Why Index believes Israel is about to have its moment

By any stretch, Saul Klein is one of Europes most high profile venture capitalists. Index, the company where hes a partner since 2007, has been one of the most active and successful investors around the continent over the past decade. Its had big hits like Skype and MySQL, and remains very busy; for example, it has backed seven of the startups listed in our GigaOM Euro 20.

Given all that, it is not exactly surprising when we met at Indexs offices in Londons posh Mayfair district, and he wanted to put aside all the interminable talk of Europe versus Silicon Valley. Just look at whats important, he says: Europe is on the verge of a breakthrough. Take a city like London, which is full of companies huge companies that are only now really starting to understand what has happened since the first website went online 20 years ago. That represents a huge chance.

In telecoms youve got BT, Vodafone and O2. In banking, youve got Lloyds or HSBC, he says. I think its going to be interesting as a lot of these big European companies start to open up to innovation. Its going to really set a light under the startup community: the number of opportunities that exist for technology today, for applications and services of technology, is legion.

Hes not just talking about online businesses as we know them. What about commerce? Theres so much more to do there. What about power companies? Ripe for change. What about telecoms infrastructure? The ripples of innovation that have hit the web are only now s! tarting to build up into a powerful wave that the old guard cannot ignore. And when the revolution really starts to happen, he believes, it will be most powerful in places that have real cultures to latch on to regardless of what continent or what country that is.

These are the big opportunities for places like London and New York, he says. If you are in cities where you can listen both to the companies and the consumers of those services, as an entrepreneur you have very, very significant opportunities.

But although Klein is closely associated with London, thats not actually where hes spending most of his time these days. Instead, hes betting on another place as the next real innovation hub: Israel. In fact, hes so convinced that last year he took the plunge shipped out and moved his family to Tel Aviv to explore the opportunities there.

Mixed heritage

Id made two investments in Israel before going out there, he points out. And one was in MyHeritage, which is by any stretch of the imagination a big consumer web business its got 60 million registered users, 700 million profiles, 32 languages, millions of dollars in monthly subscription revenues. But its a total anomaly in the Israeli market.

Thats true. The consumer web thats typified by Google, Facebook, Amazon and others has, by and large, passed Israel by. The country has a great reputation for homegrown innovation in areas like computer security, infrastructure and enterprise the profitable but unglamorous areas of the market. But its struggled to keep up in some of the more user-focused areas, which has made building big, public-facing online businesses hard.

Theres not a deep heritage of UI and design, its a very technology-led and centric culture, he says. But its an incredibly entrepreneurial society that punches well above its weight in terms of the ability to solve problems, the ambition. The raw materials for creating great global businesses are there.

In the past p! lenty of Israeli entrepreneurs headed for the U.S., but now the substrate is allowing companies headquartered in Israel to develop while sticking to the same principles as their rivals in Silicon Valley or elsewhere.

There is a wave building now, with companies like BillGuard and Fiverr, plus business-to-business services like Wix or Soluto.

But why now? Interestingly, he suggests that it is not simply that Israel now has some direction that was previously missing but that a neglected group of entrepreneurs have finally reached maturity, and the mainstream.

Success in the shadows

In the background, theres something that most Israelis dont want to acknowledge: this shady foundation, he says. The gaming industry, some of the biggest porn businesses in the world, toolbar businesses.

They might not be tasteful, he says, but in their own way they have created a pool of Israeli entrepreneurs who actually know how to make products the public wants and uses.

These are people who have figured out how to produce, at scale, highly monetized consumer web businesses, he says. So from a talent pool perspective, theres a lot of people who understand how to monetize traffic there. My view of Israel is that the next wave on entrepreneurship there is going to be around consumer web and mobile.

Theres plenty to be skeptical about here. Of course, Israel has always produced plenty of web entrepreneurs but the reality is that, like many others, most of them have moved to the U.S. to build out their companies. Can a home market of just 7 million people ever be big enough to support multinational internet businesses? Is Israel, which exists in its own political and geographical bubble, able to play host to all this?

Thats yet to be seen. Still, Klein suggests with a wry smile, its not as if its ! all or n othing.

The other thing is that Israel is still strong in areas its always been strong in; infrastructure, big data, security, enterprise applications, he says. Watch this space.

Photograph used under Creative Commons license courtesy of Joi Ito

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