Why the Possible Waze Exit is So Important to Israel's Ecosystem

Rumors continue to swirl that Facebook is currently negotiating a buyout of Waze, the popular social mapping app. The app was founded by three co-founders, Uri Levine, Ehud Shabtai, and Amir Shinar, and is based in Israel with an office in Palo Alto. As part of a potential Facebook acqusition, the Palo Alto team would be merged into FB's Menlo Park office, while the Israel team would be used as a launching point to launch Facebook's engineering efforts in that country.

TechCrunch today ran an article that discussed whether the creation of the Facebook office would harm the nascent start-up community in Israel. The article's author, Mike Butcher describes a conversation:

Because, he says, although the Waze R&D center could be a beach-head for a full-blown Facebook R&D shop, and thus good for Facebook, “it could have catastrophic effects upon local early stage startups’ ability to compete on salaries and benefits.”

His argument is that if a big company like Facebook stays away, then the Israeli tech ecosystem is more likely to be able to “push more innovation” towards Silicon Valley, which would be in the “best interest of both the local startup industry and Facebook.”

Certainly, such a large acquisition inside such a relatively small country could well change the successful dynamics of the Israeli eco-system. If it became a mere engineering centre for Facebook, Apple and Google, the implication is that we might not see quite the same levels of startup activity as we’ve seen emerge in the past from Israel.

That is almost certainly overstating the ‘problem’. It’s more likely that the experience of being inside these big tech companies in Israel is more likely to create a virtuous circle of new entrepreneurs, spin-outs and new projects. Plus, more eyes and ears on the ground for potential acquisitions.

Indeed, one should be cautious with the labor market in a country of 7.7M (which is smaller than the size of the Bay Area). It is true that slight changes in the available jobs could dramatically change the price of wages, which in turn, could equally affect the growth of the start-up ecosystem.

This reasoning is deeply flawed though, which Butcher points out but not nearly strongly enough.

Exits are everything in venture, a point that I seem to have to make to people far more frequently than I expect. Entrepreneurs (minus some exceptions) want to get rewarded for the risks they are taking in launching their business. Venture capitalists want to have strong returns by putting money in fast growing companies that eventually lead to liquidity. Even governments benefit from the exits, since taxes aren't collected until the underlying securities are liquid (Facebook's IPO, for instance, greatly helped the California state budget).

Waze and the building of a new Facebook engineering center in Israel won't harm the ecosystem – it will dramatically improve it. By showing that Israeli companies are capable of building billion dollar businesses in the consumer space, the country will not only attract more investment than before, it will attract more in-flow talent from places like Europe where such exits can at times be difficult to reach. Not only will Waze not harm the local ecosystem, it may be just the kind of fuel for the fire that leads to Israel becoming a key innovation center with a stature equal to that of Silicon Valley.

Not all exits are necessarily good – many acqui-hires are not positive for the founders or the investors. But a billion dollar acquisition of a mobile app? Yes please.