How Israeli Blockchain Startups Attracted $650M, And What Are They Ready To Overpay For
In the first part of an interview with Roman GOLD, founding partner of the Israeli Blockchain Association and managing partner of the JSCapital investment platform, we found out, that the Israeli blockchain market is developing rapidly: the amount of such startups has grown up 3 times since the beginning of the year. However, some features of the long-established startup market dictate their conditions, squeezing out the raw projects and those that are unreliable to invest.
Israeli startups have taken the path of developing blockchain as a technology to improve existing IT products and create the new ones. In October 2018, the head of the blockchain startup Sirin Labs allocated $1.9M (NIS 7 million) to establish the first institute for applied Blockchain research in Israel. It is based on the Tel Aviv University (TAU), which positions it alongside with comparable institutes at leading research universities around the world in a very small list.
In this part of the interview, we will talk with Mr. GOLD about the criteria that determine the prospects of a blockchain startup, market problems and trends that experts predict. And also we will find out, why ICO is not welcome here and what is the role of blockchain in the startup industry.
Blockchain as a technology
BNT: Why is there no ICO in Israel, what is the main reason?
RG: At the time, blockchain startups made some attempts to run the ICO. But this kind of crowdfunding is almost a thing of the past. Several high-profile projects have raised more than $100 million, but they are more an exception, than the rule, for the market. But at the same time the use of blockchain as a fundamental technology has increased many times. Almost all major stable blockchain companies in the market make regular equity rounds, attract classic institutional and corporate venture investors, and don’t even think about ICO. And they look much more attractive for an institutional investor, than any of ICO startups, because we are talking about specific blockchain businesses with the particular products.
BNT: Where have the projects, that have been recognized as gray or unacceptable moved from the market?
RG: We can only provide the internal statistics, according to which Estonia is in the first place, Gibraltar and Malta are in the second. In other countries, where they have moved, there are already Israeli blockchain projects been incorporated. There are lots of Israeli startups in Switzerland, a lot in Singapore, and the rest are harmoniously placed all around the world, where there is a favorable regulation.
BNT: You say that the majority of startups are those where the blockchain is used as technology to improve the company products. Please give some examples.
RG: In the Israeli market, blockchain startups have gained maximum expertise in very difficult science-intensive processes, such as infrastructure solutions and new protocols. Among 200 of now existing blockchain startups nearly 60 companies are fintech projects and 40 of them are specialized on infrastructure and protocols. These two segments now dominate and apparently will continue to occupy a leading position, as Israel has already developed the high valued expertise and ability to sell and implement these technologies.
BNT: What is the most outstanding example of the blockchain use as a technology you can name?
RG: The most chrestomathic example is the company Revelator, which manages the digital copyright. For example, the musician recorded his album, which he decided to distribute not through a major label like Warner Bros., Entertainment or Sony, and do it on his own or through a group of private labels. He would have to use dozens of business models that allow to distribute the content and receive payments from listening to songs. The payment can be made in seconds as with Spotify, or as payment for the track as in Itunes. At the end of each month, it is determined how many payments the author has earned. This is reflected in a 40 GB summary file that even Microsoft Excel cannot open, because all of these microtransactions are multiplied by the amount of content distribution channels and the number of countries where it is distributed. In this situation, it becomes almost impossible to track and manage the authors’ rights. Revelator solved this problem with the help of blockchain without changing the existing business model. Immediately after that, the platform was joined by institutional investors, such as Digital Currency Group, which tends to invest in blockchain as a technology.
Staff shortages and the blockchain education
BNT: What are the main obstacles to the development of startups in the market of Israel in your opinion?
RG: I would say that there is one problem, which is typical for the entire Israeli startup market - personel. According to various estimates, the staff shortage in the IT sector is from 15 to 50 thousand programmers, and this deficit is even greater in the blockchain ecosystem.
The professional has a choice: to go to the state structure, if he wants to get a quick rise up the career ladder, but this is not comparable to the corporate sector financial conditions. He can also go to a big company for excellent conditions, because the headhunting for blockchain developers and architects has reached its peak. Or a specialist can get a job in one of the successful and large blockchain startups, where there are many internal initiatives and spin-offs. There is also another way for a blockchain developer: to create his own startup.
If experts will increasingly choose the first three options, it will be a bad indicator for the market, as it means that the niche will soon collapse. On the other hand, we don’t see such tendention because of the large number of new startups. This is still a part of the Israeli business culture: everyone wants to create something new. And such dynamics of growth can be shown by a young team, which will never be achieved by a corporation or a large startup.
BNT: How is the staff problem being solved, how and where are startups looking for blockchain specialists?
RG: There is a so-called startup-visa, which is used by the Israeli blockchain community systematically for hiring the foreign programmers. Many companies are trying to solve the personnel problem with the help of outsourcing and outstaff, but Israeli startups almost are not used to go this way, although it looks more logical, faster and cheaper. Here, team cohesion is highly valued and there the people are ready to overpay for it. Any type of offshore development for an Israeli startup is the last and extreme measure.
In fact, the main base of specialists in the market consists of existing professionals with extensive experience, who improve their skills and qualification within the country, in-house. Recently, Microsoft announced a serious course on retraining developers to complement their expertise with blockchain competencies.
BNT: What problem aspects in the labor market of the blockchain field can you name?
RG: In addition to the lack of technical staff, there is also a lack of management. And this problem is solved by attracting specialists from the old corporate segment. There is a good example: an Israeli startup has created a decentralized diamond exchange on the blockchain, and began to develop its product with the support of the old Israeli Diamond Exchange. In the end they stopped the cooperation and parted ways. It seemed that startup would not survive. However, everything turned out the opposite way: the president of the exchange retired and became the chairman of this startup, and not as just a formal, but a full-time employee.
Current investments and forecasts
BNT: Which countries are most interested in blockchain projects of Israel?
RG: The United States is still on the first place, although its share is decreasing from year to year. On the second place there is China, if taking in account not only the funds that are incorporated in this country, but also those ones, which can be located in the USA or Europe with the Chinese structures as the beneficiaries.
BNT: What is the total investment in startups for the year?
RG: Last year, the total number of investments in business projects of Israel amounted to about $5 billion, with the share of domestic funds and private investors about 13-14%? and the rest - of foreign market players. And about $580 million of these funds was invested in blockchain startups in 2017, and about $650 million is expected to be by the end of 2018.
Basically, Israeli startups attract investments either from super-angels or from venture capital investors, or from large corporations. For example, one of the last major deals ended with a large investment in blockchain company of Israel from Samsung Ventures.
BNT: What are your forecasts for 2019?
RG: Our Blockchain Association conducted an analysis and identified several trends. The first and most obvious is: the highest point of growth in the blockchain market has not been passed yet. And the number of companies will only increase, and it will be a rapidly process: at the beginning of this year we had 60 startups, and by the 3rd quarter - already 200 companies, so we can suggest, that 400-500 projects are expected by 2019. However, it doesn't mean that 200 or 300 of new companies will appear on the market right tomorrow. Such statistics will be formed by the existing traditional projects, that already have their own products and validated business models, which will introduce the blockchain technology and become the part of the blockchain startup market.
The second trend is the development of infrastructure and protocol solutions, which require strong academic qualification: higher mathematics, cryptography, physics. Almost all of such companies will be spin-off from the academic environment. For example, when the research team begins to develop its startup outside the university. Or sometimes it could go this way: an expert, who had spent 10-20 years for his research, while continuing his academic activities, now becomes the founder of the blockchain startup that uses his development.