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Israel aims to grow from start-up nation to scale-up nation

Financial Times, January, 2014

Tel Aviv in Israel

When word first surfaced that Facebook was considering buying the Israeli start-up Onavo, the takeover looked set to follow a familiar script: local company with killer app cashes in and sells out to the Americans, then vanishes from the scene.

Onavo’s signature technology allows users to cut the roaming charges on their mobile devices by compressing data in a cloud-based service that delivers it back to the device in “lighter”, less expensive form. The company’s young founders had done military service in the Israeli army’s intelligence division, Unit 8200, whose graduates are behind some of the country’s best-known technology start-ups.

Israel brands itself as a “start-up nation”, the second-largest source of innovation after Silicon Valley, as measured by the value of its tech start-ups. The country is the world’s third-largest source of listings on New York’s Nasdaq, after North America and China.

What Israelis have not done so well is grow their companies into the big leagues because of gaps in management experience, the availability of growth capital, and a restless, risk-friendly culture of serial entrepreneurship that favoured quick exits over organic growth.

But that is now changing, with more international venture capital and private equity groups on the scene, and tech companies including Apple, Google, Intel and HP building up their research and development operations in Israel, making the country a major tech hub in its own right.

As part of the Onavo deal, reportedly worth more than $150m, Facebook agreed to keep open its Israeli offices, which employ 30 people, and turn them into an in-house R&D facility.

Onavo was one of several Israeli start-ups to be snatched up by Silicon Valley’s corporate household names this year. Navigation app company Waze was sold to Google for more than $1bn and Apple bought 3D sensor company PrimeSense for about $350m.

With more of the global venture capital groups on the scene, the price tags for Israeli exits of this kind are growing. PrimeSense, for example, would never have achieved its $350m sale to Apple without a sizeable investment from Silver Lake, the technology-focused private equity group, said to total $50m.

“We are moving from start-up nation to scale-up nation,” says Jon Medved, who started his first seed capital fund in 1994 and now runs OurCrowd, a platform for equity crowdfunding. “We have a more mature entrepreneurial class, and later-stage capital is finally available.”

After two decades at the forefront of creating new companies in areas like clean-tech and cutting-edge medical technology – Given Imaging, which makes swallowable camera pills, is one of the best known in this – Israel’s skills set now puts it in pole position to profit in new areas like harnessing big data. “You have 18 to 15-year-old kids honing their skills set on the army’s database,” says Michael Eisenberg, general partner at Aleph, a $140m venture capital fund. “You feed them that and a lot of training where life and death sits on the line, and you get results.”

Aleph’s first disclosed investment was $5m for Windward, which analyses maritime traffic and behaviour to warn clients such as energy and insurance companies or governments of suspicious activity on the high seas, such as oil theft or illegal fishing.

While Israel’s technology professionals are increasingly confident of taking a leading role in building a homegrown tech sector, they cannot afford to be complacent. Israel is a country of just 8m people, where many are working for a ‘flattening’ global industry where new technology allows companies to face customers directly – meaning that location matters less. But other places around the world are applying the same formula Israel did to start and nurture companies.

Israeli start-ups seeking to grow on their own or with foreign capital still often struggle to attract and keep talent, and may need to look overseas.

“There are so many start-ups, and people are such entrepreneurs, that it’s hard to find good people at the executive level who are willing to come into a larger company,” says Astorre Modena, managing partner with Terra Venture Partners, a fund that invests in rising ‘clean-tech’ companies. “This has been one of the biggest issues for a company to grow beyond 100 employees.”

Tel Aviv, which hosts one of Israel’s biggest technology clusters, is working with Israel’s economy ministry to review visa policy with the aim of introducing a “start-up visa” regime that would make it easier for skilled foreigners to come and work in Israel. “We need to have diversity,” says Avner Warner, director of global economic development with the city. “We need to have Israeli founders co-founding with Asians, Europeans – everyone.”

Start-ups: one established and one to watch

 

Waze

Year founded: 2008

Before Waze was bought by Google for more than $1bn this year, it was already a household name in Israel, often used as a verb (‘Don’t worry, I’ll waze it to your house’). The company’s app offers traffic navigation via smartphone and accumulates data on all its users to predict the fastest route from A to B.

 

Wi-Charge

Year founded: 2010

As mobile devices proliferate – and with them the need to carry around charging cables – Wi-Charge offers wireless charging for up to 10 meters, using invisible light. The company says the product is safe to use and will hit markets in the next 12 to 18 months.

 By John Reed in Jerusalem

 

 

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