Israel’s Silicon Wadi

How booming Web ventures are transforming hip, arty Tel Aviv into a top city for startups

Avishai Abrahami sits on the rooftop patio of his five-year-old Web company, Wix.com, contemplating the scene below. The Mediterranean Sea gleams in the late afternoon sun, shedding rays on the wooden planks of the uber-popular Namal boardwalk at the Tel Aviv port on the city’s north end. As he reaches into the well-stocked ice cream chest for two chocolate popsicles, a programmer pulls a beer from the fridge while a kitchen staffer lays out trays of fresh melon, dates and mango for the 7 p.m. round of fruit shakes.

“It’s a little early for beers,” says Abrahami with a smile (since office hours go until 8 or 9 p.m.). “But he’s been working hard.”

In his jeans, T-shirt and flip-flops, the 40-year-old Abrahami appears completely relaxed. His fourth venture in 19 years, Wix offers easy Web-top publishing for regular folks, making inroads against competitors such as Geocity and Weebly. “We made a conscious decision that the uniform is jeans, T-shirt and flip-flops,” says Abrahami, gesturing to his own outfit. “We don’t want to give bonuses for the way you dress. Come and do your job well, and that’s how we measure your performance.”

The approach seems to work. With 23 million users, the company has been attracting 1 million new customers each month since launching its HTML5 website builder in late March. Now it is up to 200 staffers around the globe, most of them, naturally, in the firm’s Tel Aviv offices.

Abrahami fits right into the city’s tech scene, where some 600 early-stage companies have set up shop far from the suburban business parks and glass towers that typified Israel’s earlier round of successes. Besides gaining distance from those office complexes and fleets of company cars, today’s hottest companies, like Wix, are involved in consumer Web services instead of the data telecommunications, semiconductors or software security of the ’90s boom.

With startups accounting for 30 percent of the $2.15 billion raised in 2011 from local and foreign investors in Israel overall, Tel Aviv has emerged as the new center of the “Silicon Wadi,” named for the dry river beds snaking through the desert nation. Worldwide, the city is ranked fifth on the Startup Genome’s list of top ecosystems for newly launching companies—behind only Silicon Valley, New York, London and Toronto and ahead of Los Angeles, Singapore, Sao Paulo and Bangalore.

Tech fever is a relatively new trend for the White City, named for the modernist white Bauhaus buildings flanking its streets. Profiled widely for its hothouse DJ and club scene and beachfront vibe, Tel Aviv’s streets were the headquarters for last summer’s social unrest—a precursor of sorts to Occupy Wall Street—when hundreds of Israelis pitched tents along tony Rothschild Boulevard to protest rising rents and food prices.

But engineers, designers and other employees at tech companies like Wix generally don’t need to worry about costs. Their salaries are relatively high compared to the national $2,572 monthly average, ranging between $5,000 and $8,000 a month. When these techies are young and single, or even coupled with kids, they want to live and work in Tel Aviv, the Israeli equivalent of Manhattan’s Big Apple also known as the “Big Orange.”

The country’s ability to constantly reinvent itself—fine-tuning back-end programming that makes software run better—has kept it on the world technology map for more than two decades. Today, with renewed global activity, many Israeli companies such as Wix.com are striving to build empires, while others are hoping for quick buyouts and partnerships in deeply entwined relationships with American businesses including VC firms with offices in both countries and old school ties reaching from Stanford University to Haifa’s Technion, the local equivalent to MIT.

In the last year alone, IBM bought mobile platform Worklight for $95 million, while Facebook snagged face-identification company Face.com for $60 million. eBay grabbed group gifting widget Appchee Applications (the Gifts Project) for $25 million, while Twitter acquired social information analysis company Julpan for $45 million, according to the Israel Investment Promotion Center.

Such acquisitions are not new. Israel has always excelled at developing the inner workings of global technology, whether for startups or giants such as Microsoft, GE or Google—each with major R&D centers in Israel. “Intel Inside”? That inside is made in Israel by Intel Israel. In the early and mid-’90s, startups often originated in grandma’s garage—or the kibbutz chicken coop. That was the case in 1996 with the company Mirabilis and seminal instant-messaging system ICQ, started by four twentysomethings and funded by the father of one of them, angel investor Yossi Vardi. AOL bought ICQ 19 months later for $400 million. Called the “Mirabilis Effect,” the seemingly overnight success inspired many startups, including telecommunications companies NICE Systems, ECI Telecom and Nasdaq-traded Check Point, a global IT security provider.

By the late ’90s, the dot-com bust hit Israel along with the rest of the world, though with far less force. But 2000 also saw a second Palestinian uprising, scaring away many foreign investors. With the violence under control by 2003, the high-tech scene was looking up by 2005 and pointing in a different direction—the front end of the Web.

The strong partnerships that make it happen are driven by a number of sources. Some credit Mamram or 8200, the technology units of the Israel Defense Forces, with producing the country’s best programmers. But many startups spring from the friendships developed among soldiers in combat units—also true of the Israeli professions overall.

Wix’s Abrahami served in the famed 8200 technology unit. So did Omer Perchik, the 27-year-old founder of 11-employee Any.DO, which has twice made TechCrunch’s list of the 20 best mobile apps. “My team is made up of friends of friends,” says Perchik, who got into business at age 8 selling refrigerator magnets to grade schoolers. Today, he spends up to an hour each day on the phone with his best friend, who runs his own startup. “I said, ‘Who are the smartest guys from your unit?’ and that’s how I found them,” Perchik says.

At the delivery app ironSource (formerly known as InstallCore, and before that VoloNet), Arnon Harish and his founding partner both served as fighter pilots. Birdmen are often recruited by the high-tech field, probably because “we’re very good at looking at the whole picture,” says Harish.

They’re also good at flying by the seat of their pants. Harish and his partners first created Funmoods, providing emoticons for social networks, then moved into their core installation software business that speeds download and set-up times. They bootstrapped by self-funding in the early days, building into a $100 million company with clients including Google, Download.com, Telecharger.com and Yandex.

Often built on strong partnerships literally forged under fire, bootstrapping is an increasingly common model that especially fits the Israeli DNA, says Jon Soberg, managing director of San Francisco-based Blumberg Capital and an investor in Any.DO. Israelis have a higher appetite for risk, particularly compared to the U.S., he says, where the culture is more concerned with university degrees and thinking about one’s career. But since Israelis generally enter college in their mid-20s after compulsory army service, they may never quite finish formal education, as is the case with Any.DO’s Perchik and ironSource’s Harish.

“In Israel, people think differently about what to with their life,” says Soberg. “They can be entrepreneurial, and they’re willing to take some risk. It’s something I admire in a huge way.”

Israelis may also bootstrap because there is simply not enough capital to go around. Still, Soberg believes the self-funded model may ultimately forge leaner, more resourceful companies. And when entrepreneurs do seek outside funding, they’re better developed with more complete products, giving them more bargaining power.

Israeli angel investor Elie Wurtman points to the self-funded beginnings of both ironSource and Wix as a secret to their success. By waiting several years, Abrahami believes he was able to be more choosy about his investors, ultimately raising $61 million from American and Israeli funders.

While Israel’s venture capital world is much smaller than that of the U.S., local money is still at the core of investment activity, according to the Israel Venture Capital Research Center. To expand the investing pool, a government program called Yozma (Hebrew for initiative) initially offered attractive tax incentives and matching money to foreign investors, helping develop partnerships with local investors.

As a result, Israel’s tech pool has grown, particularly in Tel Aviv, while attracting more investors from Europe, Asia and the U.S. Operating from a refurbished headquarters in a landmarked Bauhaus building on Rothschild Boulevard, eBay recently purchased social e-commerce platform The Gifts Project and opened a new global center for social shopping. And Microsoft runs one of the companies’ three Innovation Centers in Tel Aviv, fostering startups and big ideas.

As part of Tel Aviv’s soft-landing program for newcomers, the city lobbies the national government for special visas for entrepreneurs. There is also The Library, an incubator offering heavily subsidized working space and startup facilities within the municipal library of the Shalom Tower, the city’s first skyscraper built more than 40 years ago.

The tech shift into the city proper allows easy access to creative talent crucial to the elegant design needed for consumer Web apps and software. “Today people understand the value of inspiration,” says ironSource co-founder Tomer Bar-Zeev. “This building we work in on Rothschild, it’s inspiring, and people have to identify with where they are, working in a company that feels like a second home as opposed to an office.”

Despite the hip work environment, these Tel Aviv Internet pioneers are deadly serious about building out their companies, which wasn’t always the case. During the first boom, Israelis aimed more for the quick sale to the highest bidder or going public on foreign stock exchanges. Those early successes as well as failures—often the result of a well-documented lack of marketing skills—were generally blamed on a particular Israeli personality defect: the famed impatience and too-macho attitude. Israelis could build software but couldn’t promote it.

Though he sold three earlier ventures, Wix’s Abrahami now wants to grow his company. Likewise, ironSource’s Harish and Any.DO’s Perchik hope to follow through on what Israelis have yet to accomplish: building significant global companies that will create jobs throughout the country­—not just in Tel Aviv—and support the economy beyond the few hundred thousand currently employed in technology.

That kind of expansion is possible, says investor Wurtman. Still, while companies such as ironSource and Wix have broken or are nearing the $100 million mark, they will need to hit at least $1 billion to reach corporation size, while also developing sufficient platforms and sturdy management teams.

Venture capitalist Soberg believes some of today’s Israeli teams are as strong as those in Silicon Valley, though it could take 10 to 15 years to build a company the size of 34,000-employee Google. In a country with only 7 million people,­ that would be far larger than the nation’s biggest tech company, government-owned Israel Aerospace Industries, which has 15,000 employees.

With many of Israel’s leading entrepreneurs in their late 30s and 40s, they made many of their beginner mistakes in their 20s, when the Internet was new, they say. “There are some people who have proven they could build a billion-dollar company,” says Wurtman, pointing to Wix and ironSource’s potential. “Now, 15 to 20 years later, we have experience and maturity, and we’re doing it right. That’s the path everyone’s taking.”