Building a scale-up nation

Startup investment Photo: Shutterstock ASAP Creative

As Israeli startups develop an effective sales and marketing culture, many tech companies are seeking to scale-up rather than making a quick exit.

For years, research institutes, high-tech leaders, and government ministers have been telling us that Israel is turning from a startup nation into a scale-up nation. This means that we will see fewer and fewer quick exits for tens or hundreds of millions of dollars. Instead, the next technology giant will come from Israel.

This thesis is supported by reports on financing rounds by the IVC research company, which reports an increase in the number of financing rounds, accompanied by a slowing of early-stage financing rounds. The result is that over the past two years, financing rounds of over $100 million are no longer a rare occurrence, and financing rounds in the tens of millions of dollars have become routine.

In addition to the growing sums that funds and corporate investors are pouring into the industry, however, the classification of a company as a growth company is based primarily on its ability to generate revenue, in other words, to sell. More and more Israeli companies are proving that it is possible to achieve sales to global markets in the tens and hundreds of millions of dollars, despite the time differences, lack of professional know-how, language difficulties, and other challenges. They are still the exceptions, but with the burgeoning growth financing rounds, more companies will have to join them.

According to the prevailing definition, a growth company is one that raised $5-10 million and either has annual sales of at least $1 million or had 20% year-on-year growth in its first five years of sales activity. At the same time, for the growth funds, which are looking for companies growing at exceptionally fast rates, the conditions for investment in growth-stage companies are annual revenue of at least $10 million and a 100% annual growth rate. There are investors in software as a service (SaaS) companies who expect sales to triple in each of the first two years of sales, and to double each year in the next three years.

How many such companies are there in Israel? Since the companies in question are private and the figures about their revenue are private, we can only guess. Industry sources I spoke with believe that there are a few hundred growing high-tech companies with sales of $10 million or more, and no more than 50 companies with sales of $50 million or more. According to IVC figures, 435 companies conducted A financing rounds in 2018 and are striving to reach milestones on the same scale.

To sell or to be sold

"When a company looks three years ahead, it should see itself selling 10 times as much. All of the infrastructure has to grow 10-fold, and so does the managers' ability," Mangrove Capital Partners partner Roy Saar tells "Globes," adding, "Sales are the key, because if you aren't able to establish a group that can take the company to sales in the tens of millions of dollars, you won't grow; you'll be sold, either because the shareholders won't believe that the company will increase in value or because of the market. The trend in most market is towards consolidation. If you're not a big fish in the market, someone will come and swallow you."

In order to make a company grow, an entrepreneur needs management ability, he says but mainly "the ability to bring better and more experienced managers than he or she is." Saar says that a good sales manager needs three other basic traits: experience in sales on this scale, reliance on data, and the ability to plan ahead. "If I have a company that had $3 million in annual sales and is now selling $30 million a year, I need managers with experience in handling $30 million in sales. The second thing is being able to understand and analyze the constant improvements that have to be made in order to meet the growth targets, based on data. The third thing is being capable of looking ahead and planning infrastructure for six months, a year, and two years from now in order to support tens of millions in sales, even if the company's current sales are less than ten million," he says.

The jump from $10 million in sales to sales in the tens of millions of dollars, and then in the hundreds of millions of dollars, is something that not everyone can do. Shlomo Kramer is perhaps the most famous example of this: an entrepreneur and CEO who left Imperva when it reached a stage in which it needed experience and capabilities that he did not have in order to grow and reach substantial sales that brought its value into the billions of dollars. At the same time, according to the increase in the size of financing rounds from one year to the next, it appears that investors believe that Israeli entrepreneurs are also capable of increasing their sales volume.

"If I look back, we had the wave of Amdocs, Nice Systems, and ECI Telecom, which grew, became global leaders, and were not sold. Then came the wave of Check Point, and then we were in the wilderness for many years, during which Israeli companies chased exits and were sold very quickly. But then we saw Israeli companies like Mellanox (which has now been sold, Y.Y.), Wix.com, and CyberArk, with CEOs who began to say, 'I can continue growing in Israel,'" Saar remarks, and goes on to say, "They used to say that Israelis were only good in technology. Then we saw that Israelis were also good in online marketing, and now we see that Israelis are also learning to sell.

"There is also a geographic vector in all of this. Today, more and more companies are judged by how dependent they are on the US market as a leading market. We want to see companies with no more than 50% of sales in the US market, because this is correct risk management, especially in view of what is happening in Europe and China. Today, we also see US companies going outside their home country. An Israeli company with a good connection to Europe and China can makes sales to there from Israel."

If Israel still lacks professional know-how, its strategic location and large-scale immigration compensates for it. The time differences between Israel and Australia, China, Japan, and the US are large, but not as much as the difference between the US and China. You can run a telephone sales campaign from Israel that will be active during the working hours of Chinese customers, US customers, and certainly customers from Europe. Furthermore, Israel has large English and French-speaking communities. In Israel, you can find employees who speak almost any language.

Sivan Shamri Dahan, a partner in the Qumra Capital growth fund, also sees the change. "There are companies in Israel with over $10 million in sales, but going from $10 million to $100 million is harder. 10-15 years ago, it appeared impossible to do it from Israel, and few companies reached it, because they were sold first. The consensus was that it was impossible to build a large company in Israel, but there are such companies now, and there are funds that support their growth. The prevailing practice used to be that if an Israeli company reached these stages, you had to bring in someone from the US to manage it. Now, however, we're confident that there are Israelis capable of doing this."

Sales are usually put in four categories: B2C sales to a small private customer, which are usually conducted online with no personal contact, and three levels of B2B sales: small-scale online sales, medium-sized sales by telephone, and face-to-face sales in large-scale transactions. According to the most recent report by Start-Up National Central, the largest category in Israeli high tech is companies developing solutions for business organizations. Companies that sell directly to private customers, such as Wix.com, will always be a minority in Israel, in which development of deep technologies for large organizations will be dominant.

Competitor for salespeople

Historically, Israeli technologies were sold mainly to large organizational customers. In the exit scenario, one of the customers eventually acquires the company. In order to manage a small number of large deals with multi-billion dollar US companies, Israeli startups customarily set up a limited sales apparatus in the US close to the customer. The company's CEO manages the operation with a US team of experts, after he or she relocates.

As more growth companies arise in Israel, however, the inside sales model is becoming more common. Credit for bringing this model to Israel belongs to Amnon Drori, who led Panaya to tens of millions of dollars in sales by telephone from Israel. Drori, one of Israel's leading and most experienced salespeople, was exposed to inside sales during the dot.com boom when he lived in Silicon Valley and saw how they sold technology products there by telephone.

"We learned how to conduct a 20-minute call with a customer, put a mark next to his or her name on a checklist of clarification questions, understand very quickly what the customer needed, and make him or her clearly understand that value that would be given. That's how we made sales of tens and hundreds of thousands of dollars by telephone," he told Adir Zimerman. The company hired speakers of English, French, and other languages for telephone sales with customers from the US and Europe.

Is there enough know-how in telephone sales and enough professional salespeople in Israel for more companies to succeed in replicating Panaya's success in maintaining a successful sales apparatus in Israel? The talks we held indicate that there are various obstacles to the success of a sales apparatus operating from Israel, and that competition for good salespeople in Israel is at least as intense as the competition for good programmers.

"Israel doesn't have enough good salespeople," a veteran headhunter told "Globes." Zimerman is trying to solve the shortage of professional salespeople through Rainmakers IL, an initiative that he founded in order to promote professionalism in sales among Israeli startups.

"I compete for salespeople with other startups, and that increases the cost," OwnBackup EVP sales Ori Yankelev told "Globes." He added that in this competitive environment, "Every startup tries to achieve a ratio that will be both good for the company and competitive in the market. If a good salesperson has $400,000 a year in sales and I pay him or her $100,000 a year, that's a good ratio."

This cost - a ratio of 25% of the sales target - is much higher than the cost of salespeople according to various studies. It reflects the higher cost caused by competition. For example, a year ago, Viola Ventures general partner Ronen Nir published a study about founding a sales organization for startups. The study found that the salary of a salesperson with annual sales in the $400,000-800,000 range can cost a startup $60,000-120,000 in annual salary.

Gaps in hours and attitude

Yankelev has led OwnBackup's sales since it was founded in 2015 using the inside sales model from the US and Israel, from where he manages sales to Europe. The company sells a product on the SaaS periodic license model. OwnBackup does not disclose its revenue, but it has passed the $10 million sales threshold.

"Up until 15 years ago, there was no sales unit in Israel on the scale there is now. Companies said that no customer would make a $100,000 purchase on the phone, with no face-to-face meeting or handshake. This supposedly impenetrable barrier was a fiction; you can closed a $1 million deal online. In 2000, this approach was brand new. Companies that managed their sales this way achieved a huge market share," Yankelev says. Yankelev learned this approach at the fund he worked at in Boston. As part of his job, he passed the knowledge along to the fund's portfolio companies in order to create added value for them beyond the financial investment.

Yankelev says that knowledge in Israel in this area is very limited, and where it exists, it is called telemarketing. He says that the reason is the difference between two different approaches in the US: "I think that there is a product-focused attitude among startups in Israel that is more typical of the West Coast. CEOs raise money in order to hire more developers and believe that customers will come by themselves. Google and Slack, and almost every company in Silicon Valley, began like that, and this is very similar to companies in Israel. Most of them develop the technology, hire one salesperson for business development with a large organization, and make exits when they reach sales of a few million dollars.

"The East Coast approach is more oriented to building a business. The history there was much more private equity investments and less venture capital. The emphasis was that revenue and sales promote the business, not big venture capital money. This is the approach I came from, and that's how we founded OwnBackup."

In order to sell globally in countries in different time zones, OwnBackup splits its sales geographically. "Selling from Israel to the US requires working from 12 noon to 12 midnight. Those are my work hours, but not many people are willing to work all of those hours," Yankelev says. He says that OwnBackup split its sales apparatus: sales to the US are conducted from the US, and sales to the rest of the world are conducted from Israel.

Without a good sales organization, companies will become US companies

WalkMe senior VP international sales Ofir Hatsor has been in sales at large Israeli and global technology companies since 2002. "Sales is a science. It is a profession like any other. This is completely clear to everyone in the West, but this is not yet the case in Israel. Companies that start in Israel, and I was involved in two of them, regard sales as something that comes to them, but that doesn't happen," he told "Globes." "In the markets of rapid growth companies, you have to be very dynamic and respond very quickly to what happens in the market. Every day starts by looking at the numbers and responding to them.

"If we want to build scale-up companies and keep them here, a good sales organization is absolutely necessary; otherwise, the companies become US companies. You can't sell from here to all of the markets, but the big sales organization can be done from here. Up until now, the startup nation proved that it is excellent in developing technology and selling its technology abroad. The startup nation hasn't really succeeded in creating companies with sales of $1 billion or more. The wishes of the investors and entrepreneurs are the first thing, but in order to sell a company for a billion dollars, you need $1 billion in sales."

WalkMe, also an SaaS company, was founded in 2011. The company previously said that its 2014 sales were double its sales in 2013, its 2015 sales were triple its sales in 2014, and its 2016 sales were triple its sales in 2015. Hatsor has a long way to go before he achieves his goal of revenue in the billions of dollars. In order to do that, WalkMe also split its sales apparatus. In contrast to OwnBackup, however, the split was not just geographic.

"We founded three global centers: one in Sydney, one in Tel Aviv, and one in San Francisco. The aim was to show the customer the value and close an initial deal as fast as possible digitally, by phone, or online. At the same time, we continue to establish centers in various countries that work face-to-face with the large customers," Hatsor explains. "This in effect combines two worlds: efficient remote sales and the old world, which says that in the end, it is very important to the large customers to do business with the local culture and in the local language."

Concerning the feasibility of building a global sales organization based on Israel, Hatsor says, "Thee are salespeople in Israel, and there are excellent people, but not enough of them. Israel is a very effective place from which to do business. First of all, salaries here are relatively sane, and I say that as an employer. Secondly, I can now cover two thirds of the world very effectively from here. Except for the US West Coast and Australia, I'm a short flight away from anywhere. Thirdly, Israel has personnel that always speaks at least two languages, and it's very easy to find a third and fourth language here. In my previous company, I had people who spoke Japanese and French. The problem is that Israelis don't think of sales as a profession."

Published by Globes, Israel business news - en.globes.co.il - on March 26, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Startup investment Photo: Shutterstock ASAP Creative
Startup investment Photo: Shutterstock ASAP Creative
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