs in the region, according to Ofer. No doubt we will see 83North diversifying in the future into these and other new areas of investment as it continues to ride the scale-up phase of Startup Nation.
Originally published on Forbes.com