In this episode, McKinsey’s Israel managing partner David Chinn and McKinsey’s Israel Tech Hub leader Jay Jubas take a deep dive into the challenges facing Israeli start-ups and talk about different ways of approaching those issues.
Peleg Dekalo: David, Jay, first of all, thank you for joining. And let's start from a quick introduction, David, do you mind going first?
David Chinn: Sure. I’m David Chinn. I’m a senior partner in McKinsey and the managing partner of McKinsey in Israel. I’ve been with firm since 1996, and for about the last 20 years, I’ve spent most of my time in the aerospace-and-defense industry working with governments. Particularly helping armed forces and aerospace-and-defense companies on every area from strategy to manufacturing and supply chain.
Peleg Dekalo: Jay, it's not your first time, but still, we want to hear from you.
Jay Jubas: Thank you. Nice to be back, Peleg. Thank you for inviting me. So, my name is Jay Jubas. Like David, I joined McKinsey in 1996. I’m a physicist by training, and I spend my time working with technology companies, telecommunication companies, and media companies as well. I spent the first twenty-four and a half years of my career in North America, working with clients, mostly in North America and Latin America. A little more than half a year ago, I moved to Israel to be part of this wonderful tech ecosystem in this wonderful country, and I am leading now on behalf of McKinsey, a division within the firm called Fuel, that works with start-ups.
We work with companies at different stages in their lifecycle, from early stage to exit and then in some cases beyond exit. And we help them in a range of topics that have to do with fundraising, strategy, operational improvements, scaling, a large range of ways we work with companies in this vibrant economy.
How we help tech clients with their challenges
Peleg Dekalo: David, it would be great if you can help our listeners understand a bit about McKinsey’s overarching methodology and how it’s adapted to serve the tech industry here in Israel.
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David Chinn: McKinsey has been around for a long time. We started in 1928 and really created the modern profession of management consulting. McKinsey is a global company. We have over 100 offices in 50 countries and over 35,000 professionals working for us. I think the primary feature of how we serve clients is that we serve all clients as clients of the global firm.
We’re talking about Israeli tech companies. A tech company in Israel, first of all, is in almost no case an Israeli company in the traditional sense of the word. It’s a company with a global customer base that often started in Israel, sometimes is based in Israel. And when McKinsey supports them, it does so with a global team.
We have Jay and the yech hub team here physically close, bringing global perspectives, but always a group of experts from around the world. So, you might have our biotech experts from our Boston hub, or our fintech experts from London, Frankfurt, or New York, or a manufacturing expert from India helping you with offshore manufacturing. So, in every case, whatever the company needs, McKinsey assembles a team from around the world to help it with its issue.
Peleg Dekalo: David, how is serving a tech company or even more so, a tech start-up, different than serving clients pertaining to other sectors?
David Chinn: I spent a lot of my career serving very large companies, and often for them, in addition to working out what to do, actually making it happen is very complex. There are a lot of different interests. There’s a lot of different people involved in a complex organization structure. Start-ups have none of those issues. One of the ways in which we serve start-ups is different as we solve their problems much more quickly. Start-ups, by definition, they’re early in their life, they’re changing very fast. They’re growing very fast, so they need generally quick solutions, not complex solutions to their problems. And they constantly change and evolve. The famous pivot—first of all—they often change what their business is. And then as they grow, they have to adapt continually to doing that. And so, we have to adapt the way we serve them to the stage of the lifecycle that they’re in.
Maybe the other thing that’s really different between start-ups and larger organizations is start-ups have to continually raise money to fund their operations. And that raising of money creates many big transactional moments in their life for which they have to prepare; which they have to be able to tell their story in a compelling way. We have a series of ways in which we support companies going through that particular moment of truth in their development.
Peleg Dekalo: Jay, anything to add to that from your point of view?
Jay Jubas: Sure, I agree 100 percent with what David said. I mean, just to put rough numbers on it, when we work with a large organization, a strategy engagement might be three, four or five months. Typically, for a start-up—an engagement would be three to four weeks, five weeks tops, because what they need is an answer. They need it quickly. They need enough of a fact base on which they can form the basis of them taking action, but they don’t need more than that. There isn’t the whole alignment that needs to be created. There’s one or two decision-makers and they go, and they go quickly. And by bringing in experts from around the world, we’re able to meet that need for speed. So, I think not much really to add to what David said, but it is a dramatic difference in terms of the speed with which we give the answers and the ability to go from answer to implementation essentially instantaneously.
Three sets of challenges facing start-ups
Peleg Dekalo: Now after laying out more of the client engagement structural differences if you will, let’s dive into the content of those engagements. What kind of business and management challenges do start-ups experience?
David Chinn: Start-ups face three sets of challenges. First of all, they have to work out what their strategy is. Start with, ‘What is my product, and who I am I selling it to?’ Then it might be, ‘How do I enter a new market?’ or ‘How do I extend beyond my existing product to take advantage of the customer base that I’ve built?’ and then strategic questions like M&A: ‘If I want to pivot to a different direction, should I do it through building this myself through acquiring? And what does that do to the company?’
The second set of issues are around telling an equity story. So, in order to raise money, you have to convince investors that you’re a good investment. We call that an equity story. It has a narrative component: ‘What’s the situation in the world that creates this opportunity? What’s my solution to that opportunity in the world? And how do I differentiate myself in order to deliver against that opportunity?’ And then, ‘What are all the numbers behind that? How big is that market? What is the value I create?’ And then ultimately, ‘What’s my business plan? What is the revenue and cost projections that enable me to convince investors that I’m actually going to make money in the long run?’
And then finally, as you grow a company, there are many functional issues. Sales and go-to market, manufacturing, distribution, pricing and so on, which are all issues that evolving companies and large companies need to solve on a continuing and ongoing basis. So those are the three sets of issues that we find ourselves addressing. Obviously, they’re quite varied.
Number one: How to expand into new markets
Peleg Dekalo: To sum up, we are speaking about strategic challenges, support in fundraising, and handling functional issues, which all three are of course broad sets of challenges and within those we can find a lot of subsets of challenges. My suggestion is that we’ll make these three challenges more lively through examples and let’s start from strategy problems. Jay, do we have any example there?
Jay Jubas: Sure. Though I might reframe it from problems to opportunities. Start-ups are generally successful by relentlessly focusing on a customer problem. They identify a problem that a group of customers has, and they relentlessly focus on solving that problem in the best possible way, delivering value to a particular set of customers who are solving a particular problem.
And start-ups, unlike large organizations, do not have the wherewithal to be focusing on all the other applications that a technology that they’ve created may help solve. And when the time is right, they will often ask, ‘We see many, many potential applications of our technology. When and what should we focus on next? We’ve got this machine. 95 percent of our energy is going to continue going into that machine, but we need to start taking steps if we’re going to have a new offering in 12 months or 18 months. We need to start taking steps now to figure out what that new offering should be.’ And very often, they will invite us in because we tend to bring very deep understanding of their end customers.
To give you one particular example, we worked within the last year at a company in the fintech space, which excelled at a particular solution and a part, in this case, of insurance companies. And the business was growing very, very well, but the realization was that the AI-based technology that they had had many, many other potential applications, both within the insurance vertical as well as many potential other verticals. And the work we did with them was to very quickly go through all the potential use cases of their particular technology, leverage the understanding we have of the potential customers in each of the potential verticals that the technology could have been relevant to, and through a process of understanding the competitive situation in each of the other verticals that this was potentially relevant to, and understanding the core technology that this company had, and the level of effort it would take to create an offering that would be compelling, we help them prioritize.
And I don’t want to give away exactly what the solution was, but we helped them go from a fairly long list of potential use cases for the technology to one or two that they were going to focus on. And they are now in the process of creating an offering with a pilot customer and have very large expectations for what that will achieve.
Peleg Dekalo: Especially for start-ups that need to move fast and where the cost of moving forward in the wrong route is higher, they must make sure they’re moving in the right direction. Now on to our next big issue—fundraising. David, what can you share with us on that front?
Number two: How to speak to your investors
David Chinn: I think this is most relevant to companies that have, as we say, a less than simple story to tell. I mean, if you have a simple product in a well-established category, then typically, those companies find it relatively easy to tell the story. But many of the companies we work with are, in fact, inventing their own categories.
We worked with a company recently that actually has amazing technology that is relevant to many different markets and it sits across a number of different categories. And so, telling the story of where the value is going to come from for this, let’s call it a platform technology, is actually quite complicated. So, we actually had to look across the entire universe of potential applications--more than 50 different potential applications. We then had to categorize them by the ones where they already had pilot projects and on the way to establishing product/market fit, those which were credible in the near-term and those which, frankly, were less likely because they depended upon other things happening in the world that made those markets more interested in this technology solution, and then to try and work out what’s the addressable market for a product that doesn’t exist anywhere across all of these different categories, and what would it take for them to be successful, understand the competitive environment, particularly, the more accessible markets.
There are different solutions that meet some of the needs. What’s the value to customers? And for a product that doesn’t exist, how do you work out what the revenue might be? You can only understand it in how much of the possible value you create for your customers would they be willing to share with you? And does that make sense given the costs of providing that solution?
So that, in the end, leads you from a story about how this company is literally planning to change the world through to a very detailed business plan that says, if they have these milestones in these markets, they can expect this kind of revenue versus this kind of cost base. And therefore, you can see a path over time to potential profitability. And finally, a real understanding of the risks to that so that an investor can understand really what they’re getting into.
That together is a story that they can tell to a potential investor about why they’re a good investment and how they would ultimately make money that could reward that investor. So that’s an equity story.
Peleg Dekalo: What a great example, and especially when a start-up is targeting an uncharted territory, telling your story in a concise and compelling way can definitely come in handy. And another thing that David mentioned, the third and last one, scaling functional capabilities. It’s all about scale. So, let’s talk a little bit about that.
Number three: How to scale your operations
Jay Jubas: Absolutely. We see that in many, many varieties. We see that in scaling organizational capabilities in the commercial organization, we will find cases where we need to help a company build sales operations. Many companies will have sort of rudimentary sales organization, but as the company grows, they have not put in place all the discipline that a proper sales operation would have. So, I would say a lot of the work we do tends to be in the commercial areas, but interestingly, we’re completing work right now with a company that is in the medical device space.
Their particular challenge is that they created a very, very interesting technology, but the cost of the device they created is very expensive. And for pilot deployments, it’s quite fine. Customers who adopt their technology will create much more value from it to offset the cost. But they know that if they have hopes of really scaling the business, they need to take the cost of the device down by a considerable amount of money, some 40 percent or so.
We work with the client on a redesign of their medical device, in this case leveraging a design-to-value capability we have in Europe, where we tear down the product and really go back to basics of electronics design and help them lower the cost of materials, what actually is in there and what can be replaced with lower cost, and what could be designed a little bit differently so that certain expensive components are not needed?
Half of the value has come from a redesign and then half of the value came from just helping them understand a lean manufacturing-assembly process. This is an assembled product. There are best practices that device companies have for assembling such products at a much lower cost, using lean approaches, so we help them design a much lower cost assembly operation.
Peleg Dekalo: And we also encourage companies to do those things as soon as possible. To do those revamps of their cost structure in order to just scale more healthily.
Jay Jubas: 100 percent. It’s all about scale. I mean, the first step is proving that you’ve got a solution that works and adds value to your customer. And once you’ve got product and market fit, you’ve got customers who are willing to pay for your device. That roadmap by which you’re going to show your customers that you can take them down, and that you can improve the economics of the offering quite quickly is very, very key to enabling the companies to scale. So it’s important to be thinking about what the price point is you really need to hit, and show that you can make money and add value to customers at that price point?
Peleg Dekalo: You both got the chance to work with a lot of Israeli entrepreneurs in the past few years. So, what is your general impression of Israeli entrepreneurs when compared to entrepreneurs from the rest of the world? And what would be your top advice?
To stay ahead, think about your long-term plan
Jay Jubas: Well, the first thing I would say is I’ve been remarkably impressed with the sophistication of Israeli entrepreneurs. I met many entrepreneurs ten, 15 years ago and it was quite different. Brilliant technologists, but generally less sophisticated businesspeople, less global awareness of what’s going on and the generation of entrepreneurs that we’ve been working with and that we’ve been meeting here really are as good as the best entrepreneurs anywhere in the world. Really remarkable understanding of customers, remarkable understanding of the businesses that customers are in, not just technology-out, but really thinking ‘market back, customer back.’ So, Israeli entrepreneurs are remarkable.
I think the one piece of advice I might give is to be thinking long term, right? Again, it’s a hard act to do because you have to have that relentless focus on solving the customer problem. But as a founder or as CEO of a scaling company, really be thinking 24 months out, 36 months out, where you want to be and start planting seeds for how the company is going to not just scale its current offering but scale the technology platform or scale whatever they have to really change the world in a more profound way than perhaps the path they might see immediately in front of them.
Peleg Dekalo: David.
David Chinn: Like Jay, I’m super impressed by the people that I’ve met. I think the thing that I most enjoy when I talk to entrepreneurs, the ones who are honest, who admit how many times they’ve had to transform themselves as leaders through the journey of their company. It’s a very different person who can lead a three-person start-up coming up with an idea to someone who can lead a 300 or even 3,000-person organization. And when it’s the same individual, that’s an incredible journey of self-transformation.
I think I would echo Jay’s thing about thinking long-term, but I would think long-term also about the team. The Israeli talent market is getting very tight for people, which is, forcing, first of all, a more global approach to sourcing talent. But having the key professionals just before you need them. And the key senior management position is critical. We observe a real challenge finding, for example, experienced CFOs in Israel who can help a company get ready to go public.
Finding people early and being able to attract them. And sometimes it takes a campaign to find a person like that. That can take many months. It’s said that entrepreneurs are always hiring and always raising money. And in both of those cases, taking a long-term perspective on where you’re going to need to get to can give you an edge.
Peleg Dekalo: Great. So, we’ve reached the end of the discussion. It was short and on point exactly as we—and also Israeli entrepreneurs—like. So, thank you very much for joining. Thank you for participating in the podcast.