Despite the Times, Israel’s Hi-tech Sector Thrives

From processors to software, from innovations in online video to security systems, from cellphone technology to better ways to stay safe on the road, Israel is there – at the forefront, designing and producing the hi-tech wizardry that has changed the world. Some of the products produced by the “Israeli braintrust” are well known – like the iconic ICQ chat program, which revolutionized communications, leading to the plethora of internet-based chat and phone solutions available today.

ICQ is just a case in point: Many Israeli companies developed their “killer” device or application with assistance and investments from venture capital investors and funds – investments that paid off big time when the companies they worked with arrived at a successful exit, either getting bought out by a multinational, or going public themselves – turning into worldwide enterprises that, themselves, snapped up promising Israeli startup ventures. With over 100 Israeli companies trading on the NASDAQ – the majority of them in the hi-tech business – Israel is one of the world’s technology powerhouses.

First, some stats: Over little more than a decade, Israel has grown into a hi-tech powerhouse, with the technology boom fueling Israel’s amazing GDP growth of the past few years, says the Ministry of Industry, Trade and Labor. Nearly three quarters of Israel’s $70 billion exports last year were in the high-tech sector, Ministry statistics indicate, and the country has one of the highest per-capita rates of patents filed. In its latest report, the Israel Venture Association (IVA) said that high-tech companies raised $600 million during the third quarter of 2008, an eight-year quarterly high and up 45 percent from a year earlier, and 29 percent more than the second quarter. The World Economic Forum in its 2007-2008 report called Israel one of the leading countries in the world in technological innovation, ranked first for availability of qualified engineers and total expenditure on R&D.

The hi-tech boom, along with the solid fundamentals of Israel’s economy, has helped the country sustain strong growth for decades, with GDP rising most years. Israel’s GDP in 2006 reached $195 billion, according to the International Monetary Fund , and GDP per capita was $31,767 in 2007, the IMF said. After adjusting its forecast to take into account the world financial crisis, the Bank Of Israel still predicts that GDP will grow by 2.7 percent in 2009. Israel has free trade agreements with the European Union, the United States, the European Free Trade Association, Turkey, Mexico, Canada, Jordan, and Egypt, and last year became the first non-Latin American country to sign a free trade agreement with Mercosur. According to Bank of Israel statistics, industrial exports grew by some 27% since the start of 2008 and hi-tech exports, climbed at an annualized rate of 18.2% over the past three months.

But with the technology boom in recent years, much of Israel’s growth has been fueled by hi-tech development. As an umbrella group for those seeking to invest in Israeli hi-tech, the IVA lists dozens of VC firms that have portfolios of Israeli companies, some of whom have been working here for over a decade. Almost all the “name-dropping” companies identified with Israeli hi-tech – companies like Checkpoint, Nice Systems, Aladdin, etc. – were nourished by VC companies like Genesis, Gemini, Pitango, and many others.

From modest roots, many Israeli companies have grown to be world leaders in their specialties. One such company is Checkpoint Software, the creator of the modern commercial computer network firewall. Checkpoint was established in 1993 in a small Tel Aviv apartment, by Gil Shwed, Shlomo Kramer, and Marius Nacht – and today the company has some 100,000 customers and over 1,500 channel partners, and is traded is worth over $7 billion, with 1,800 employees worldwide. Nice Systems, which is involved in everything from telephony to web, radio and video communications, has been trading on the NASDAQ since 1996, and has over 24,000 customers in 100 countries, including over 85 of the Fortune 100 companies. Both companies subsisted on investments in their early days, going on to far exceed the expectations of early investors.

In addition to private funding, the government of Israel runs a number of programs that provide help to promising startups. The Office of the Chief Scientist, the Israeli Industry Center for R&D (MATIMOP), and programs like the Israel-US Bi-national Industrial R&D (BIRD) Foundation, among many others, lend a helping hand with logistics, advice, and even funding. The BIRD Foundation, for example, was established by the U.S. and Israeli governments in 1977 to generate mutually beneficial cooperation between the private sectors of the U.S. and Israeli high tech industries, including start-ups and established organizations. BIRD supports approximately 20 projects annually with a total investment of around $11 million per year. To date, BIRD has invested over $245 million in 740 projects, which have produced sales of over $8 billion. Since the establishment of the Foundation 30 years ago, the accumulated repayments have totaled $82 million.

Israel, in other words, is a bright – very bright – spot on the hi-tech world map, with so much innovation going on, many entrepreneurs who take their companies to a successful exit come back for another round, hoping to build yet another startup into a successful world changing company. In an interview with the Israel Investment Newsletter earlier this year, Gemini’s Carmel Sofer said that the rise of the “serial entrepreneur” was an increasing factor on the Israeli hi-tech scene. “We were some of the earliest to spot a key trend we see playing out right now: the return of successful entrepreneurs,” Sofer said. “We’re seeing serial founders of startups rebound off successful exits and with money in pocket, begin building new businesses. We’re seeing more and more of this caliber of professional starting new companies. They’re not necessarily interested in the money. They have a strong commitment to building a company and they’re coming from a variety of different fields.”

One of those “serial entrepreneurs” is Zohar Zispael, one of the most successful and prolific hi-tech entrepreneurs in Israel, or anywhere. With 27 startups under his belt, Zispael’s RAD Group of companies, which he co-founded with brother Yehuda, is considered the top developer of telecommunications startups in the world. In an interview with the Jerusalem Post, Zispael said that he had worked with nearly all the VC companies in Israel, plus a good number from the U.S. “In the early days, before there were VCs, we raised money ourselves. We got some help from the Chief Scientist on some projects as well,” he says. In fact, he says, the assistance the government offers encourages VC investors to do business here. “The Chief Scientist and other programs run excellent programs, which pay off for the country, encouraging not only specific projects, but an atmosphere of development, and a feeling that with enough hard work, a company can succeed. That drive encourages VC investors, who are more willing to put money into startups, and in the end, when there is a successful exit, both the investors and the country benefitting. Even if a company doesn’t make it, the technology they developed with find its way into another project,” Zispael says.

But hasn’t the world financial crisis changed the rules? What are the prospects for Israeli hi-tech in the coming years? Zispael remains optimistic, saying he expects growth to continue. “So far, I haven’t seen a falloff in technology sales, at least by established company, although I do expect a dip next year. But things will definitely not get as bad as they were in 2001,” when the dot com bubble burst. “This bubble is for the banks and real estate, so it will affect hi-tech less,” Zispael says. While VC “angels” may temporarily be intimidated by the market and may hold off on their investing activities in the short term, and some brand new and almost-mature (pre-exit) companies that have a high burn rate may face real problems, he expects most well-run developers to survive the crunch. “If anyone asked me, I would tell them that the time to buy or invest is when everyone else is afraid to, because you can get better terms,” Zispael says. “Those investing in new companies now are looking at exits in perhaps five years,” when things should be looking much better, he says.

And if there’s one thing Zispael has proven, investments in Israeli tech pay off for those willing to take the investment risk. When it comes to the innovation that is a feature of Israel’s hi-tech developers, nothing’s changed, he says; the fundamentals remain the same. “What’s changed is the market, but the ideas are still out there,” he says. And those ideas are as great as ever, according to Gemini’s Sofer. “We’re now witnessing the emergence of the mobile Internet, and this is coming from Israel. The mobile phone is no longer being looked at just for its voice capabilities, it’s being considered as a data device,” he told Israel Investment Newsletter. “Many are trying to take web applications and make them work on the phone. This is just part of the story. Those companies, and many of them are located in Israel, who can start developing mobile applications from the ground up as they look how users will interact with the Mobile Internet are going to be the winners. These companies are working on application development as much as building sustainable businesses.” Regardless of investment climate, that development will continue – and investors like Gemini, who know a good thing when they see it, will continue to bring the future Israeli “stars” to successful exits.