Israel becomes the Middle East's Silicon Valley

Israel becomes the Middle East's Silicon Valley

At an age when many young adults are just entering the workforce in entry-level positions, Gidi Cohen was leading an elite software development unit charged with building information security solutions for the Israeli military.

At an age when many young adults are just entering the workforce in entry-level positions, Gidi Cohen was leading an elite software development unit charged with building information security solutions for the Israeli military. "I was 21, running significant budgets, with tons of projects under development and lots of people reporting to me," recalls Cohen, who served from 1987 to 1992 in the Israeli military's intelligence corps.

Having command over large projects at such a young age accelerated his technology and management experience, says Cohen, who co-founded analytic software maker Vigil Technologies in 1998, and security risk management vendor Skybox Security in 2002. The military atmosphere in Israel supports innovative and independent thinking -- attributes you'd expect an entrepreneurial startup to promote. "That gives you a very good jump-start later on," he says.

Cohen isn't alone in parlaying his military experience into a high-tech career. Israel is known worldwide as a breeding ground for entrepreneurs. With 69 Israeli companies listed on Nasdaq, it's second only to Canada in the number of foreign countries on the exchange. Among the country's more recognizable success stories are security vendor Check Point Software and VOIP pioneer VocalTec Communications.

In concentration of new technology companies, Israel most resembles Silicon Valley, says Adam Fisher, a general partner at Jerusalem Venture Partners, a venture capital firm established 12 years ago to help create and fund early-stage companies in Israel. Take any technology startup in the U.S., and odds are that one of its competitors is an Israeli company, he says.

One reason is the independent nature and penchant for risk taking that characterize Israel's 6.5 million people. "They're not afraid to fail or to risk suffering to create a better life," Fisher says. "That willingness to prove themselves over and over again is what created the environment today."

Israelis have learned to create opportunities without dwelling on potentially bad outcomes, adds Philippe Szwarc, CEO of Arel Communications and Software, a videoconferencing platform vendor founded in Israel.

"When you're fighting in war situations on a daily basis in the Israeli military, you can't think 'What will happen if I die?' You don't think about the negative that could happen because not doing anything is an even worse risk," says Szwarc, who was born in France, emigrated to Israel when at 18, and spent four-and-a-half years in the Israeli navy.

There to assist Israeli visionaries with big ideas are venture capitalists with investment dollars.

Israeli venture capital funds raised US$724 million in 2004 -- up from $14 million in 2003, but still below the $3.7 billion raised in 2000, according to IVC Research Center. Today, about $1 billion in capital is available for investment, and the research firm expects Israeli venture capitalists to raise $1.5 billion more in 2005.

Benchmark Capital, one of the U.S. venture capital firms that have set up shop in Israel, earlier this month announced the creation of a $250 million fund earmarked for early-stage technology companies in Israel.

Benchmark established an office in Israel four years ago, recognizing that the Israeli high-tech industry at that time had matured to a level where it could be viewed as a logical extension of Silicon Valley, says Nachman Shelef, a general partner in the firm's Israel office. "Israel is so similar to Silicon Valley that you can take a company in Israel, treat it the same way as a startup in Silicon Valley, with the same kind of support, and have the same expectations of success," Shelef says. "In every way except as a market, Israel is a major global high-tech center."

One major obstacle Israeli startups have to contend with is the lack of local buyers -- every sale is abroad, Fisher says. On the positive side, vendors from the start adopt a global perspective and are trained to look not just down the road, but across the ocean for customers. In an increasingly global market, that mind-set is an asset, Fisher says.

Military savvy

While Israel doesn't have scores of local corporate buyers to help sustain its startups, it does have one power technology consumer: the military.

Israel's defense industry has had to use the most advanced technology available to make up for what it lacks in size and human resources, says Shelef, who began his career developing communications systems in the Israeli Defense Force between 1977 and 1985.

While the U.S. government procures much of its technology from commercial providers, Israel tends to develop its own. As a result, young Israeli adults -- who are subject to compulsory military service -- can become involved in significant IT development projects during the time they spend in the military.

"You get to work on advanced projects in an environment where there is not a lot of management in place -- you get to do it, to a certain extent, independently, which helps people think independently" in the outside world, Shelef says. However, it's a rare case when technology developed in the Israeli military becomes the basis for a commercial startup, he says.

There have been startups born out of technology developed in the Israeli military -- for example, the JVP-backed optical component company CyOptics and security vendor Cyber-Ark Software, Fisher says. But more often the value of military service is the experience gained, Fisher agrees.

Military service spawns networking opportunities, too, Fisher says. Entrepreneurs often look up former military colleagues when they need experts. "Israel's small size definitely lends itself to building companies," Fisher says. "Everybody knows everybody. There's no need for headhunters in most situations."

The military also helps cultivate salesmanship, Szwarc says. During his years of service, computers were much less prevalent than they are today, "so we had to make a lot of sales pitches to convince people it was the way to go," he says.

Government assistance

Culture and military service are two of the pillars that created Israel's high-tech industry, but they aren't the only influences, Fisher says. The presence of multinational vendors such as IBM, Intel and Motorola, beginning as early as the 1970s, helped put Israel on the technology map.

"Some of these companies' largest R&D centers outside of the U.S. are in Israel," Fisher says. "What that's done is build up a generation of technology managers -- not just people who can develop but people who know how to manage technology and deliver according to international standards."

The Israeli government, too, has played a role in fostering the country's high-tech savvy with incentives aimed at helping young companies get established.

The Office of the Chief Scientist within Israel's Ministry of Industry, Trade & Labor runs programs to encourage industrial R&D. Among the initiatives are 23 technology incubators designed to help nascent companies develop ideas, form new business ventures and attract private investors. There's also an R&D fund that gives grants to companies to support project development in return for a royalty payment of 3 percent to 5 percent of future product sales.

Israel has come a long way toward adopting a more open economy, but it hasn't always been as receptive to entrepreneurialism as it is today, Szwarc says. "When I first came to Israel in '82, there was one brand of chocolate, and one brand of coffee, and a lot of companies were government-controlled. It's been a huge evolution, and it's come pretty far and pretty fast," he says. "The successive governments have understood that high-tech was what the country needed."

Looking ahead, a challenge for Israeli startups is sustaining corporate growth. Israelis are eager to get ahead and do things by themselves, Shelef says. "They don't like working for anyone. They want to be their own boss." This bodes well for entrepreneurialism but makes it hard to grow a company, Shelef says.

"It's a great place to innovate, but it can be difficult to sustain that effort," he says. "That's the next challenge for the Israeli high-tech industry." -- Network World (US)

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