Heady Times For Israeli Tech


Tel Aviv — For several days last week, the world of high-tech seemed to take over Tel Aviv, as hundreds of foreign investors, executives and journalists descended on the city to mingle and size up Israel’s overflowing scene of start-ups and innovators.

The occasion was centered around DLD Tel Aviv, a conference on digital innovation. The master of ceremonies was Israeli angel investor and technology guru, Yossi Vardi. It was Vardi who helped originate the narrative of “start-up nation” 12 years before the publication of the seminal book, when his kids sold ICQ, an instant messaging software technology, to America Online.

Since then, the technology world has gone through several cycles of boom and bust, but the excitement surrounding Israeli technology seems to have risen to a fever pitch in the four months following Google’s acquisition in June of the Israeli mobile traffic-navigation app, Waze, for nearly $1 billion.

“The whole world was there [at DLD Tel Aviv]. From all the big companies — Yahoo and Google — as well as the international press,” said Hillel Fuld, a Israeli tech blogger and start-up mentor. “All in all, it was definitely a good week for innovation in Israel.

“In the venture capital world, there’s never been so much interest. I’m getting calls from global VC interested in investing here, and that’s exciting.”

A string of good news has followed Waze’s wake: an acquisition with a comparable price tag by IBM of Israeli cyber-security firm Trusteer; and Facebook’s announced that it would establish its first research-and-development center with the acquisition of its third Israeli company, Onavo. Amazon also announced that it was opening shop in Israel.

The May bankruptcy of Israel’s famed electric-car start up, Better Place (which managed to blow $850 million), seems all but forgotten.

The heady atmosphere last week was backed up with new data: according to the IVC Research Center, Israeli tech companies raised $660 million in the third quarter, the highest level since 2000, during the dot-com boom. For the first nine months of 2013, 474 companies raised $1.6 billion.

“There’s been a dramatic increase in the number of venture capital-backed start-ups in Israel,” said Ofer Sela, a partner in KPMG Somekh Chaikin, in a statement. “We see this trend continuing, leading to a record number of deals in 2013.”

The atmosphere at the conference was reminiscent of the dot-com boom: there were entrepreneurs touting of $1 billion ideas and some in “stealth” mode with ideas too good to divulge. Venture advisers bragged of seed investments in the pipeline. At a discussion on scouting Israeli start-ups, one panelist suggested Israel might be saturated with accelerators for entrepreneurs. SENSE?

“This feels like a bubble,” remarked Eran Yarkoni, who founded an optical device company in the 1990s. He suggested that Israel currently has a surplus of start-ups and that it’s impossible that all of them will be viable.

Amid that heady atmosphere, the Tel Aviv Municipality has been trying to leverage its newfound status as a haven for start-ups. The municipality says there are 1,200 technology companies based in the city, and it sponsored a competition to bring teams of entrepreneurs from around the world to a start-up competition in Tel Aviv.

The municipality has opened a workspace in a public library for entrepreneurs, and it has appealed to the government to grant special work visas for foreign non-Jewish entrepreneurs.

Despite all the success, one tech entrepreneur at the conference remarked in private that start-up nation was a misnomer because Israel’s technology ecosystem only accounts for 150,000 jobs out of a work force with several million people.

The Waze acquisition also exacerbated a long-running dilemma among Israeli entrepreneurs and venture capitalists: should start-ups founders sell successful businesses to the large multinationals, or should they push ahead with an initial public offering and try to build up a business on their own.

Tel Aviv’s technology ecosystem has been rated the best in the world outside of Silicon Valley, but many believe that for Israel’s tech industry to move to the next level, more investors and entrepreneurs need to avoid the urge for the “exit” and look to building up companies for the long term.

It used to be Israelis would wonder if they could ever build a Nokia, but after the telephone company faltered and hurt the Finland economy, Israeli venture capitalists are looking to repeat the success of Ramat Gan-based firewall company, Checkpoint Software.

“We want to build Checkpoints, a lot of them,” said Michael Eisenberg, a founding partner at the newly inaugurated Venture Capital Fund, Aleph. “We’ve arrived at the point of scale-up nation, not start-up nation.”

Israelis are concerned that if they don’t succeed in “scaling up” their tech start-ups, the country will remain a supermarket for multinationals that will eventually move much of the tech operations abroad.

However, in the last decade, nearly every major U.S. technology company has established some sort of research-and-development presence in Israel, giving Israeli start-ups access to capital and international markets that they didn’t have back in 2000.

Alongside the sense of accomplishment, however, is a rising feeling that the one of the building blocks of Israel’s technology prowess — Israel’s research universities — are in decline and are unable to attract the country’s best minds.

That concern was highlighted when two Israelis — Arieh Warshel and Michael Levitt — were named as the recipients of the Nobel Prize in Chemistry. Both happen to be employed by U.S. universities and have been living abroad for decades.

Instead of elation, the fallout from the announcement spurred angst-filled discussions about the state of Israeli higher education. Just two days before the announcement of the Nobel, an Israeli public policy think tank, the Taub Center, released a report on the state of academic brain drain. (The report was the subject of a column last week by Jewish Week editor and publisher Gary Rosenblatt.) The conclusion was that Israel suffers the highest level of academic attrition in the West.

Ayal Kimhi, a Hebrew University agriculture professor who works with the Taub Center, says the achievements of today are the fruits of the investments four decades ago. Since the ’70s, however, Israeli universities have been in decline because investment hasn’t kept up — limiting the potential for laboratories and staff.

“Budgets of the universities didn’t keep up with the number of students. It’s a budget issue,” Kimhi said. “This is our biggest asset here. We don’t have natural resources. The future of mankind is the brain. We have a comparative advantage.”