Why Israel Keeps Producing Billion-Dollar Consumer Companies with Danny Cohen and Oren Charnoff

0:00People have this view that AI, the core platform, will take all the market. I think that will not happen. Unlike enterprise, the majority of consumers will not develop their own apps. No matter how easy that is, there are people that will always buy other people's software. Danny Cohen grew up watching Israel become a startup nation. Now alongside Oren Chernoff, he's betting the country's next breakout wave will be consumer. Through Sicker Ventures, they're backing a new generation of Israeli founders, building profitable, globally-minded consumer brands and apps designed to win far beyond Israel's borders.

0:32Today, Sicker Ventures is helping redefine what consumer innovation from Israel can look like. We deeply believe the best distribution tends to win, not necessarily the best product and consumer. So we look for those types of entrepreneurs. I think the reality is great marketing alone will not get there if the product is shit, right? Because if they're just product people and that's all they are, they'll just never pass the first year into the real market.

1:00Danny and Oren, thank you both so much for coming on the podcast. I am so excited to have this chat with you. How are you both doing today? We're pumped. Long-time listener, first-time caller. Oh, my gosh. Well, thank you so much for listening. I really do appreciate it. And I'm excited to talk all things Israel, all things consumer, and sticker ventures. So I'm really, really excited for this conversation. I want to, if you can give us like a brief history on the Israel as it pertains to technology and startup innovation. Why has Israel dominated when it comes to technology startup innovation from your perspective?

1:46Sure. Maybe I'll take that because I was a little bit older. So I was there when things I don't think started, but I was there when they emerged. Mike, hope you're OK. You're OK there. I'm good. I'm great. I'm great. Great. I think there were a couple of drivers that were significant for Israel Tech. Probably the obvious one is that without taking any size or opinions, we live in a difficult neighborhood. We have a pretty strong military investment. And one of the things is that the military is based on technology and innovation. and when people leave the military, the IP that they develop or the knowledge is theirs, and usually they take that and create a wide range of products, and it turns out that what is applicable in the Army is usually applicable to many, many other areas, and kind of the empowerment that you get in the Army transmits itself to a startup thing.

2:40So that is one. The other two, and we won't take much into it, But Intel, which used to be the darling of Silicon Valley, they opened up an R &D center in Israel in the 70s. And that drove, that was the first of many of these R &D centers that started to come because of talent that moved from Israel to Silicon Valley and back. And that kind of open road between what used to be the only technology hub and Israel really generated later on R &D centers from Microsoft and then later on Google and Meta. and so on. So the combination of the military, there's multinationals. And I think the third thing maybe is Israelis are very innovative and they want to, they always think their boss is an idiot and they should do, they could do a better job.

3:27So that kind of, that combination together creates the magic. Amazing. Amazing. Yeah. I, I, I appreciate that summary. I don't know, or if you have anything else to add on this? Yeah. I think the one thing is I'm an immigrant to Israel. And I moved in 2018 from the States. But for folks who've gone through the army, and then they do university, when they go to university, university in Israel is three years. It's like vocational university. There's less liberal arts than in the States, less mandatory classes. So you already have a lot of identity about who you are, what you want. But like people benefit from business school, you have the military network and then your university network.

4:08So you're really starting your career a bit older. And the last thing I'd say is people are willing to take way more risk here than in the States, way more risk. So the fear of starting a company that might not work, I don't know, that failure celebrated if it doesn't work out, but also people are less risk averse in Israel than they are in the States. Is that just because it's kind of ingrained in the culture and also, you know, the history? There's one thing I always say to people, the word startup is a slang word in Israel. So we can sit in a dinner and you would say something funny and I would say, oh, Mike, that's a startup.

4:44And we don't mean that from, you know, it's not really a startup, but it's really embedded in the culture. And I think that that really defines that. It's incredible. It's incredible. I know that, you know, Israel has historically been a B2B market and as well as, as well, you know, also military to technology for the military. What, talk about like the moment that's kind of on when it comes to innovation? And what is a specific unlock right now that makes you both feel confident that it's the consumer moment in Israel? So firstly, Israel has always done consumer. Always. Israel is great at it.

5:24Just a couple of recent examples. A billion dollar exits as of late. Oddity on the cosmetic side is a public company on NASDAQ. Etoro on the consumer crypto side is also a public company in the US. Resident Mattresses, billion dollar e-commerce mattress outcome, Superplay Gaming. And that's all just from the past 18-ish months or so. But I want to talk about how this has always been the case. Maybe you're a customer, a shareholder of Fiverr, eToro, again, Lemonade, Hippo, Wix, Simply, MyHeritage, Guardio, So, Lightrix, Move It, Waze, Mixed Tiles, Addicted, Resident Mattresses, again, Bubble Skin Care, Nanit Baby Monitor, or if you're in gaming, anything from Moon Active or Playtica.

6:13These are not anomalies. But I think the thing that's happening right now is the momentum, the expert alumni, the newly minted angels, the repeat founders, that it's just we see way more people building in consumer now than years ago, but we've always been building in consumer. Do you think as well that there's a lot of... Sorry, Danny, if you have anything to add on that, first of all. Just the resident mattresses one, I think is a great example because people are not always familiar with it. But Casper, Purple, there were not great stories. Who won in that market was the Israeli version. Resident won.

6:50They did a much better job than the US comparables to it. And I think that reflects the quality of the consumer startups when they do emerge out of Israel. Why did they do a much better job than the American companies? Because I think they hacked it. Yeah, a hack is totally the word. You know, I think the Americans went for brand with a capital B. And the Israelis, kind of with the outside in perspective, were just following the math. They weren't necessarily taking out subway ads to establish brand in Manhattan. They were Google, quant, data science alumni who followed the math. So it was built fundamentally differently.

7:33So they were outlasted and got to a billion dollars of profitable revenue and were bought for a billion dollars by the largest furniture retailer in the States called Ashley's. Hacking is the right word, Danny. Totally. So they were honestly just maniacal in terms of their actual marketing spend and ROI and ROAS and what their overall CAC is versus sales. Yeah. With no, you know, almost to an extreme, just driving through the numbers. And by the way, still today, Ashley Home Furniture, everything on the data numbers and performance marketing is done out of Israel. Wow. Well, how do you think about that in your analysis when you actually talk to companies in terms of how much like even like a marketing spend?

8:18Because consumer, you know, usually a lot of money gets tied up in terms of marketing spend. When you're talking to founders and talking to companies, how do you think about brand awareness spend, for example, versus spend that actually leads to ROI directly? I think when we look at our fund is sticker ventures, we're a small fund. And, you know, we come in usually early, early on, it's performance is the only thing that matters. The only thing, right? We're not our money, not a single dollar is spent on long term brand, you hope that some of the performance marketing will translate to brand, right, that the product will be good enough that will translate to brand.

8:57But it's not the early stage money that we look on. Then it's only ROAS, ROI, L2B to CAC. Makes sense. Orin, anything to add there? Yeah, so Danny was talking about the core numbers that we look at. We also are looking for them not just to be performance marketing quants, but also exceptionally financially literate as well. Something that Danny and I like to talk a lot about is we don't just look for ROAS. We look for founders who talk about POAS, profitability on ad spend. So people who have that language on day one is they have a contribution margin orientation and not just a purely performance marketing.

9:37But the power of performance marketing is the fast feedback loops. And so for these early stage hackers, you can get those fast feedback loops. And we look for both marketing and financial oriented metrics as part of their language. What's also typically the route to market for Israeli companies? Is that typically day one that they're going into the U.S.? And how do you think about validation since you are investing in the early stages? Yeah. So first of all, we should say that when we invest in companies, they're usually Israeli based, but we target the global markets. So usually initially US, maybe beyond that, but Israel's market is not interesting for us exactly, Mike, for what you talked about.

10:19And in today's market, we push the entrepreneurs to go US day one. We're not interested in a pilot or anything done in Israel because we don't think that translation works well. Now, I'm telling you, the data is the most interesting input on what you have. It's so easy to launch in the U.S. You don't need to do anything. And the data can tell you the story. Now, I can give you an example. I was an investor in a company called Lightrix. I had an app called Facetune. The four guys got to 10 million in revenue without visiting, I think, the U.S. in their lives. Right. And they had unbelievable economics, good brand recognition, all of it.

10:56It was all because they had good product market fit. And they did it all from their dorms in Hebrew University in Jerusalem. That's wild. Anything to add there, Oren? Nothing. Danny got it. Why? That's really, really. I appreciate that story about them getting to$10 million. How do you think... I know that when you talk to founders, when you're interviewing founders and thinking about, hey, should we invest in this company or not? I know that profitability is maybe the number one center that you all are thinking about. How do you balance profitability and growth? Because obviously, you want the company to grow, right?

11:42And sometimes, in terms of growth, that's why many companies are negative EBITDA and are not profitable because they're spending so much money in order to grow. How do you think about this balancing act? So it's not that the companies need to be profitable on day one, but they need to have a profitability orientation or that they understand that that's what they're building towards. It's not the growth at all costs like everyone likes to talk about. It's unit economics. It's are some of the things that we want to hear about. They're not going to be profitable for a long time, most always. I think across our 12 investments we've made to date, I think we have one profitable company right now.

12:25And we're fine with that. But there it's the exception to the rule, but that's because we're coming in at inception. But we're looking for the founders who are talking about that profitability early on. I totally, totally agree to that. And I think one of the faults that people had, especially when you look at 2020 and COVID times, is that they looked at non-profitable growth, meaning buying users that will never be profitable or buying cohorts that will never be profitable doesn't make any sense. It just does not, has no value creation at all, right? So it's okay that the early cohorts are not profitable because you learn on them.

13:02But at the end, as you scale, you have to have a playbook where at some point you see profitability on them because Otherwise, it just doesn't make any sense. That makes sense.

13:17When you get involved in terms of the early stage, do they have to have... For you all, there has to be some cohorts that are working, right? in terms of that you actually see maybe repeat purchase or if it's a subscription that there is in churn, right? First of all, we invested in companies pre-launch. So I think for us, it depends on the market. I think there are markets where we feel so confident about that we're willing to take that risk. Meaning we know it will work. We know the entrepreneur is good enough that this will work. What do you mean it will work? Not this company specifically, but we have a strong conviction that this market is going to disrupt and the unit economics will work in that market.

14:04In that case, we're willing to invest pre-launch. But in many other cases, we won't. Yeah, and when we look at some of these cohorts, it's not that the cohorts need to be profitable per se, but we want to see the steepness of their learning curve reflected in the performance of the cohorts. They ought to get better over time. If month four is bad, that's okay. But the next time a cohort reaches month four, what do they do different as a result of it? So there's no omniscient number of X amount of retention, but it's mostly just seeing the steepness, the agility of their learning curve. That can give us conviction that, okay, they are on a path to figure this out.

14:43How do you build conviction in pre-revenue companies?

14:51I think at the end, venture is all about two things, right? It's about market and entrepreneurs. And there are entrepreneurs in Israel that we've worked with before, that we've seen how they work, and we're willing to take pre-launch bet on those people because we think that they are great and they will figure it out. There are markets where we feel that those markets will be disrupted no matter what, and we want to have a bet on those markets. Does it always work? It does not. But it's usually the combination of those. The quality of the entrepreneur, the quality of the market. If one of them is interesting enough for us, we will make that bet.

15:28So typically on the pre-revenue side, it usually is then second time or serial entrepreneurs that you're taking a bet on. Usually that's the case. I think, or correct me if I'm wrong, I think the only other exception that we had was we made an investment in the short drama space where we saw this unbelievable number of entrepreneurs going after that market. And we decided that we have to have a play in that market. And we picked the team and kind of the story that we liked the most of all of them. They were all pre-revenue when we invested. Yeah. Yeah, I was just going to add across the 12 investments to date, we have nine repeat founders, but all 12 are awesome and gave us enough confidence to invest.

16:16But yeah. Is it more so, do you find it's more so a bit top down when it comes to making an investment in that these are the markets that we think there needs to be disruption or will be disruption? So we're going to try to find the best company that's in this market? or do you find that it's a bit more bottoms up and you actually meet a meet a meet an entrepreneur they're the one that kind of have the insight and then you're and then you're kind of realizing then aha there's a big opportunity here in this market i know for me through the years it's it's i would love to think of myself as top down i think it's mostly bottom up you know the reality is, is that, you know, just we sit and people come in with stories and you go, huh?

17:06Wow, I never looked, I didn't know such a market existed, you know, wow, this is fascinating. So, so I think it's much more bottoms up. And I think that's what makes this job so exciting and so amazing, especially on the consumer side. Yeah, I think particularly, and again, I'm just projecting over the past year, right? Like we're literally finishing our fundraise, like today, this week. We spent so much time focused on that. We've done less top-down. It's been a lot of bottoms up. We're actually about to have our offsite in a week. We were talking about where we want to bring the top-down in more.

17:39But I think that's aspirational. Usually it's reactive. And are we inspired and captivated by some founder and their insight that we try and do top-down as quickly as we can? We have an investment in a property tax appeals business. we did not talk about property tax appeals Danny and I ever throughout our relationship we have an investment uh in a company spoken about property tax appeal no what a great topic yeah yeah no it's yeah it's fun we're active in the yahoo answers boards of property tax appeals but uh we uh we have an investment uh in a company that's creating um apparel gaming challenges for teenagers, right?

18:24You get your virtual self and you have all these, Danny and I have not spoken about our AI avatars and apparel challenges for it. Now we do. So yeah, bottom up a lot. How, I guess once you get this insight, right, you learn this insight from the founder in terms of this market, how do you all then go back and kind of do your research in terms of sizing and see if this is like a real opportunity or not? Excuse me, sorry. Yeah. You know, first of all, we're now it's a great question. I think one of the again, I think I love it. I think it's interesting, but also a challenge in the consumer space is that, for example, in e-com, you meet a lot of companies.

19:04They may have e-com characteristics, but the markets are so different, right? And one of the things that we work on, we have an analyst, and she does a lot of help from Claude, and basically spit out kind of a two-pager on the market early on so we can really quickly get to 40%, 50 % understanding of what are the dynamics of the market. And then if it kind of passes that test, we double-click on it, talk to people, do more research, but try to get like very, very fast, a kind of crash course to get an understanding of this passes or not. And also something that we really love to see is the power of consumer is the feedback loops are so fast.

19:42They are so fast. You can run performance marketing campaigns for a landing page competition to get a proxy and then add to cart. And even if they type in the credit card number and you waste the user's time, you're not committing fraud, but you have no product to fulfill, right? and then the credit card link, then it's broken afterwards. That type of proxy can demonstrate to us they are incredible at acquiring users, starting with top of funnel, and they will find something to build. It's less so that they're intellectualizing this in business school. But we've had founders who've come in and said, this is what we intend to test.

20:16And then 90 days later, we see how those tests have gone and then we back them. So we can size the market academically and that's good and that's important, but we build a lot more conviction in what the founders have done to prove they can acquire users. Because we deeply believe, generally, deeply, generally believe, it's an oxymoron, that the best distribution tends to win, not necessarily the best product and consumer. So we look for those types of entrepreneurs. Got it. So you would say that you skew much more when it comes to, let's say, call it marketing versus product. You're much more inclined to invest in a very talented kind of marketing-led business at the early stages versus a remarkable product?

21:03You know, wow. Can I say both? It's hard what you said, right? Because I think the reality is great marketing alone will not get there if the product is shitty, right? But I think what we want is we want a future product that we believe in, but a team that has a marketing DNA. Because if they're just product people and that's all they are and they do marketing one-on-one, which is kind of the basics, they'll just never pass the first year into the real market. I also think that the funnel itself will determine the product. When you acquire users, you'll understand where things are broken so then you can further optimize them.

21:45It's not that you have this great product intuition per se, but again, the power of consumers, the feedback loops. It's not anecdotal data of a handful of B2B customers. You could acquire users and see how it changes over time when you change something in the product flow, not just in the marketing flow. Yeah, no, that's fair. I mean, it just, I was, I had on one, I was talking with one private equity investor recently, and he was saying he believes when he makes an investment, he kind of have two buckets in terms of what the superpower is of the company. Is it sales and marketing or is it unbelievable product?

22:18And he was talking to me about how he actually made an investment. And he thought that it was sales and marketing was the superpower. And then he realized, oh my gosh, actually, it's the product that was actually the superpower that was driving it. So I'm just kind of always curious. And I know that there's never really one right answer to it. But if there is like a leaning towards, you know, kind of companies that typically are sales and marketing led that are really, really great at kind of capturing, capturing people to try and experience product versus others that are really great, just really great product people.

22:54Agree. Agree. Superpower. We need a superpower. Without that, it's hard to invest. Yeah. Yeah, totally. Absolutely. So let me think. How do you think as well, because I know you all invest in consumer technology and then also inventory businesses, right? E-com businesses, retail businesses, but ultimately inventory businesses. How do you think about that dynamic? Because the outcomes of these businesses, not even from an investor lens, but just how big they can grow can be quite different. So how do you balance that in your portfolio of pure kind of software technology businesses versus ones that actually have like an inventory piece to it or really that is the business?

23:40Yeah, I think I would say this. When we started the fund, when we did our first kind of pitch deck before making any investments, right off the bat, we said we want both because we believe at the end that both can generate great returns. By the way, the fact that inventory businesses may have lesser huge outcomes. I think you get compensated because the entry valuation is lower. So you can get good ownership at relatively small checks. So maybe overall, maybe the title number is lower, but the return for us as a fund actually works out. I will say that when you look at the first year that we invested as we raised money in 25, we did 11 consumer tech and only one brand.

24:24But now I think, especially with AI kind of taking off, right now our pipeline is, I think, six or seven kind of really hot brand companies. So I think that number will go up dramatically in the next quarter for us. And Mike, this is going to bring me back to your previous question. I'm generally, as Orin, as a part of Sticker, I tend to be drawn to more distribution-oriented founders on day one. Danny has way more room in his heart than I do on the product side. I appreciate it too, but I'm like, wow, it's amazing the fast, how quickly they've learned and iterated on it. Like, uh, that's something that really gets me pumped.

25:00Whether you're selling a physical product or a digital one, your feedback loops are fast and you can demonstrate demand and initial cost for acquiring them that we think it's a similar core skillset that is pretty essential to be on the founding team. Um, so, uh, we have room for both. We think it's the same founders who built something in e-com will then do something in consumer digital and vice versa. You know, I wrote a post on LinkedIn on Grunz, it's spelled? Grunz, yeah, I saw that. Yeah, and two things surprised me. One, the exit was amazing, but it was surprising how little people knew about it in Israel.

25:40It just shows, again, how much there's room for us to promote kind of consumer in Israel and the fact that there's such a huge opportunity because so many people looked at it and said, wow, we didn't know what that's possible to do in these categories. And I think that's part of what we're trying to push forward in the local ecosystem. What was your biggest learning from the Greens acquisition? Obviously, it was an incredible outcome, but any learnings from you both in terms of that maybe companies to look out for or different... Any kind of learning in terms of that outcome? I would say I'll go for two things.