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On the Israeli hi-tech experience and what we should all learn from it

By : Ziad K. Abdelnour| 13 May 2010
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In the 1990s, Israel emerged as a leading center for technology start-ups and innovation. In 2000, near the peak of the high-tech boom, Israel had 4000 high-tech firms and new ones were forming at the rate of about 500 start-ups per year. Today, out of the 101 companies trading on NASDAQ; 63 of them are registered in Israel; a stunning number indeed for a country with a population of only seven million people, the size of Rhode Island and the population of New Jersey.

And the story doesn’t stop here.

The Israeli high-tech industry boasts today 43 of the 50 leading technology giants in the world; all with cutting-edge R&D centers. Scientific American’s list of ’50 Research Leaders’ include three Israeli scientists. Notwithstanding the fact that S&P credit rating for Israel is still AA – amid a still shaky global environment – , four Israelis have been awarded the Nobel Prize and Israel tech investments have produced consistent and significant returns which only continue to climb.

So the question is: What makes Israeli technology companies so unique?

One argument is that the country’s small size forces Israeli companies into creating a global operational platform at a very early stage. The benefit is the consequence of a lack of a large local market. Many companies in countries with large domestic markets have been unable to overcome the hurdles to globalization. India for instance, has a thriving technology industry that is making huge and not always successful efforts to evolve beyond technological services to product-based models. Brazil is another example.

Another argument is that like in the U.S, Israel is an immigration destination where people with diverse backgrounds create solutions that are not created in a more settled and sedentary country. It is for example a known fact that people who are willing to leave everything and start again in a new country bring qualities, imagination, persistence, motivation, etc…. that others don’t.

Our argument is even simpler. We believe, as most private equity professionals with knowledge of the Israeli market do, that a technology company either competes globally or does not compete at all. This applies to technology start-ups that are born in Israel just as much as it does to those born in substantially larger economies. Because Israel’s size forces everyone to look for customers and technologies outside of the country, and because most of the 63 NASDAQ- Israeli companies understood early in the process that they had to acquire satisfied customers in primary markets such as the US prior to begin selling in their home country, they were able to access both the US private equity and capital markets the way they did.

In the vein of Eastern luminaries such as Sun Tzu, it is clear today that Israeli tech entrepreneurs have clearly shown the world perhaps–better than anyone–that success is not about beating the system or winning the game. Rather, it is a matter of working fluidly and strategically within the system, like a skilled martial artist deflecting the kicks and punches of their respective opponent.

Having said this, it is no surprise that such a high-percentage of leading Israeli technologists derived from the various technology branches of the Israeli Defense Forces and defense establishment. On the same note, it is crystal clear by now that the IDF “labs” did indeed create many of the start-ups and trained a whole generation of start-up “starters” more than anyone in the land. It is less obvious though that the reason why the Israelis always had “skin in the innovation game” was and still is because of the need to survive on the military front which they carried out to the civil environment. Notwithstanding the fact that the Government did its part too by providing much needed venture stimulus in the early 1990’s through various funding programs in which it both lent and invested monies in venture capital funds, and throughout the years has had programs- such as the Chief Scientist- and participated in joint international funds –such as the BIRD foundation- that support R&D at various stages.

While the number of Israeli start-ups is extremely high, only few of them though are maturing to become multi-billion dollar enterprises. Most start-ups are sold to global players – part because of the broken US VC model they espouse, the other part because they cannot do it alone.

It is high time for Israeli companies to start partnering with the right US financial players if they ever plan to truly get to the next level of market dominance.

Most importantly, at the end of the day, it comes down to the formation of a company’s global corporate platform, that will make it or break it.

Looking forward to doing business with you and to continue being your resource for deals, capital, relationships and advice.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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