A culture of survival drives growth
Wartime life has not stopped Israel's tech juggernaut, which draws more venture capital today than ever before.
Technology's promised land / Industry, investment thrive in Israel despite violence
A culture of survival drives growth
TEL AVIV, Israel--If engineers here seem unfazed by the high-pressure environment of today's technology industries, it is because many have been trained under life-and-death circumstances.
When the Arab-Israeli war erupted in 1973, the Israeli army asked a couple of professors at the Israel Institute of Technology to come up with a way to scramble the guidance systems of incoming Russian-made missiles. The mission, according to the institute, was accomplished in two days.
"In Israel you don't plan. You improvise," said Zak Dechovich, who worked in the government's cybercrime unit before becoming chief executive of SecureOL, a software security company. "The market has its own forces."
Few markets, however, face anything like the forces imposed on Israel. Just last month, the technology institute was shut down in the first few weeks of conflict with Lebanon. Yet the country's tech industry is charting unprecedented growth despite the current war and chronic political disruption, drawing more investment from venture capitalists and multinational corporations than any other time in its history.
Between January and July of this year alone, 45 Israeli tech companies were acquired, five committed to mergers, and 12 went public, according to the Israel Venture Capital Association. Buyers included Microsoft, IBM, EMC, Oracle and Johnson & Johnson. In the same period, British venture capital firm 3i, Greylock Partners and Opus Capital all have recently begun or expanded investment activity in the country.
Industry organizations have tallied 2,642 high-tech companies in operation within Israeli borders, a ratio of one for every 2,400 people. Some, such as Check Point Software Technologies and Amdocs, have become publicly traded global corporations, but most are relatively small businesses.
"The number of start-ups is second only to Silicon Valley," said Tali Aben, a general partner for Gemini Israel Funds.
That observation is especially noteworthy in light of Israel's political and military volatility, which would seem to be a powerful deterrent to outside business and investment. But a strong argument can be made that life under constant adversity produces a highly competitive workforce that is particularly well-suited for the survival-driven technology sector.
At age 18, most Israeli youths enter the armed services, where a battery of psychological and intelligence tests identify the most intelligent and promising inductees. While their U.S. counterparts are still deciding on a major in college, young Israelis are being asked to fly jets, oversee projects under wartime deadlines and conduct other urgent tasks.
"When you are quite young you get a lot of exposure to state-of-the-art technology and are given a lot of responsibility," said Zeev Holtzman, chairman of Giza Venture Capital. "When you come out, you know a lot about technology, management, budgets, etc. You are quite mature. It is one of the reasons that can explain the success here."
Venture capitalists have typically been attracted to the small and nimble start-ups that are churned out on a regular basis by local entrepreneurs and, in rising numbers, the country's universities. These include such innovative companies as Transtech Control, which develops visual aids for air traffic controllers; BrainsGate, which is working on emergency stroke recovery; and Saifun Semiconductors, a maker of flash memory technology.
A key reason that small companies have proliferated is the comparatively low cost of getting off the ground, far less than the expenditures of U.S. start-ups. Serial entrepreneur Shimon Eckhouse noted that his first company, ESC Medical (now part of Lumenis), needed only $2.25 million before turning a profit. Syneron Medical, which was founded in 2000, was in the black after $3.5 million in investment and is doing about $100 million a year in hair-removal equipment.
The influx of venture capital has made Israel something of a national incubator. Just as India and China have become global destinations for customer support and manufacturing, Israel has devised a formula for taking novel ideas from the lab and building companies around them.
"Israel can be--and already is, I think--an outsourcing destination for R&D," said Amos Drory, executive vice president of the American Associates, Ben-Gurion University of the Negev (AABGU), the U.S. fundraising arm of the institution. Drory, who also used to run the university's management school, boasted, "We have at least as much entrepreneurship in Israel as in all of Europe put together."
Although Drory is partisan, his claims are not wildly exaggerated. In 2004 and 2005, venture investors poured more money into Israel than any European nation. Israel and its population of 6 million citizens attracted $1.3 billion in venture money last year, more than double the $637 million invested in Germany, which is home to 82.4 million people and multinational companies like Siemens and SAP, according to a VentureWire-IVA study.
While Israel has historical strengths in communications chips and security, new companies have been expanding the horizons in such diverse areas as homeland security, alternative energy, water processing and even chess technology. In the hot mobile phone industry, Dblur Technology has developed a lens system for camera phones that cuts costs and improves focus, while another company in stealth mode will soon debut a keyboard activated by hand gestures.
Even the hypercompetitive consumer Web business is thriving here.
The online advertising business also attracted Yair Goldfinger, who co-founded instant-messaging pioneer ICQ and eventually sold it to AOL for about $400 million. He is backing Dotomi, which has created personalized banner ads.
Next page: Saluting its disciplined origins 
Technology's promised land / Industry, investment thrive in Israel despite violence
Like many things here, the technology industry owes a huge debt to the military, which serves as a combination incubator, finishing school and good-old-boy network. The first local tech companies were born from necessity after France embargoed military equipment shipments to Israel in 1967, Drory noted, and dominance in information security emerged from its intelligence services. Check Point co-founder Gil Shwed, for one, came out of a classified intelligence unit.
The medical field has benefited from its military roots as well. Eckhouse spent 17 years in weapons design before becoming an entrepreneur, and missile engineer Gadi Iddan invented the "Pill Cam" by Given Imaging--a swallowed camera that takes pictures of the intestines in a human body. In its hair-removal technology, Syneron Medical uses a light source originally used to clean jet planes.
"The military budget indirectly subsidizes the high-tech sector," Giza Venture Capital's Holtzman said. Army friends, such as Check Point's founders, frequently are reunited in commercial projects later in life.
Given these strong state ties, the industry has, not surprisingly, maintained close relations with civilian government agencies as well. That involvement took two major forms in the early 1990s: in venture capital and in research.
The Yozma Project was founded in 1993 to lend money to budding entrepreneurs and to create a venture capital community, an effort that gave rise to Gemini, Vertex and several of the first local venture capital firms. Around the same time, the Office of the Chief Scientist formed its national incubator project, which sought to take ideas or lab projects and turn them into companies through relatively modest grants of $200,000 to $400,000 annually over a two-year period. In both programs, graduates are required to pay back the financing they received.
The incubator project was initially created to help give jobs to a wave of Russian immigrants who often had degrees in medicine or engineering but could only get jobs in manual labor. Immigration from Russia has since slowed, but the program has not.
"We don't accept start-ups. We establish start-ups," said Rina Pridor, who runs the program for the government. "We invest in people when private money won't touch them."
Successful alumni include Compugen, a bioinformatics company with 200 employees, and Visionix, which makes equipment for eye care. Visionix's founder first went to his boss for sponsorship but was rebuffed.
"Later, after they raised $5 million, his employer said, 'I am ashamed to admit it, but my experts told me (that) scientifically it wouldn't work,'" Pridor recalled. "You can never tell in advance."
Foreign corporations also have taken chances that have paid off after recruiting young graduates and future entrepreneurs. Motorola and other multinationals began opening Israeli research and development offices in the 1970s. But the turning point came with the arrival of chip giant Intel in the 1980s--a development that can be traced in many ways to a single engineer.
Dov Frohman, who invented a memory called EEPROM, wanted to move back to Israel. So Intel opened offices there because it didn't want to lose him.
Today, Intel operates an Israel-based chip fabrication plant, where local engineers came up with the Pentium M line of notebook processors and Merom, a chip that has helped the company recover from two of the worst years in its history.
A change of economic culture
The rise in foreign investment is leading to a cultural change in Israel's technology business, one that industry veterans would like to see accelerated.
In the past, success has often meant getting bought out by a larger corporation. Holtzman and others would like to see more of a balance between companies that get acquired and those that grow up to become independent entities.
Holtzman recalled telling the founder of Libit Signal Processing, a professor from Tel Aviv University, that the chip company could become a $1 billion operation in a few years. The professor replied, "I now have the opportunity to make $70 million today" and sold Libit to Texas Instruments for $360 million, Holtzman said.
Part of this attitude is a product of geographic isolation. Because it has almost no local market, Israeli companies often end up exporting their goods overseas and eventually sell their businesses rather than build international sales teams.
Those within the industry acknowledge that marketing, managing and other "soft" skills need to be improved. It is in these areas that the military's pervasive influence can backfire; many who have gone through the training say it gives Israeli executives and engineers an abrupt, argumentative personality.
Mooly Eden, a vice president in the mobile group at Intel, said he sometimes feels like a man without a country after having worked in both the United States and in Israel. People in the U.S. think he's overly aggressive, he said, while Israelis think he's become soft.
Regardless of what form it takes, assertiveness will increasingly be a necessary part of doing business in today's globally competitive market. China and India are investing heavily in university research, which could lead to similar tech-heavy industries in those countries.
"The goal of the world is to beat the Chinese. They produce more engineers every year. They have 200,000 to 300,000 a year; we have 8,000 to 10,000," said Oded Tira, a former general who now heads up Phoenicia, a $50 million glass manufacturer. "They don't care about intellectual property. We have to develop something that will take two to three years to copy."
Israel, of course, faces threats that are far more serious and closer to home in national security. But Israeli citizens and even many Westerners say they have become accustomed, as much as as it is possible, to enduring a wartime existence.
For some, the omnipresent danger has manifested a patriotic determination not to let the violence kill economic growth.
"If you look at the last 15 years, there were ups and downs in terms of the security situation, but whenever it calms down, foreign investment picks up," said AABGU's Drory. "We may be in Lebanon for God knows how long, but the present intensity level can't last for very long."
After a pause, he added: "I hope I am right."
Technology's promised land / Industry, investment thrive in Israel despite violence
A culture of survival drives growth
TEL AVIV, Israel--If engineers here seem unfazed by the high-pressure environment of today's technology industries, it is because many have been trained under life-and-death circumstances.
When the Arab-Israeli war erupted in 1973, the Israeli army asked a couple of professors at the Israel Institute of Technology to come up with a way to scramble the guidance systems of incoming Russian-made missiles. The mission, according to the institute, was accomplished in two days.
"In Israel you don't plan. You improvise," said Zak Dechovich, who worked in the government's cybercrime unit before becoming chief executive of SecureOL, a software security company. "The market has its own forces."
Few markets, however, face anything like the forces imposed on Israel. Just last month, the technology institute was shut down in the first few weeks of conflict with Lebanon. Yet the country's tech industry is charting unprecedented growth despite the current war and chronic political disruption, drawing more investment from venture capitalists and multinational corporations than any other time in its history.
Between January and July of this year alone, 45 Israeli tech companies were acquired, five committed to mergers, and 12 went public, according to the Israel Venture Capital Association. Buyers included Microsoft, IBM, EMC, Oracle and Johnson & Johnson. In the same period, British venture capital firm 3i, Greylock Partners and Opus Capital all have recently begun or expanded investment activity in the country.
Industry organizations have tallied 2,642 high-tech companies in operation within Israeli borders, a ratio of one for every 2,400 people. Some, such as Check Point Software Technologies and Amdocs, have become publicly traded global corporations, but most are relatively small businesses.
"The number of start-ups is second only to Silicon Valley," said Tali Aben, a general partner for Gemini Israel Funds.
That observation is especially noteworthy in light of Israel's political and military volatility, which would seem to be a powerful deterrent to outside business and investment. But a strong argument can be made that life under constant adversity produces a highly competitive workforce that is particularly well-suited for the survival-driven technology sector.
At age 18, most Israeli youths enter the armed services, where a battery of psychological and intelligence tests identify the most intelligent and promising inductees. While their U.S. counterparts are still deciding on a major in college, young Israelis are being asked to fly jets, oversee projects under wartime deadlines and conduct other urgent tasks.
"When you are quite young you get a lot of exposure to state-of-the-art technology and are given a lot of responsibility," said Zeev Holtzman, chairman of Giza Venture Capital. "When you come out, you know a lot about technology, management, budgets, etc. You are quite mature. It is one of the reasons that can explain the success here."
Venture capitalists have typically been attracted to the small and nimble start-ups that are churned out on a regular basis by local entrepreneurs and, in rising numbers, the country's universities. These include such innovative companies as Transtech Control, which develops visual aids for air traffic controllers; BrainsGate, which is working on emergency stroke recovery; and Saifun Semiconductors, a maker of flash memory technology.
A key reason that small companies have proliferated is the comparatively low cost of getting off the ground, far less than the expenditures of U.S. start-ups. Serial entrepreneur Shimon Eckhouse noted that his first company, ESC Medical (now part of Lumenis), needed only $2.25 million before turning a profit. Syneron Medical, which was founded in 2000, was in the black after $3.5 million in investment and is doing about $100 million a year in hair-removal equipment.
The influx of venture capital has made Israel something of a national incubator. Just as India and China have become global destinations for customer support and manufacturing, Israel has devised a formula for taking novel ideas from the lab and building companies around them.
"Israel can be--and already is, I think--an outsourcing destination for R&D," said Amos Drory, executive vice president of the American Associates, Ben-Gurion University of the Negev (AABGU), the U.S. fundraising arm of the institution. Drory, who also used to run the university's management school, boasted, "We have at least as much entrepreneurship in Israel as in all of Europe put together."
Although Drory is partisan, his claims are not wildly exaggerated. In 2004 and 2005, venture investors poured more money into Israel than any European nation. Israel and its population of 6 million citizens attracted $1.3 billion in venture money last year, more than double the $637 million invested in Germany, which is home to 82.4 million people and multinational companies like Siemens and SAP, according to a VentureWire-IVA study.
While Israel has historical strengths in communications chips and security, new companies have been expanding the horizons in such diverse areas as homeland security, alternative energy, water processing and even chess technology. In the hot mobile phone industry, Dblur Technology has developed a lens system for camera phones that cuts costs and improves focus, while another company in stealth mode will soon debut a keyboard activated by hand gestures.
Even the hypercompetitive consumer Web business is thriving here.
The online advertising business also attracted Yair Goldfinger, who co-founded instant-messaging pioneer ICQ and eventually sold it to AOL for about $400 million. He is backing Dotomi, which has created personalized banner ads.
Next page: Saluting its disciplined origins
Technology's promised land / Industry, investment thrive in Israel despite violence
Like many things here, the technology industry owes a huge debt to the military, which serves as a combination incubator, finishing school and good-old-boy network. The first local tech companies were born from necessity after France embargoed military equipment shipments to Israel in 1967, Drory noted, and dominance in information security emerged from its intelligence services. Check Point co-founder Gil Shwed, for one, came out of a classified intelligence unit.
The medical field has benefited from its military roots as well. Eckhouse spent 17 years in weapons design before becoming an entrepreneur, and missile engineer Gadi Iddan invented the "Pill Cam" by Given Imaging--a swallowed camera that takes pictures of the intestines in a human body. In its hair-removal technology, Syneron Medical uses a light source originally used to clean jet planes.
"The military budget indirectly subsidizes the high-tech sector," Giza Venture Capital's Holtzman said. Army friends, such as Check Point's founders, frequently are reunited in commercial projects later in life.
Given these strong state ties, the industry has, not surprisingly, maintained close relations with civilian government agencies as well. That involvement took two major forms in the early 1990s: in venture capital and in research.
The Yozma Project was founded in 1993 to lend money to budding entrepreneurs and to create a venture capital community, an effort that gave rise to Gemini, Vertex and several of the first local venture capital firms. Around the same time, the Office of the Chief Scientist formed its national incubator project, which sought to take ideas or lab projects and turn them into companies through relatively modest grants of $200,000 to $400,000 annually over a two-year period. In both programs, graduates are required to pay back the financing they received.
The incubator project was initially created to help give jobs to a wave of Russian immigrants who often had degrees in medicine or engineering but could only get jobs in manual labor. Immigration from Russia has since slowed, but the program has not.
"We don't accept start-ups. We establish start-ups," said Rina Pridor, who runs the program for the government. "We invest in people when private money won't touch them."
Successful alumni include Compugen, a bioinformatics company with 200 employees, and Visionix, which makes equipment for eye care. Visionix's founder first went to his boss for sponsorship but was rebuffed.
"Later, after they raised $5 million, his employer said, 'I am ashamed to admit it, but my experts told me (that) scientifically it wouldn't work,'" Pridor recalled. "You can never tell in advance."
Foreign corporations also have taken chances that have paid off after recruiting young graduates and future entrepreneurs. Motorola and other multinationals began opening Israeli research and development offices in the 1970s. But the turning point came with the arrival of chip giant Intel in the 1980s--a development that can be traced in many ways to a single engineer.
Dov Frohman, who invented a memory called EEPROM, wanted to move back to Israel. So Intel opened offices there because it didn't want to lose him.
Today, Intel operates an Israel-based chip fabrication plant, where local engineers came up with the Pentium M line of notebook processors and Merom, a chip that has helped the company recover from two of the worst years in its history.
A change of economic culture
The rise in foreign investment is leading to a cultural change in Israel's technology business, one that industry veterans would like to see accelerated.
In the past, success has often meant getting bought out by a larger corporation. Holtzman and others would like to see more of a balance between companies that get acquired and those that grow up to become independent entities.
Holtzman recalled telling the founder of Libit Signal Processing, a professor from Tel Aviv University, that the chip company could become a $1 billion operation in a few years. The professor replied, "I now have the opportunity to make $70 million today" and sold Libit to Texas Instruments for $360 million, Holtzman said.
Part of this attitude is a product of geographic isolation. Because it has almost no local market, Israeli companies often end up exporting their goods overseas and eventually sell their businesses rather than build international sales teams.
Those within the industry acknowledge that marketing, managing and other "soft" skills need to be improved. It is in these areas that the military's pervasive influence can backfire; many who have gone through the training say it gives Israeli executives and engineers an abrupt, argumentative personality.
Mooly Eden, a vice president in the mobile group at Intel, said he sometimes feels like a man without a country after having worked in both the United States and in Israel. People in the U.S. think he's overly aggressive, he said, while Israelis think he's become soft.
Regardless of what form it takes, assertiveness will increasingly be a necessary part of doing business in today's globally competitive market. China and India are investing heavily in university research, which could lead to similar tech-heavy industries in those countries.
"The goal of the world is to beat the Chinese. They produce more engineers every year. They have 200,000 to 300,000 a year; we have 8,000 to 10,000," said Oded Tira, a former general who now heads up Phoenicia, a $50 million glass manufacturer. "They don't care about intellectual property. We have to develop something that will take two to three years to copy."
Israel, of course, faces threats that are far more serious and closer to home in national security. But Israeli citizens and even many Westerners say they have become accustomed, as much as as it is possible, to enduring a wartime existence.
For some, the omnipresent danger has manifested a patriotic determination not to let the violence kill economic growth.
"If you look at the last 15 years, there were ups and downs in terms of the security situation, but whenever it calms down, foreign investment picks up," said AABGU's Drory. "We may be in Lebanon for God knows how long, but the present intensity level can't last for very long."
After a pause, he added: "I hope I am right."