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Even in Israel, it is hard to turn young companies into adults
THE young must shout if they want to be heard. In a stone hangar in the old
port of Jaffa, 30 entrepreneurs have five minutes each to present their
start-up companies to a panel of digital luminaries and an audience that
includes potential investors. Not everyone in the room is ready to shut up and
listen, so the hopefuls must battle against the din. Feng-GUI explains how, by
simulating human vision, it can tell advertisers and designers which areas of a
web page are most likely to grab people s attention. CopyV promises to send
large files quickly and securely. With Fooducate, a dietician in your pocket ,
on your smartphone, you can scan bar codes in the supermarket and find out what
s really going into your trolley.
Israel s legions of young technology firms clamour for attention and money.
Rapid-pitch events like this one, at DLD Tel Aviv, a two-day conference in
November, are common. More than 300 firms applied for a slot at DLD; 100 turned
up; the lucky 30 were chosen by raffle. Yossi Vardi, a technology entrepreneur
who has invested in 75 start-ups since 1996, says that he receives between
three and eight approaches every day.
Dan Senor and Saul Singer called Israel The Start-Up Nation in a book of that
name in 2009. The label has stuck because it fits. Everybody and his
brother-in-law seems to be starting a company with old schoolmates or army
colleagues, in a spare room or the parental home. Starting a business is easier
than ever, thanks to advances in information technology. Budding designers of
smartphone apps can rent space when they need it on a remote server rather than
buying huge amounts of computing power. The internet has democratised the
right to innovate, says Mr Vardi.
Israelis innovate because they have to. The land is arid, so they excel at
water and agricultural technology. They have little oil, so they furrow their
brows to find alternatives. They are surrounded by enemies, so their military
technology is superb and creates lucrative spin-offs, especially in
communications. The relationships forged during military service foster
frenetic networking in civilian life. A flood of immigrants in the 1990s gave
national brainpower a mighty boost (see article). The results are the envy of
almost everyone outside Silicon Valley.
Small country, big dreams
But even in Israel turning tech start-ups into big companies is difficult. For
all the comparisons with Silicon Valley, Israel has not begotten a
Hewlett-Packard, an Intel or a Google. Its best companies are often bought by
American giants while still in their infancy. The biggest home-grown technology
company is Teva, a drugmaker which is listed on NASDAQ, an American
tech-oriented stockmarket, with a market capitalisation of $43 billion. In
information technology the biggest is Check Point, a security specialist
founded by veterans of Unit 8200, an elite army-intelligence group. Also on
NASDAQ, on which Israel has more companies than any foreign country bar China,
it is valued at $11 billion no minnow, but no whale.
Very young firms have a good deal of support, which is getting stronger.
Accelerators, in which entrepreneurs can shape their ideas and meet advisers
and investors, are springing up: this week, for example, UpWest Labs, which
intends to bring five to ten Israeli start-ups to Silicon Valley for ten-week
stints, began its first programme. As well as meeting helpful people, the
hopeful entrepreneurs receive $20,000 in seed money.
There s a plethora of opportunities at a very early stage to raise $20,000 or
$100,000 to get a minimum viable product out there, says Liat Aaronson, the
executive director of the Zell Entrepreneurship Program, a scheme for
final-year undergraduates at IDC Herzliya near Tel Aviv. The difficult bit is
turning small firms into bigger ones.
One commonly cited problem is a lack of early-stage venture capital: sums of
$1m-2m or so. Ms Aaronson agrees that this step is trickier , though some
firms emerging from the Zell programme have attracted such amounts. People on
the course founded the Gifts Project, acquired by eBay in September, which
allows people to club together to buy presents online for their friends, and
Wibiya, a web-design company that was bought by Conduit, a biggish Israeli
firm, for $45m in July. Alumni set up LabPixies, a developer of web and
smartphone apps that was spirited away by Google for $25m in April 2010.
Israel attracts far more venture capital per person than any other country $170
in 2010 to America s $75 (see chart 1). Yet there does not seem to be enough
early-stage money to go around. One reason is that there are simply an awful
lot of young companies fighting for a share of the pot.
Another is that venture-capital firms in Israel, just as in other countries,
have had a lean few years. That could be changing: investment is climbing back
towards its pre-crisis peak (see chart 2).
But some funds based in Israel, several of which were created with public money
in the 1990s, are still having difficulty raising money and are hesitant about
deploying what they do have. They are likelier than big international brands to
deal in smaller amounts. According to the Israel Venture Capital Research
Centre, Israeli funds now account for only a quarter of the amount raised by
the country s high-tech companies, down from two-fifths a few years ago.
Whether the brand is Israeli or foreign, says Adam Fisher of Bessemer Venture
Partners, an international group, the money comes from abroad.
Building a business requires more than money and technology. Companies need
customers, and in a country of 7.6m people there are not very many. So Israeli
firms are often global virtually from the start. For example, BillGuard, which
alerts its users to errors and fraud on their credit and debit cards, has an
office in New York, staffed by Yaron Samid, its chief executive and one of its
founders, and the head of business development and sales, and keeps a 15-strong
product-development team in Herzliya.
Now that young Israeli companies are applying their technical brilliance to
consumer products as much as to designing semiconductors or developing
computer-security software, broader skills matter more. In a blog post last
July, Mr Fisher exhorted them to think about their entire business model,
including product design and marketing, from the outset. Some start-ups, he
wrote, had made this mental leap, but the tech crutch , a model of focusing on
technology alone and then selling to foreign multinationals, was increasingly
unsustainable in the face of competition from China, South Korea and Taiwan.
Building businesses also requires people who are willing to be, say, the 50th
employee in someone else s firm. But in a nation of start-ups a lot of people
want to be their own bosses. Talent risks being thinly spread. Mr Samid s
theory is that after their stint in the army many young Israelis have had
enough of being told what to do. He reckons that three-quarters of the members
of TechAviv, a network of entrepreneurs that he set up, are start-ups with
fewer than ten employees.
And making a business into something not merely big but enormous means
resisting bigger companies blandishments of a few million dollars, or even a
few hundred million. Given a certain payoff for selling and an uncertain future
going it alone, it is not surprising that many people take the money. Several
companies have rejected offers of hundreds of millions of dollars only to fail
a few years later. So leaving the task of building a company to someone else
may not be such a bad idea.
Mr Vardi certainly thinks so. We are developing intellectual property, not
just companies, he says. He reels off a list of American tech giants, from
Intel to Google, with operations in Israel into which they have folded local
firms. Several have been in Israel for decades. It is these multinationals, he
says, that create the 30th, 40th and 500th jobs in Israeli start-ups. Intel
employs more than 7,500 people in the country; HP too has several thousand
staff; IBM has more than 2,000. This month Apple made its first Israeli
acquisition, Anobit, a maker of parts for flash-memory drives, for a reported
$390m. It is said to be setting up a research centre too.
Israel is not alone in agonising over the sale of its home-grown companies. In
Britain, the sale of Autonomy, a software company, to HP for $11 billion last
year caused a brief national lament. Some Israelis may wish their crops grew
taller in the field before the harvest. Most countries would settle for sowing
half as much seed.