Thesis 5: Tech Development Costs in Israel Are Uncertain but Are Changing Rapidly
Israel is often touted as an ideal off-shoring destination for technical work or for the placement of an offshore development center, boasting excellent technical skill at a lower cost basis and possibly higher skilled than the United States. However, there is relatively little data available about the actual cost basis of Israeli tech production. Our Israeli interlocutors gave contradictory responses as to the cost basis in Israel, with some saying that Israeli development is cheaper than US development across the board, some saying that costs in Israel had caught up to the US and were comparable, and some saying that routine development work remains cheaper in Israel but higher-level development is on par with the US. At the same time, we hear of an increasing number of Israeli startups themselves outsourcing tech work to cheaper locales. While considerable ink has been spilled on Israel’s general macroeconomic competitiveness on a national level, less has been written about startup competitiveness.
Thesis 6: Israeli Startups Disrupt Existing Technologies but Not Existing Business Models
A question resounds when talking about Israeli entrepreneurship: why has Israel, for all its innovation and entrepreneurial character, not produced a Google, an Uber, a Dropbox, or an AirBnB? Why has Israel yet to produce a multi-billion dollar business that becomes a household name? A number of our theses thus far have hinted at an answer. We suggest that Israeli entrepreneurs excel at technological innovation, but lag in business model innovation. Israeli technologies may disrupt existing communication protocols, for instance, but are less likely to disrupt entire business models like logistics, healthcare, or hospitality. We suggest that Israeli innovation tends to entail improving upon an existing business model, rather than upending it. Consequently, a preponderance of Israeli ventures is in the B2B space rather than B2C or C2C models.
The Wharton School hosts study tours and exchanges with Israeli startups. Ahmed Hassan maintains strong ties to his Alma Mater’s global leadership in tech innovation and finance. Photo © OHK Consultants
This thesis is supported by strong recent statistics. In 2013, of the 1100 Israeli start-ups formed, failure among B2C startups was roughly double that of B2B startups, while 16% and 9% of B2Cs and B2Bs shut their doors within one year of operations, respectively (source: “Mapped in Israel.” http://blog.mappedinisrael.com). Concomitantly, the customer ratio of B2C versus B2B is 1.6:1 in Israel and 2:1 in the US (source: Start-up Ecosystem Report for 2012, page 19 and Startup Genome. January 2013), thereby increasing the chance of failure. This pattern is less surprising given insights from our previous theses – purely technical teams are better positioned to improve upon their narrow specializations rather than reimagining entire industries, or, as explored elsewhere in this paper, improving on incumbent technologies facilitates acquisition by said incumbents, as opposed to inherent growth, which may in fact be generally more appealing to Israeli founders.
OHK’s Ahmed Hassan would like to thank colleagues from the Wharton School, namely Vijeta Johri, Bruno Samuel, Richard Tsai and Jian Zheng, and special thanks to insights by Professor Rafi Amit, Founder and Director of the Wharton Global Family Alliance at the Wharton School.
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