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Israel's Silicon Wadi

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

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