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Israel’s Big Tech Sector Looks to Produce Bigger Companies

TEL AVIV—Try as you might, it is extremely hard not to be a bit star-struck by the Israeli technology scene. Just when you think you have seen everything, along comes something even more impressive, such as a startup with a nanotechnology that has the potential to disrupt everything from batteries to display screens to semiconductors.

But can the country continue to deliver in the way it has, and what is next for the startup nation?

It is the scale of Israeli ambition that other startup ecosystems outside the U.S. seem incapable of matching. “It is Silicon Valley for the rest of the world,” said Saul Klein, a London-based venture capitalist and recently appointed a U.K. tech envoy to Israel.

“On a scale of one to 10, the innovation I see in, say, Germany would be close to zero. In Israel, it is a 10,” said Mark Tluszcz, co-founder and chief executive of Mangrove Capital Partners SA, a Luxembourg-based venture firm that has been investing in Israeli startups since 2007.

What’s the secret? Reasons include the role of the Israeli Defense Forces, and in particular the high-tech Unit 8200; the unique cultural values of a country forged from centuries of oppression; and Jewish mothers. Yossi Vardi, the larger-than-life so-called father of the Israeli tech scene, favors that last theory. “From birth,” he said, “your mother will tell you that you have to succeed, that you have to be better than your cousin, or her friend’s son, or whoever.”

Waze, an Israeli mobile satellite navigation application, is seen on a smartphone in this photo illustration taken in Tel Aviv, Israel on May 9, 2013. Reuters

A cellphone running an application of Israeli app developer Onavo seen backdropped by the login screen for the website Facebook in Tel Aviv, 15 Oktober 2013. European Pressphoto Agency

But what is next for Israel? Certainly there doesn’t appear to be any slowing down. Recent acquisitions by Google Inc. of crowdsourced traffic app Waze for a reported $1.1 billion, and by Facebook Inc. of mobile-data-compression service Onavo (which our sister title All Things D reported was for $120 million), show the lure of the eight-million-strong nation hasn’t tarnished. So does Amazon.com Inc. ‘s recent announcement that it is to open an R&D center in Israel.

Mr. Klein, who until recently lived in the country, said that to talk about what is next for Israeli tech is to miss the point. “You have within this tiny country—you can drive from east to west in an hour, from north to south in five—every major sector and subsector of the technology industry. What is next? All technology.”

While Israeli technology may be world-leading, can the same be said of the companies that are built upon it? Critics, including Mr. Tluszcz, say that while Israelis are great at building small tech companies, too many sell too soon.

“The first $1 billion [Israeli] Internet company was Waze,” he said. “They need some leaders to give them the confidence that they can stay longer and not sell. What Waze has shown is that you can stay in Israel and build a billion-dollar tech business.”

However, according to Chemi Peres, managing general partner and co-founder of the Herzliya-based Pitango Venture Capital Ltd., things are changing. “There is [now] a notion of, ‘Let’s build bigger companies,’ and not to sell them at $200 million. This is a cultural change. Look at companies like Waze or Trusteer.” Trusteer, a security firm, was acquired in August by International Business Machines Corp. The Wall Street Journal reported the deal was worth between $700 million and $1 billion.

One who is trying to build a global tech company from within Israel’s borders is Josef Mandelbaum, chief executive officer of Perion Network Ltd., who recently steered his company into a reverse takeover of user-engagement firm Conduit Ltd. with the aim of building a $1 billion company. “One of the biggest objectives we have is to build a big, leading Internet company here in Israel,” he said. “We don’t think there is a reason why Israel can’t have a big multinational company in the Internet space.”

If Israel is seeking to build multinational companies, this represents an opportunity for other countries to share in Israel’s success, said Mr. Klein. “No single country can do everything themselves,” he said. “The challenge is how to connect to the other countries.”

The U.K. government is lining itself up to reap what benefits it can. Its embassy in Israel hosts the U.K.-Israel tech hub, a program to foster closer ties between tech companies. Nor is the U.K. the only one to send envoys to woo and court Israeli tech leaders; the new Irish ambassador hosted a party for entrepreneurs at a recent tech conference here.

European efforts may be in vain. According to Mr. Peres, while local entrepreneurs and venture-capital firms are beginning to look outside of their traditional market of the U.S., they’re turning not to Europe (which one entrepreneur unkindly quipped was “the thing you fly over to get to the U.S.”) but to the Far East and the huge markets of Asia-Pacific. His firm recently closed a fund taking “significant sums” from investors in the region. Mr. Peres described the investment as “a strategic partnership, a bridge between the Israeli tech market and Asia-Pacific. This is an area where many of our companies see significant growth. Having investors in the region opens doors.”

But even Mr. Peres admits these are early days and the link with America, while it may move up and down with the political current, remains as strong as ever. If you look at the flight schedules into Tel Aviv, there are just three direct flights a week from Beijing, and another three from Seoul. There are at least that many a day from the U.S.