In tiny Israel, startups reach for global success

For years, most Israeli startup founders defined success as a quick sale to a bigger company. Now, they see a chance to build a lasting business.

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TEL AVIV and JERUSALEM -- While banking a white Audi on Route 443 outside Jerusalem, Shalom Mines nonchalantly let go of the steering wheel and took his foot off the gas.

In an instant, a camera-and-software system made by Mobileye, a Jerusalem company developing autonomous-car technology, took over and navigated the vehicle through a curve.

"I'm not doing anything," Mines, a Mobileye test driver, said while he craned his head toward the rear of the car to show it was no trick. "One day I will just sit in the backseat."

Mobileye's journey reached a milestone last year when the 16-year-old company listed on the New York Stock Exchange, raising $1 billion in the largest initial public offering ever for an Israeli tech firm. The company, now at the forefront of crash-avoidance systems and the white-hot market for self-driving mechanisms, immediately became a poster child for the higher ambitions of Israeli technology.

Mobileye's Shalom Mines shows off the hardware powering his company's self-driving test car. Ben Fox Rubin/CNET

Israeli entrepreneurs, many seasoned from earlier booms, are increasingly ready to follow Mobileye's road map. The country has punched above its weight in tech for decades, with thousands of startups and 300 research-and-development centers for Apple, Google, Facebook and others. The country birthed Waze, a maps and navigation app that's now owned by Google; Given Imaging, which invented a pill-sized camera for gastrointestinal exams; and PrimeSense, which created technology that lets computers "see" in three dimensions and that was purchased by Apple.

Yet Israel has seen few homegrown companies go the distance to become long-standing leaders in their fields. Most founders sell early to competitors and avoid the risks of staying independent.

But that mentality is changing, many observers say, with entrepreneurs looking to build sustainable businesses that can grow into multinational corporations, rather than quickly selling out to one. This new strategy could result in Israel becoming the proud parent of more major tech companies and an even bigger influence on the tech world.

"In order to nurture multinational companies, you need to have some sort of heritage," said Niron Hashai, a professor at Hebrew University of Jerusalem who has studied the Israeli tech market for years. "That heritage is building up."

Last year, 17 Israeli companies raised nearly $2 billion in public offerings, the biggest IPO year by dollars raised since 2007, according to Dealogic. That's a sign that more local companies may be trying to stay independent for the long term.

Still, those figures pale in comparison to the $5.2 billion overseas companies spent last year to buy 75 Israeli firms.


Growing beyond

Tel Aviv, the heart of Israel's tech scene, has long been a hotbed for early-stage companies. Many are now expanding beyond the startup phase, leading to a construction boom that is changing the city's modern skyline.

Wix, a website developer, went public in 2013, raising funds that helped it hire more than 1,000 people worldwide. In Tel Aviv alone, the company has offices in 11 buildings near the city's old port. That's a far cry from its origins nine years ago in a spare office crammed with a dozen workers.

CEO and co-founder Avishai Abrahami had the opportunity to sell out for $45 million a few years after the company was founded. But he and the other founders eschewed the typical story line for Israeli startups, turning the money down. Wix is now worth more than $750 million.

Inside Wix's design studio in Tel Aviv. Ben Fox Rubin/CNET

Abrahami met with me last month in his bright fifth-floor office, where he arranged a stuffed-animal cow, a baby doll in a bowtie and suspenders smoking a pipe, and other knickknacks around a large window overlooking the Mediterranean Sea. There's a whiteboard on the wall filled with an indecipherable mess of colorfully drawn charts and numbers.

The 44-year-old serial entrepreneur, who speaks in a commanding baritone, said more Israeli founders want to follow the lead of Wix and Mobileye by staying independent and going bigger.

"They can see it's possible" Abrahami said. "And it's a lot more exciting to see that it is possible."

Gett's development center in Tel Aviv became so crowded the startup set up new digs nearby. Ben Fox Rubin/CNET

Across town the development-center offices of Gett, a fast-growing startup offering a driver-hailing app that competes with Uber, teemed with activity. The entrance hosted a large meeting at which staff discussed the latest passenger stats. Around the corner, developers were tweaking code and ironing out new features, while others played ping-pong on a nearby porch.

"It's too small," finance chief Tal Brener said of the offices, which became so full that Gett renovated a new space nearby to accommodate its expanding staff. "Everything is gone in less than a month."

Analysts and venture capitalists see Israel's pipeline of startups as especially strong now. They see 20 to 50 firms with the potential to go public in the next five years, though many will still opt to be acquired.

"It requires great entrepreneurs, capital and patience," said Arnon Dinur, a partner at Israeli venture capital firm 83North. "We're at a time when all these three things are coming together."

It still isn't easy

Omer Kaplan, co-founder and Deputy CEO of IronSource, told me his app analytics company had been approached about a buyout several times over the last five years. The founders refused them all, betting the company's future was better if it stayed independent.

IronSource Deputy CEO Omer Kaplan expects that more Israeli startups will seek to stay independent. Ben Fox Rubin/CNET

"It's something relatively recent," Kaplan said of the growing desire for tech companies to go it alone. "You see entrepreneurs in Israel saying out loud, 'We really want to create something huge here.'"

Kaplan's company is now one of Israel's biggest startups with more than 550 employees.

Of course, there are plenty of reasons for entrepreneurs to sell when they get the chance. About half the country's startups don't make it to their fourth birthday and just four of 100 local startups are big enough to be deemed successful, according to the Israeli startup-focused IVC Research Center.

On top of that, the structure of the Israeli economy, which is dominated by a handful of big, government-backed businesses, skews against smaller companies. So do a high cost of living and Israel's distance from the US, its primary market. Entrepreneurs also complain about government regulations -- like tight restrictions on bringing in overseas talent -- which they say stifle growth.

"The issues are well identified," said Avi Hasson, chief scientist for the Israeli Ministry of Economy and a former venture capitalist, who noted that many of the larger Israeli tech firms weren't even around five years ago. "We're addressing them."

What did you build?

Before I went to Israel, I met with Itai Tsiddon at a cafe near my Manhattan office. The 30-year-old law grad came to New York in 2013 to help expand Lightricks, a 3-year-old Jerusalem startup he co-founded that develops photo-editing apps.

Porch ping-pong at Gett's development center. Ben Fox Rubin/CNET

The 30-person company's two apps quickly became hits, with Facetune -- which lets users brush up their photos with the swipe of a finger -- routinely in the top 10 paid apps on Apple's iPhone App Store in the US, according to research firm App Annie.

The founders of Lightricks are looking to Wix and Mobileye for inspiration. Tsiddon wants the company to grow enough to build a suite of creative apps for smartphones, potentially going head to head with Adobe, the top dog in photo-editing software.

"It used to be that anybody that made a few million dollars used to be a winner," Tsiddon said of the Israeli tech market. Now, he said, people are asking, "What did you build?"

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