Israeli startups are typically built from day one to target the global market, and predominantly the US. It’s impossible to build a decent size business targeting the local market since Israel has a small population and is surrounded by dissimilar and mainly hostile neighboring countries.
However, in the very early stages of a startup Israeli founders often target the local market. First, most of the founders’ network will naturally be Israeli making it easier to penetrate locally. Second, it’s common to get harsh, non-polished feedback from Israelis (if you are willing to take it) which can be helpful in the early days of designing a product. And most importantly, it’s more convenient and efficient to work locally instead of flying back and forth or working with different time zones.
Sometimes starting in this ‘friendly’ environment can significantly accelerate product launch. Furthermore, there is a huge benefit in having the first product launch with a supporting Israeli customer. It is a low-risk, convenient way to fix all the early bugs before launching the product with ‘real’ US customers.
However, starting with the Israeli market might be risky. Startups which sell to businesses can spend too much time working with local customers instead of quickly going after their target market abroad. Also, the feedback you get from an Israeli customer will not always be relevant for your future US-based customers. Even your largest Israeli customer will typically be considered small or mid-size in the US, so the needs are often quite different.
This gets even worse for startups who target consumers (B2C). Israel is a graveyard for consumer startups that planned to first win over the local market and only later target the US. The rational for these startups is mostly the same- it is easier to quickly test the product and get traction locally before spending a lot of time and money on penetrating globally. While it makes sense in theory, it rarely works this way.
First, there are many subtle differences in consumer behavior between Israel and the US. These small variances will make all the difference between a great product and a mediocre one. Second, getting scale in Israel often requires a lot of customization which will not be relevant later- this includes localization and translation to Hebrew, supporting local credit cards and payment methods, building a local support team in Hebrew etc. Furthermore, getting marketing right in Israel is different so you will have to start from scratch once you enter the US market. Finally, and perhaps most importantly, even if you achieve good traction in Israel, it will be difficult to raise the next financing round. I have seen many Israeli startups use their seed round to demonstrate traction in Israel and then hit a wall when they try to raise the series A. Investors rightfully discount the Israeli traction and fear that the company will not be able to achieve the same results in their ‘real’ target market. Therefore, they ask to see signs of success in the US before investing and by then it’s often too late as the company has already burned through most of the seed money.
The only example I can think of where an Israeli consumer startup first succeeded in Israel and only later in the US is Waze. Waze managed to build a large community in Israel to showcase the model before targeting other countries. But even in this case, the company had incredibly good timing and benefited from the tough fight over maps between Apple and Google which boosted the penetration into the US.
So when you first launch in Israel, you need to define clear objectives and timelines. Otherwise, this shortcut might end up costing a lot.