Technology's promised land / Industry, investment thrive in Israel despite violence

A culture of survival drives growth

By Michael Kanellos
Staff Writer, CNET News.com
August 8, 2006 4:00 AM PDT

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. YouTube competitor MetaCafe, which is moving from Tel Aviv to the United States, is among the top 10 video sites in traffic. But what drew $15 million in venture dollars in July were MetaCafe's ranking technology and its technique for including seconds-long corporate ad clips in homemade videos.

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.

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