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A Piece of the Action

With new investors come new investment opportunities, and many of the most unique ones are in Israel
A teen at work in a start-up (Pexels)
A teen at work in a start-up (Pexels)

In 2015, Israeli start-ups were raising more money than ever before, and better yet, making larger exits than ever before. This, together with an all-time-low interest rate and an overpriced real-estate market, have led entrepreneurs and investors who were not previously involved in the high-tech sector, to try and jump on the bandwagon.

This trend has resulted in a some very interesting ventures that might have not come into existence otherwise. Blender, the Israeli Peer-to-Peer lending platform, which was founded, and funded, by Aviv Group, a construction company, serves as a perfect example for that.

Another positive outcome is the disruption of financing. Several equity crowdfunding platforms, like iAngels and OurCrowd, have emerged in Israel over the past few years with the intent of making startup investing more accessible. These platforms enable startups to become less dependent on angels and VC’s, while enabling accredited investors (who are not necessarily traditional high-tech investors) to review a larger number of investing opportunities, with lower minimum investment requirements. They also enable these qualified individuals to invest through a streamlined process, which eliminate many of the overheads entailed in startup investments.

While there are many positives in the aforementioned situation, it may also pose a threat.

The Golden Goose

Investors and entrepreneurs who come from non high-tech industries, can make an impact in one of two ways. They either try to bring innovation to a traditional industry (preferably, the industry they came from), or seek for a proven business model which appears to consistently work out well for others.

At end of the day, many of them choose the latter. It’s hard not to do so, considering the fact that in Israel, one sub-sector is a genuine goldmine. An area in which everyone seem to have the Midas touch. Online advertising.

The Online Advertising Market In Israel

In Israel, online advertising comes in many shapes and forms.

Some call it digital marketing, others  prefer performance marketing, and some go by the description of “content monetization”.  A number of companies even specialize at particular niches within that sub-sector, such as mobile, display, toolbar, gambling, or casual games.

Hundreds or thousands of companies in Israel are operating in a very similar away, and by that, they are making good profits, and growing at a staggering pace.

Online advertising isn’t the only “Israeli” sub-sector that demonstrates strong performances by a multitude of companies over prolonged periods of time, but it has fewer barriers to entry, and requires smaller initial investments. Knowledge is easy to come by, considering the volumes of people with prior experience in this field. and time to market is minimal. To top it all, the nature of the online advertising business make it more sales and bizdev oriented, than “technological” per se . Thus, it’s not surprising that this specific sub-niche is considered is so lucrative entrepreneurs and investors, and in particular those who come from non high-tech industries.

The Adversities Associated With Sector Overpopulation 

As additional companies tap into this space, which is largely dominated by Israeli players to begin with, profitability margins tighten up. It’s a zero-sum game between many highly similar companies who work with the same list of advertisers and publishers. In many cases it’s just a race to the bottom – overpopulated niches aren’t as profitable as they used to be, unless a company demonstrate genuine technological advancements (which very few companies do), or that it has access to unique advertisers and publishers (which is a situation which can never persist for long).

Another identifier of that industry is the high volatility associated with it. While on the broadest sense it appears online advertising is here to stay, as advertisers are always looking to expand their clientele and publishers are always looking to monetize better, on the micro-level any currently successful advertising technique can easily dissolve into thin air in an instant. Take the toolbar industry that was almost eliminated from existence as a result of decisions made by large corporations. Even crème de la crème companies with stronger technology and a wide array of clients and publishers, like Outbrain or Taboola, can be deemed irrelevant in a year or two, and become replaced with a similar solution that just offers better monetization for clients who use them.

Summary And Future Outlook

The migration of people from traditional industries that have slowed down  to high-tech is a natural process which currently takes place in all industrialized societies across the globe.

In theory, this sort of process should be in favor of everyone involved. Startups have higher potential to grow significantly at a higher pace than other types of businesses. They can easily raise money, including foreign investment money, and pay higher salaries to employees. They can hire doznes or hundreds of people before they even turned in any profit. They can be become highly profitable or be bought by a larger firm at any stage, even quite an early stage, which always results in taxation.

What’s happening right now in Israel is structural deformity. Money and manpower are moving towards the most profitable areas where risk levels are lowest and barriers are almost non-existent, resulting in cannibalization of Israeli revenues  – when one Israeli company in the online advertising segment grows, it is probably on the expense of another Israeli firm.

Not only online advertising is a margin industry, it’s also quite a volatile one. Most companies rely heavily on particular advertisers and publishers that could terminate their agreements at any given moment, and they are even more dependent on media networks and pay-per-click engines. Things are always happening on this frontier, and it’s almost never in the advantage of online advertising firms. It’s only been several months since Google added its insurance comparison feature, which will undoubtedly have a significant negative impact on marketers operating in this industry, and there’s more to come. Media networks and search engines are trying to cut “middlemen” advertisers off, and they can seriously impact the industry as a whole.

So, if this segment will continue growing beyond any proportion, the Israeli high-tech industry and perhaps its entire economy will be affected.

Existing companies will operate on tighter profit margins that will be eaten away by newcomer competitors, which will operate on lower margins in order to compete with the established firms, creating a lose-lose situation. That, and the elusive nature of the industry are major threats – one substantial change in an advertising network guidelines could have an impact an entire country’s economy.

Israeli entrepreneurs and investors who want to own their own internet venture are better off finding new innovative ways to tackle issues which currently don’t have viable solutions (even with the realm of online advertising),  instead of simply trying to get a piece of the action.

About the Author
Alon Rajic is the Managing Director of Fintech firm Finofin LTD. Before that, he worked for XLMedia PLC as the Head of SEO, and helped the company grow from seed stage to a market cap of $200m.
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