Is it possible to start with a bad business idea and turn it into a publicly-traded company worth $2.3 billion?
That's whatplaceholder two former Israeli army officers did between 2006 and 2018. It's a tale that combines world-class technical knowhow, two of the most talented leaders in Israel, and the ability to bounce back from mistakes that might have stopped most people in their tracks.
It's a story that should inspire any entrepreneur or city feeling that its back is up against the wall in its bid to create world-class startup success. It's typical of the stories I described in my recently published book, Startup Cities.
The company in question is Herziliya Petuach, Israel-based solar power electronics maker SolarEdge Technologies. Its revenues have risen at a 46% annual rate to $607 million in 2017, according to Morningstar -- and my interview last month with one of its founders convinced me that SolarEdge is being built to last.
SolarEdge's technologies make solar systems produce more electricity. Specifically, its "direct-current optimized inverter systems -- which consist of power optimizers, inverters, and cloud-based monitoring platforms -- maximize power generation at the individual solar module level."
SolarEdge, which went public in 2015 and has a market capitalization of $2.3 billion, sells into the residential, commercial and small-utility solar installation markets by partnering with "large installers and engineering, procurement and construction firms, and indirectly to a multitude of smaller solar installers through distributors and electrical equipment wholesalers."
Here are three of the key reasons for SolarEdge's success.
1. Founding a venture with world-class technical and entrepreneurial leaders
Where does Israel get its entrepreneurial talent? It's certainly not Harvard or MIT. As I wrote in Startup Cities, the answer is the Israeli Defense Force (IDF) -- more specifically, its elite units 8200 and 8100.
As Lior Handelsman, SolarEdge cofounder and VP Marketing & Product Strategy, said in a March 21 interview, "When you're in high school you come for medical, psychological, and mental testing. They ask you 'Can you do it?' and "Will you volunteer?' And they decide who goes where."
I had long heard that the 8200 was the place where the most talented people go. That is partially correct. As Handelsman said, "The 8200 is like the U.S. National Security Agency (NSA) -- [which collects and analyzes intelligence]. But not everyone who works in the 8200 is top talent. It depends on which part of the 8200 you're working in -- those who listen to intelligence on headphones, may not be the best. Those who analyze the intelligence are the elite of the 8200. But there is an even more elite unit -- the 8100 -- which gets information to the 8200."
Handelsman joked he could tell me more about the 8100, but then he'd have to kill me.
What does this have to do with SolarEdge? Handelsman and CEO Guy Sella--who was Handelsman's boss in the 8100-- both worked in the 8100 before they started SolarEdge. In short, SolarEdge's leaders are the best of the best of the IDF's entrepreneurial talent machine.
2. Bouncing back from a bad business idea
While Sella and Handelsman were talented technologists and leaders, they had a ways to go when it came to being successful entrepreneurs. Their initial business idea was not very good.
Handelsman left the IDF after 12 years in 2006 and contacted Sella who was then a venture capitalist. "We wanted to start a company but had no idea what we were going to do. We considered many markets--imaging, cybersecurity, homeland security, and power electronics management. We went to Silicon Valley to raise capital," said Handelsman.
The Silicon Valley visit taught them a new idea--when a venture capitalist says your product is "very interesting" it means that the VC will never invest.
But they got one useful piece of feedback from the process. "A venture capitalist from Sevin Rosen told us, 'You have amazing technology but you're trying to sell to a terrible market.' We thought we were going to sell into consumer electronics but he told us that Texas Instruments and National Semiconductor would never let us into the major accounts. He said we should focus on solar which was number 20 on our list."
That turned out to be good advice. "While solar panels were very efficient, 25% of the power was lost due to the inverters which convert the Direct Current (DC) produced by the panels into Alternating Current (AC). We had an idea for a better inverter based on our Application Specific Integrated Circuit (ASIC). But we were not certain how to distribute it," he said.
They decided to go directly to end users rather than partnering with the eight big makers of solar energy power electronics such as Bosch, GE, and Siemens. As Handlesman said, "I present this decision as a case to business schools. Israel is good at R&D, not sales, service or manufacturing. If we OEM to those eight companies we can build on our strengths. The business risk for us was -- 'What if all eight companies say no?'"
Rather than OEM, SolarEdge decided to go directly to end users and today its inverters--which are 97% efficient--lead the industry. Why is the SolarEdge inverter so popular? "It is easier to install and service than competing products and it's a bigger system so it means more revenue for the installer. The installer can explain to the homeowner that it produces more energy and it's safer," he said.
3. Learning from mistakes how to globalize
Today SolarEdge has offices in 22 countries and its product is installed in 110 with over 1,000 employees. It is the market leader in Germany and ended up leading in the U.S. market because "everyone knew our product was less expensive than the competition's."
But SolarEdge made mistakes in its global strategy. As Handelsman explained, "We lost 18 months in the U.S. because we put the wrong person in charge -- someone from an established company who knew the technology. He was always waiting for us to tell him what to do. You have to hire someone who is from the country who can provide leadership and selling skills -- We say 'You are everything in this country, just do it.'"
SolarEdge's goal is to be an institution that leads in power electronics. To that end, the company is adding adjacent products -- it is introducing a "virtual power plant;" added less-expensive software talent from Bulgaria and acquired a company in Fremont, Calif. for R&D; and while it now outsources manufacturing to Jabil, Celestica, and Flextronics, it plans to take full control of its manufacturing," he said.
As long as SolarEdge can keep finding new sources of growth, it will stay built to last.placeholder