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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.
"We don't accept start-ups. We establish start-ups...We invest in people when private money won't touch them."
--Rina Pridor, director, Israel's technological incubators program
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.
"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."
--Amos Drory, American Associates, Ben-Gurion University of the Negev
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."