Tel Aviv start-ups grow up

As Israel's start-up ecosystem matures, technology companies are seeking to create a footprint there. Tel Aviv is ranked the No. 2 spot in the world for start-ups. 

Rich Clabaugh/Staff

This gleaming metropolis, with geeks, hipsters, lawyers striding along the tony streets where only sand dunes stood a century ago, is ranked the No. 2 spot in the world for start-ups, after Silicon Valley. 

It’s an impressive feat for a country smaller than New Jersey that has built an outsized hi-tech industry while fending off numerous enemies with its other hand. The very state of perpetual survival mode, the compulsory military service that gives many young people an extra one to three years of experience in the field, and the relative disregard for hierarchy and authority have helped to create the dynamic technology ecosystem. 

For years, however, those same characteristics were blamed for preventing Israel from building an Intel of its own; entrepreneurs simply had too much chutzpah and too little patience.

“We really have a DNA problem in this country because we can’t deal with discipline and hierarchy,” says Yoav Chelouche, a former CEO turned venture capitalist. “That poses a problem when you try to scale up.”

Companies like Intel and IBM have long bought Israeli start-ups in the early stages and folded them into US-based operations. But that is changing as Israel’s start-up ecosystem matures. 

Waze, the GPS-based traffic navigation mobile phone app, bided its time before accepting a deal from Google reportedly worth close to $1 billion earlier this year and insisted on keeping its offices in Israel. Likewise, cybersecurity firm Trusteer was grown-up enough to be acquired for a reported $630 million by IBM last month, and will be part of IBM's new cybersecurity software lab in Beersheva, Israel.

And this week Facebook, upon acquiring mobile data analytics firm Onavo for an estimated $100 to $200 million, announced that it was not only keeping the company in Israel but turning its offices into the social media giant’s first overseas research and development center – following the example of Apple and Microsoft.

“Now the talent is maturing,” says Zack Weisfeld, senior director of Microsoft Ventures, a global initiative based in Israel. “I think you’re going to see more $1 billion companies in Israel than in the past.”

Microsoft Ventures, which is eager to benefit from hi-tech innovation around the globe – as well as to get feedback on its devices and services from start-ups, which are more dynamic than slowly evolving multinationals – started by launching an accelerator in Israel in April 2012. It has since added accelerators in Bangalore, Beijing, Paris, a pilot one in London, and will be opening another in Berlin next month. 
Microsoft also recently started a global seed-funding initiative. Perhaps not surprisingly, the first start-up to secure funding was SkyGiraffe, a graduate of Microsoft Ventures' lab in Israel. 

Despite being such a hub of hi-tech innovation, however, Israel has room to grow. Very few ultra-Orthodox Jews or Israeli Arabs, which together account for almost one-third of the population, are represented in the field. But there are efforts to address that issue, such as KamaTech, a program that collaborates with 13 of Israel’s largest tech firms to recruit and mentor Orthodox engineers.

Avi Hasson of Israel’s Ministry of Economy said at the recent DLD digital innovation conference in Tel Aviv,that he gets weekly visits from foreign government officials asking how to replicate Israel’s success.

But one thing none of them have is Israel’s shared tradition of debate emanating from the Talmud, which a rabbi and pupil can debate as equals, says Mr. Chelouche, who so believes in that culture that he once promoted a junior programmer who barged into his office uninvited to tell him why his company was bad and how to fix it.

“That’s a pretty secret sauce because most societies don’t allow you to do that,” he says.

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