Silicon Wadi Grows Up

Startup

2015-01-13 / www.thefinancialist.com




Silicon Wadi, Israel’s high-tech industry, is as much a state of mind as a physical location. For a long time, size dictated orientation and identity, but also determined limitations. In a small country of 8 million, the birth of Israel’s high-tech industry in the 1960s was closely linked to its fractious relationships with larger neighbors. Successive Israeli governments invested heavily in military technology, innovation and technical expertise as a counterbalance against strategic disadvantages. These things began to seep into the civilian environment, and many of Silicon Wadi’s earliest commercial successes were in hardware inspired by military R&D.

Start it up, Sell it Quick

Silicon Wadi came into its own with the software boom of the late 1980s and early 1990s, through business support system firms such as AmDocs and Magic Software, and security solutions – another military connection – such as Checkpoint and NICE Systems. Translating innovation into an international commercial advantage was a challenge; modest domestic markets and the difficulties of scale inherent in international penetration meant that Israeli tech firms labored at a disadvantage. But the 1998 sale of Mirabilis ICQ to AOL for $407m – the lack of a revenue stream notwithstanding – marked a new phase of high-tech entrepreneurship in Israel: Start it up, sell it quick. Small size was no longer a disadvantage; a steady stream of Israeli startups made lucrative “exits” – to use the industry parlance – and several international tech firms set up R&D units in Israel to tap into the burgeoning spirit of tech innovation. But this success came at the price of a self-perpetuating, commercially limiting cycle that militated against growth. Constantly primed to sell up, there was little incentive for young startups to aim for global dominance. However, this might be changing.

Driver safety firm MobilEye – founded in 1999 by a Hebrew University of Jerusalem professor – raised $890 million in its NYSE IPO, valuing the company north of $7 billion. It’s no one-off – Outbrain, a media tech startup founded in 2006, recently filed documentation ahead of a NASDAQ IPO, valuing the company at $1 billion. It’s worth noting that Outbrain, far from selling out at the first hint of international interest, followed an acquisition and expansion trajectory, purchasing three firms in the last three years. Even startups not going down the IPO route are devoting more time to growth and, ultimately, healthy M&A.

Silicon Wadi, it seems, has discovered the benefits in aspiring to achieve maximum value before selling. This is the end point of a confluence of factors. First, success breeds success, and the dominance of Israeli startups in the apps and software marketplace has led to significant infusions of VC capital. “Start-Up Nation,” the influential 2009 book by Dan Senor and Saul Singer, has played a major role in attracting investment from as far afield as China and Korea. There is also a wave of investment from within, as beneficiaries of successful exits plow money back into the community that nurtured them, often as angel investors. This is a crucial factor in Silicon Wadi’s success – the genuine sense of community. Entrepreneurs believe that they owe something to the community that nurtured and supported them, and the next wave of startups stand on the shoulders of the giants that preceded them.

 

Startup Nation Grows Up

Two firms that participated in a pitching competition at the recent Credit Suisse High-Tech Forum in Tel Aviv epitomize the new paradigm. Upright, a quirky but innovative startup, has invented a wearable device that analyzes sitting habits in order to correct body posture. It has already garnered healthy media coverage ahead of a product launch next year, and one might expect an early exit to be on the cards. But it doesn’t seem to be.

 “Upright is just the first product on our roadmap of wearable devices,” says Ori Fruhauf, Upright’s business manager. Next is a device designed for teenagers – notorious slouchers by habit, hunched these days over smartphones. The objective is market dominance. “We really believe that with these products, we have the opportunity to change people’s lives. This is our objective first and foremost.”

CallVU – which bested more than 30 promising startups to win the pitching contest – also understands the long game. A visual interface for smartphones, CallVU gives a layer of connectivity and efficiency to call center and automated answering systems. In fact, managing time is in the startup’s DNA. When the original product patent was filed 6 years ago, CallVU couldn’t have existed. “In 2008, we didn’t even have the word ‘smartphone’,” VP Ziv Orr notes. CallVU’s customer base is presently enterprise-based, but the company aims to target small businesses and peer-to-peer communications next. What matters, Orr emphasizes, is that the startup recognizes all options: “We have a great product. We have had offers, but it isn’t the right time. We have so much to achieve in the next few years, turning this new media we have invented into a paradigm-changer.”

Silicon Wadi’s new wave of entrepreneurs are looking ahead. Staying in the game will strengthen both them and the ecosystem in which they exist. Not very long ago, the chance that the next Facebook or Google would emerge from Israel was slim.

This article originally appeared on the Credit Suisse website.

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