Israel's technology transformation
Five thousand start-ups in a country of six million people
By Hanson R. Hosein

From MSNBC (NBC NEWS PRODUCER)

TEL AVIV, July 6 - The Wadi falafel restaurant just north of Tel Aviv is not, at first glance, much different from any other of the omnipresent fast food stands that serve the delightful fried chickpea treat throughout the Middle East. But upon closer examination, you might notice the newspaper article on the wall declaring the Wadi as the place to get falafel in Israel's Silicon Valley.

ASH IS NOT the preferred payment at the Wadi. Here, imitating the custom of its North American cousin, the mostly high-tech clientele stream in with their company-paid vouchers collecting a small perk - free lunch. It's a different world here in the suburbs around Tel Aviv - the "new economy" has struck with a vengeance. Here you can find a modern, high-tech slice of America. Silicon Valley, meet Silicon Oasis: crowned by WIRED magazine as the fourth most influential high-tech hub in the world - a $99 billion economy with $1 billion in venture capital.

"We used to be the land of milk and honey, we are now turning into the land of bits and bytes," said Yanqui Margalit, CEO of Aladdin Knowledge Systems, an established Israeli computer security company. "The high tech industry is becoming the real future for our economy."

Silicon Oasis is difficult to distinguish from the equivalent high-tech centers in the United States. Young men and women in casual clothing work long hours, speak English fluently and all dream of the big initial public offering on Nasdaq to whisk them away to a world of riches in America. There are five thousand start-ups in this tiny country of six million people, and they are heavily influenced, and financed, by Americans. Case in point, last month, U.S. technology giant Lucent acquired Israeli start-up Chromatis for $4.5 billion - the largest corporate sale in Israeli history.

"The Americans see Israel as the next Silicon Valley," said Amir Izenberg, an editor for a new Israeli online business publication, TheMarker.com. "They have a strong connection with U.S. companies. They fly a lot to the States to market their products, and make alliances with American companies."

In hindsight, turning Israel into a high-tech center was not a difficult task. It's a country with a highly educated workforce, Russian immigrants skilled in technology and science, and a penchant for using its brains rather than brawn (its small population gives it little choice).

High-tech firms like Margalit's Aladdin play to Israel's strengths in security and defense. Last year, Aladdin had $45 million in global sales. It developed an antidote to the "Love Bug" virus, and it's about to introduce a device it calls "eToken" - a security key to protect personal computers. "There is a lot of talent here that enables us to do security," Margalit said. "There is also the army."

FROM MAMRAM TO MILLIONAIRE
Compulsory military service in Israel has gone a long way in helping this country develop its technology industry. Step inside the building housing the Israeli army's elite Mamram unit and you might think it resembles any other American high-tech start-up - except the young people here are all wearing drab green uniforms. Mamram provides computer services to the entire army. Its soldiers serve six years (three years more than combat soldiers) here. It's a priceless education.

"We give young people a lot of opportunity," said Lt. Col. Avi Kochva, who heads up Mamram's software branch. "Ninety percent of our soldiers move on to high-tech companies when they are done here."

It has almost become a clich� here: do your time in this unit, come up with an innovative high-tech idea with a couple of your army buddies, start a company and become a millionaire before you're thirty. Combat soldiers eyeing their computer-trained comrades with envy, have dubbed them "Jobniks" - young people assured of a job once they complete their service.

"I was in Mamram for six and a half years," Asaf Monsa said. "I got to manage more than fifteen people at a time and a high budget project - all before I was twenty-five."

EXPORTING INNOVATION
Monsa is now one of the heads of RichFX - a company he started with a few friends he served with in the army. They developed a high end visual technology that allows users to view graphics and multimedia effects regardless of the speed of their Internet connection. American retail giant Nieman Marcus recently used part of RichFX's technology to give its online customers a 3-D shopping experience. Prospective buyers can use their mouse to "pick up" the product and examine it from all angles.

But RichFX's operations in Israel are limited only to R&D; - its headquarters are now in New York City to reflect its partial ownership by the U.S. company RealNetworks. Monsa will soon be relocating to New York. It's indicative of the ongoing brain drain in Israel - if you're successful enough, it's inevitable that you have to move on to the big time in the United States.

"You still have to do business where business is," Monsa said. "Today it is very legitimate to develop a product here and market it in the U.S."

Which brings us to the greatest irony in Silicon Oasis: high-tech Israel is largely an export market, now making up a third of what Israel sells to the rest of the world. Less than a hundred thousand educated well-paid people work in the industry, doing business mainly with the United States. But the online market in Israel is small and undeveloped. Fewer than one million Israelis surf the Internet, and e-commerce is negligible.

"It's a paradox," said Nisso Cohen, the Israel country manager for International Data Corporation. Cohen has researched the low Internet usage here and has attributed it to costly telephone charges and painfully slow connections. "The current situation doesn't support vast usage of the Internet. We are two years too late."

Aladdin's Margalit says the high-tech sector has a responsibility to bring the rest of Israel up to speed. The country has to find a way to keep companies at home through tax reform, as well as address the growing disparity between the high-tech "have's" and the "have nots" who live and work outside of the Tel Aviv area where wages are low and unemployment is high.

"Unless we find real ways to bridge this gap, we will not survive here," Margalit said. "The high-tech industry here is a steam engine, but we have to make sure that the rest of the train is with us."

Back to list of news