As a technological powerhouse, considered by many
as the second Silicon Valley, Israel ranks immediately after the US and
Canada in the number of companies (± 120) listed on NASDAQ. During
the past decade, over 5000 startups have joined the ranks of Israel's
Silicon Wadi - as Israel's high tech community is often called - creating
a dazzling array of cutting-edge products in areas such as advanced chip
design, semiconductors, networking and communications, wireless communications,
security software, enterprise software, Internet applications, medical
devices and biotechnology.
Historical necessity has forced this tiny country,
with a total area of 8400 sq. miles and a total population of 6.5 million,
to excel in advanced technologies. Surrounded by enemies on all sides,
suffering embargoes by major suppliers, Israel had no choice but to develop
a strong and innovative military industry and to assure its superiority
in fields such as electronics and communications. Developments in military
technology are now being translated into exciting new products for the
international marketplace.
Crucibles of energy, determination, and innovation,
Israeli startups are scattered across the country, ranging in size from
one lone entrepreneur to firms employing hundreds of highly skilled technical
personnel. Based on the talents and original thinking of Israel's multi-national
population, their boldness and single-minded dedication are reminiscent
of Israel's legendary pioneering spirit.
Demobilized soldiers - veterans of the Israel Defense
Forces - many of whom served in elite technology units, together with
Russian immigrants who arrived in Israel with their technological know-how,
have burst onto the scene with new ideas and the energy to actualize them.
Often focused on meeting the needs of specific, well defined, niche markets,
or creating elegant solutions that will be sold as OEM products to large
manufacturers who will use them in their own products, these companies
are providing global markets with the fruits of world-class technology.
Top Israeli technology companies have gained worldwide
recognition and status in the international technology arena, enhancing
Israel's image while enabling Israeli companies to join forces with -
and themselves become - world leaders in their fields.
Some of the success stories have already become legendary
- Comverse, Check Point and Mercury, to name a few. Many have been bought
by large foreign companies in multi-million and multi-billion dollar deals:
Mirabilis (ICQ) was bought by AOL (America Online), Top Tier by SAP, Memco
by Platinum, VisionTech by Broadcom, New Dimensions by BMC, and Butterfly
became Texas Instruments Israel.
Recognizing the abundance of talent concentrated in
this tiny country, some of the world's leading electronics and software
companies - such as Intel, Motorola, IBM, BEA, and Tower Semiconductors
- have set up R&D and manufacturing units in Israel. A host of foreign
venture capital (VC) funds regularly invests in Israeli high-tech startups
- either directly, or through their Israeli partners.
High tech exports have had a significant effect on
Israel's economy, improving its balance of payments and accounting for
over half of the country's industrial exports. According to Mr. Amnon
Leibovici, Secretary General of the Israel Association of Software Houses,
despite the worldwide slowdown related to pure Internet companies, Israel
- having always nurtured true technology companies - has been less affected
by recent global developments.
A recent survey by the IVC Group found that Israeli
venture capital funds have a total of USD 4 billion in their possession.
Less than half that amount has been slated for follow-up investments in
their portfolio companies, leaving a hefty USD 2.1 billion that has been
designated for new investments.
The Israeli Government, despite some justified complaints
regarding its over-involvement, has been a major contributor to the success
of Israel's high tech industry. It was instrumental in creating the structure
which encouraged and backed large numbers of projects, and helped turn
ideas into marketable products. Establishment of the Office of the Chief
Scientist, the Israel Export Institute, and Israel's Venture Capital infrastructure
can be credited to the foresight and determination of Israel's government.
The Office of the Chief Scientist was created in the
early 70's to encourage R&D-based export-oriented industries. The
Chief Scientist's emphasis was originally centered on technological innovation.
However, according to Prof. Liora Katzenstein - a well-known entrepreneur
and President and Dean of ISEMI, the Israel School of Entrepreneurial
Management and Innovation - an important transformation occurred in the
early 80's, shifting the emphasis to product marketability.
In answer to the influx of technologically trained
Russian immigrants, a technology incubator program was developed, under
the aegis of the Chief Scientist. These immigrants had come with exciting
ideas (which they were unable to develop in Russia), but without the resources
to develop them or even a basic understanding of a market economy. Many
of them, unable to find work in their fields of expertise, became street
musicians and street cleaners.
The goal of the incubators was to employ these immigrants,
while turning technological concepts into commercial successes through
a framework of support and financial aid. Once accepted into this scheme,
entrepreneurs are expected to complete development of their products and
to locate required financing. Their obligation to return government loans
is based on their future success.
The Israel Export Institute currently works with approximately
1350 high tech start-ups, offering seminars and workshops on every relevant
topic, focusing especially on marketing and management. The Institute
also initiates contacts with foreign investors and potential JV partners,
and rents space in relevant worldwide exhibitions, encouraging and assisting
start-ups to participate. According to Sagi Ashkevitz, Marketing Division/Start-Up
Companies, "The Israeli High Tech scene is a well-spring of ideas,
innovation, brains, and technology. For investors, the ideal combination
is Israeli R&D, innovation and improvisation, together with US-style
management and marketing."
The BIRD Foundation, the Israel/US Bi-national Industrial
Research & Development Foundation, administered by the Chief Scientist
in conjunction with the US standards institute, promotes partnerships
between Israeli and US companies. Today, most start-ups understand that
sales and marketing is best managed from the US, and most expect to open
US offices for this purpose.
Criteria have gradually shifted from emphasis on product marketability
to emphasis on quality of management and the CEO's vision and strategy.
Additional bi-national R&D foundations have been established with
Canada, Germany, France, Jordan, and Singapore, as well as tri-lateral
agreements with Israel, Jordan and the US. Israel also benefits from R&D
cooperation with the European Union.
Enrollment in Business Schools is booming. Among the
dozen or so institutions offering MBA programs are: the Tel Aviv University;
the Hebrew University in Jerusalem; University of Haifa, Ben Gurion University
of the Negev, and Bar Ilan, as well as a number of small private colleges;
and, branches of foreign schools, whose courses are taught in English.
Today's entrepreneurs typically complete both engineering degrees and
MBAs.
According to Prof. Katzenstein, "ISEMI was established
as an alternative to standard MBA programs whose curricula generally emphasize
the theoretical at the expense of real-world implementation. Through a
hands-on approach which is coupled with a rigorous academic program, ISEMI's
lecturers guide students through situations they will actually face as
entrepreneurs of technology start-ups."
The Israeli government can be credited with creating
the underpinnings for the VC community in Israel. Yozma ("Initiative"
in Hebrew) a venture capital fund, was established by the government with
an initial sum of $100m, in order to assist technological start-ups.
Within six years, after an impressive record of success,
the government sold its stake (at a substantial profit), leaving Yozma
to become the basis for the more than 100 VC funds currently operating
in Israel. Many of these funds were created with foreign partners and
have acted as conduits through which a great deal of money has flowed
into Israel. Israeli VCs that have teamed with US co-investors have benefited
from the opportunity to springboard their start-ups into the vast US market.
Following the fall of NASDAQ and Israel's internal
situation, funds found it difficult to raise additional capital, and in
some cases, their existence was threatened. However, Israeli VCs, in general,
did not invest in dotcoms, but rather, in true technology companies, and
were thus less affected by the dotcom collapse. Some of the few that did
invest in dotcoms no longer exist. A consolidation is occurring in the
industry, which will result in a smaller investment community made up
of the strongest and most stable VCs. Among the strongest today are: Apax,
Pitango VC (originally Polaris), JVP, Star Ventures, and Giza VC.
The Israeli VC community has typically shied away
from seed-money investments, preferring more risk-free ventures. VCs have
generally built safe portfolios and have taken key positions on the Boards
of the companies in which they invest, thus controlling a great deal of
what happens in Israel's high tech community. Though money is available
for start-ups that have reached more advanced stages of development, some
investors are demanding lower pre-money valuations, forcing cash-strapped
start-ups to settle for less. In the past, this has opened the way for
foreign investors to participate in potentially lucrative opportunities,
but this trend has slowed down considerably, due to the current political
situation.
According to Amir Gilboa, manager of Gilboa High Tech
Ventures, a consulting firm focusing on the high-tech industry, "Israeli
start-ups tend to adopt an M&A exit strategy, due both to their great
distance from major markets and to their lack of appropriate resources.
This strategy usually creates lower value than the potential value that
would have been achieved had the company adopted an IPO exit strategy."
Though many foreign VCs have either set up offices
in Israel or have joined Israeli VC firms, US companies have been, for
the most part, slower to invest in Israel than their European and Japanese
counterparts. It is generally accepted that this reluctance is due in
part to geographical distance, and in part to the current unfavorable
tax situation, which in effect, creates double taxation. The Israeli government
has promised to amend this; a similar amendment has already solved this
problem for European investors.
Despite this hesitance, between 1995 and 2000, over
200 US companies either invested in Israeli companies, built subsidiaries
in Israel, or sub-contracted work to high-level Israeli technology companies.
Some familiar names include Motorola, Intel, IBM, Johnson & Johnson,
Sun, Cisco, and Texas Instruments.
The benefits of investing in Israel are becoming more
widely recognized. International attention is being focused on Israel's
modern infrastructure of roads, airports, and ports; its impressive telecommunications
system; its sophisticated banking community; its strong judicial system
and world class legal community.
Not less important is a labor pool offering the world's
highest proportion of scientists and engineers, plus a growing cadre of
experienced high tech managers with impressive histories of start-up successes.
Uniquely positioned to enjoy the benefits of Free
Trade Agreements with the US, the European Union and EFTA, Israel is able
to act as a bridge between these markets.
Despite the current situation, there is reason for
optimism. Both startups and VCs are learning from their mistakes. The
Israeli VC community is maturing and has begun a much-needed consolidation.
Processes are becoming standardized. Israeli startups continue to focus
on sophisticated technology for niche markets, thus maintaining their
competitive edge over dotcom and application-based companies. Startups
are turning more and more to industry experts in law, accounting and marketing.
These trends bode well for a bright future for Israel's Silicon Wadi.
Arlene Marom, the Director of Tech River Ltd., is originally from Miami, Florida. She moved to Israel in 1976, and since 1995, has been working with Israeli high tech startups. She can be reached as follows: Tel: 972-3-6419107, Cell: 972-52-4527179, E-Mail: arlene@tech-river.com
