In tough times Israel’s high-tech sector thrives

Despite the straightened economic situation, investments in Israel’s high-tech industry will pay off for those willing to take the risk.From processors to software, from innovations in online video to security systems, from cell phone technology to better ways to stay safe on the road, Israel is there – at the forefront, designing and producing the high-tech wizardry that has changed the world.

Some of the products produced by the “Israeli brain trust” 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 which, in turn, snapped up promising Israeli startup ventures. With over 100 Israeli companies trading on the NASDAQ – the majority of them in the high-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 high-tech powerhouse, with the technology boom fueling Israel’s amazing GDP growth of the past few years, according to the Ministry of Industry, Trade and Labor. Nearly three quarters of Israel’s $70 billion of 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% 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.

Strong economic growth

The high-tech boom, along with the solid fundamentals of Israel’s economy, has helped the country sustain strong growth for decades, with GDP rising in most recent 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% 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, the South American common market. According to Bank of Israel statistics, industrial exports grew by some 27% since the start of 2008 and high-tech exports climbed at an annualized rate of 18.2% over the past three months.

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 1,900 employees worldwide, with a market capitalization of over $4b. and 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 was established by the US and Israeli governments in 1977 to generate mutually beneficial cooperation between the private sectors of the US and Israeli high-tech industries, including start-ups and established organizations. BIRD supports approximately 20 projects annually with a total investment of around $11m. per year. To date, BIRD has invested over $245m. in 740 projects, which have produced sales of over $8b. Since the establishment of the Foundation 30 years ago, the accumulated repayments have totaled $82m.

A bright spot on the world high-tech map

Israel, in other words, is a bright – very bright – spot on the high-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 high-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 such “serial entrepreneur” is Zohar Zisapel, one of the most successful and prolific high-tech entrepreneurs in Israel, or anywhere. With 27 startups under his belt, Zisapel’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 this week with The Jerusalem Post, Zisapel said that he has worked with nearly all the VC companies in Israel, plus a good number from the US.

“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 said.

In fact, Zisapel said, the assistance the government offers encourages VC investors to do business here.

“The Chief Scientist and others 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, to be more willing to put money into startups, and in the end, when there is a successful exit, both the investors and the country benefit. Even if a company doesn’t make it, the technology they developed will find its way into another project,” Zisapel said.

But hasn’t the world financial crisis changed the rules? What are the prospects for Israeli high-tech in the coming years?

Zisapel remains optimistic, saying he expects growth to continue. “So far, I haven’t seen a falloff in technology sales, at least by established companies, 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 high-tech less,” Zisapel 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.

Invest when times are bad

“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,” Zisapel said. “Those investing in new companies now are looking at exits in perhaps five years,” when things should be looking much better, he said.

And if there’s one thing Zisapel 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 high-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 toldIsrael 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.

Printed by courtesy of The Jerusalem Post.

Israel: The history of an economic miracle

Israel, like the rest of the world, faces serious economic challenges in the years ahead, but it does so from a position of strength.In Israel at 60, we are witness to an economy which has proven its prowess and competitiveness on the global scale, as evidenced by a shekel which is one of the world’s strongest currencies, backed by a surplus in the balance of payments.

A closer look at many of Israel’s companies shows numerous examples of the successful transformation from local enterprise to multinational firm. While one used to speak exclusively about high-tech and startups, today one sees Israelis involved in all sorts of ventures, displaying impressive managerial and entrepreneurial skill.

Last year, the Tel Aviv Stock Exchange chose five companies traded on the exchange that exemplify the trend towards global excellence. Teva, the world’s largest generic drug maker, is headquartered in Israel, while Strauss Group, which began as a family dairy, has expanded to Latin America, Eastern Europe and elsewhere. Elbit, a defense electronics maker, understanding that countries purchase arms only from “local” companies, set up international subsidiaries. Ormat, the geothermal energy producer, has manufacturing and research centers in the country while the actual power plants are built overseas, and Israel Chemicals exports the country’s natural resources around the world.

Aside from manufacturing and high-tech, Israelis are also active overseas in real estate, with Israeli magnates involved in projects in London, Toronto, Eastern Europe and the US. And bankers, lawyers and accountants are intimately involved in overseas dealings.

Israel underwent a wrenching economic crisis in the early 1980s whose roots were in the 1973 Yom Kippur War and the ensuing oil embargo but which continued until 1985. This “lost decade” of the Israeli economy saw near-zero per capita growth, inflation at dozens or even hundreds of points a year, and terrifying deficit and national debt levels. During this time, both the business sector and the quasi-governmental sector (health insurance, pension plans, kibbutzim) became completely inefficient and almost entirely dependant on the government, which at the time accounted for 70 percent of GDP.

Israeli industry received generous credit subsidies and tariff protection, while the financial sector was largely nationalized (with “special [government] bonds” receiving large tax breaks) while the markets were all but closed. Israelis generally refrained from foreign commerce, while foreign investors shied from commitments in the politically and economically unstable atmosphere.

At that point, the popular joke had it that the only way to make a small fortune in Israel was to come here with a large one. By the height of the crisis, in 1984-5, Israel was a total economic failure, requiring two major reforms to get the country back on track.

Stabilization program – 1985

The stabilization program passed by the government in 1985 managed to rein-in inflation from some 400% to a more manageable 20%, stabilized the balance of payments, but most importantly brought the deficit down from 15% of GDP to a surplus of 1%. By 1986, government expenditures had been cut back, and the government was legally prohibited from printing money to cover deficits, forcing it to rely on publicly traded bonds.

The massive reduction in spending forced the private and quasi-public sectors to become more efficient, as the government could no longer be relied on to provide funding. The years 1985-90 saw the private sector make great strides in efficiency and worker productivity while the labor unions were weakened and management was given the capability to fire employees at its own discretion.

Market liberalization 1991-2004

In 1991, Israel made a major strategic decision to gradually open the sectors of consumer goods, currency and investment to international competition.

Customs were slowly decreased to the point that the effective tariff protection today is less than one percent. Meanwhile, currency markets and, later, investments were also liberalized, and in 2004 Israel equalized taxation on foreign and domestic investment.

The liberalization of financial markets was finalized with the advancement of the stock exchange, as all financial instruments, including retirement funds, were made completely market-dependent. Such areas as telecommunications, the port system and the banking system were privatized.

The effects of globalization

Over the past five years, the Israeli market has become totally globalized, and the success has been impressive. The Israeli entrepreneur and businessman have taken full advantage of the possibilities of global commerce. The government has kept to policies of a stable budget, debt reduction and low inflation, while foreign investors have begun viewing Israel as a prime investment target.

The country’s success can also be seen in its performance in leading economic indicators: Number one in per capita R&D investment, and number one in startups, per capita. The business sector is also ranked very high (8th in the world) in measures of creativity and business savvy, as well as technological-readiness, widespread higher education and more.

Challenges ahead

Despite these impressive achievements, Israel faces serious economic challenges, primarily from the ongoing global financial crisis, which seriously affects globalized economies like Israel. Israel will face a test of fire for the entrepreneurial and commercial skills of its business leadership. Another challenge is the reform of the public sector, which, while financially stable, has shown poor results in such areas as educational achievement (40 in a ranking of 57 countries), infrastructure and environmental protection. The social inequality in Israel’s workforce is one of the worst in the world, and there is a low level of economic participation.

The revamping of the public sector is critical to the nation’s economic success – it is one of our key challenges in the coming years.

Printed with permission from The Jerusalem Post.

It’s an Israeli thing

For a foreigner, the Rabin memorial ceremony seemed a bit like Woodstock. Something like that wouldn’t have been possible in my homeland of Germany.

For someone who does not understand any Hebrew and is in Israel for the first time, the memorial ceremony for Yitzhak Rabin held in Tel Aviv recently seemed to me at the beginning to be a purely political event: Something which politicians use as a platform to express their opinions. So, I didn’t expect much.

But I was proved wrong.

As I was walking to the Rabin Square through Gordon Street I had to pass through several security control points manned by the police and army. I heard a helicopter hovering over me. They checked my bag, which felt strange, because although I have already been here a week, I’m still not used to it. And I am also not used to the guns. In Germany the police do not carry machine guns in public and the army is never present at such events, so the atmosphere is much less militaristic. But I do understand the necessity for it in Israel, or at least I accept it as necessary. I mean, I am just a foreigner here, what do I know?

As I reached the square I was astounded by the huge number of people who were standing there peacefully. Although I didn’t know what was written on the banners and the signs held by the crowd, I was encouraged by the number of young people around. I expected a mourning ceremony, not something like Woodstock. Well, of course it wasn’t Woodstock, nobody was naked or banging their heads to the music, but the general atmosphere and the feeling at the square seemed to be similar: A yearning for peace and for the world as a better place.

One banner, which I could read, said: “This is the time: Choose peace”. It was written by some American youngsters who joined a group of Israelis. They wore blue shirts and were part of a youth movement. They sang together the songs of freedom Israeli artists performed on the stage. And I thought how nice and warm it was – young people standing side by side is always the foundation for peace and understanding.

I asked the people around me to explain what the politicians were saying and what the songs were about. Nearly everyone in Israel speaks English; you must have a good education system!

One man on stage was the US Teamsters Union President James P. Hoffa, who brought greetings from the new US president-elect Barack Obama. It was okay, but his attempt to encourage the crowd to chant Obama’s campaign slogan, “Yes, we can”, was a bit over the top. This evening was not about Obama or about motivation for peace. I felt the people here were already very motivated.

I was especially moved by the song for peace, “Shir LaShalom”, and the national anthem, “Hatikva”. The people sang together, something which rarely ever happens in Germany. The people in my country seem to be too reserved for such a thing and they have also had bad experience with mass events and chanting and singing crowds. We are more a society of individuals, but we long for something like what was going on at Rabin Square. Maybe this is one reason why the Germans were so hyped up about the FIFA-World Cup 2006, which was held there. They could celebrate and sing their national anthem without feeling guilty. It was just sports, not politics.

As the Rabin memorial was over the organizers played “Imagine” by John Lennon in the background, and I became a part of the people around me. I know this song and I joined the singing people while they were already leaving the place. I sang phrases like “Imagine all the people, living in a world of peace,” and went home humming the melody.

Reprinted with permission from YnetNews (www.ynetnews.com).

Young Israelis to volunteer in Cambodia

In December, a contingent of Israeli volunteers will head for the Cambodian rainforest in an effort to help improve the lives of villagers living there.After finishing their military service, legions of young Israelis deploy themselves throughout the world. Having subsumed their interests to those of the State of Israel for several years, they often take on missions of indulgence. As a result, Israeli travelers have become notorious in many parts of the world for post-military partying.

The “Backpacking and Donating” project is designed to improve the international perception of Israel and its youth. At the beginning of December, a contingent of Israeli volunteers will be sent to the Cambodian village of Chi Phat in the Cardamom Mountain rainforest for three months. Over the course of a year, four groups, each consisting of 10 volunteers between the ages of 21 and 40, will participate in the program. They will engage in volunteering activity for 10 hours per day, five days a week.

“This important project will introduce young Israelis to the humanitarian problems that exist in Cambodia and will emphasize to the locals the giving aspect on the part of Israelis,” said Yael Rubinstein, the Israeli ambassador to Thailand and the region. “This sort of activity will assist me in presenting Israel as a country that is attentive to humanitarian problems.”

Although their responsibilities will vary according to the immediate needs of the community, the volunteers will be collectively committed to improving the quality of the lives of the approximately 3,000 residents of the village. They will work intimately with the local population, focusing on English, mathematics, computer, health, and occupational training.

Despite minimal advertising, there were numerous applicants to the project, according to Gil Hen, the project coordinator.

Finding complete personalities

“We chose complete personalities that we believed could handle the rigors of the program, and represent Israel well,” he said.

The first group is already involved in a three-week training course in which they are learning about Cambodian culture and practicing relevant skills, Hen said.

Eshhar Tsafrir, the manager of the first three groups, will be going to the village in the middle of November to prepare for the arrival of the rest of the volunteers.

“I plan to meet with the leaders of the village to create a timetable for the program,” she said. “I will also coordinate with the representatives of the Wildlife Alliance who are reforesting the area and helping people develop permanent agriculture.”

For Niv Reshess, one of the members of the group, the project represents an opportunity to fulfill a lifelong desire.

Lucky to be taking part

“My nationality has prevented me from participating in overseas volunteering programs in the past,” he said. “So I feel really lucky to be part of one that will allow me to help improve the lives of people in need on behalf of Israel.”

Chi Phat was selected for the project based on its acute need for intervention. At this point, students attend classes for only two hours a day, and no one speaks English. Five percent of children do not reach their first birthday, ten percent of women die during childbirth, and the oldest person in the community is 57 years old.

The Israeli Ministry of Foreign Affairs, and Latet, an Israeli humanitarian organization, are financing the project. They have commissioned Lametayel, an Israeli outdoor gear and travel company, to manage it, based on its involvement with a similar effort in Nepal.

Yuval Limon, the CEO of Lametayel, is confident that the project will be successful, due, in part, to the desire of the villagers for help.

“From our vast experience in this field, in order for a project to be effective, the most significant factor is the willingness of the local population to receive assistance,” he said.

Despite its relatively small scale, the organizers of Backpacking and Donating hope that it will lead to a larger movement towards Israeli humanitarianism worldwide.

“We want to inspire more Israeli people to effect positive change, and display the real character of this country to the world,” he said.

Printed by courtesy of The Jerusalem Post.

El Al flies to the rescue

Israeli airline El Al celebrates its 60th anniversary this fall. It’s been a long and interesting ride.This fall, El Al will mark 60 years in the air. The company’s maiden flight took place on September 28, 1948… to pick up the first president of the State of Israel Chaim Weizmann from Geneva and bring him to Israel. Few know that the original El Al insignia blazoned on the company’s first uniforms wasn’t a Star of David; it was a flying camel – a mascot of early Jewish aviators. In its 60 years, El Al has accumulated a stock of “you’ll never believe this” service stories – some are highly “unorthodox services” the company has provided in extraordinary times, and a number concern genuinely bizarre “service routes” that sound like an upscale fly-by-night take-off on Marc Chagall’s famous series of blissful floating lovers seemingly caught in mid-flight.

One winter, El Al looked into using some of the carrier’s fleet as flying movie theaters during slow periods. The idea never got off the ground as a commercial operation… perhaps because the unorthodox flight plan – simply going in circles over the Med – did not qualify moviegoers for duty-free privileges.

Some of El Al’s perks are industry firsts. The most outstanding one to date was inaugurated in 2002 on behalf of a wealthy New York couple who visit Israel at least four times a year, each time bringing their two cats with them. The airline decided to allow small dogs, cats and birds, who indeed had tickets – $89 one-way from New York, Chicago or Miami and $98 from Los Angeles – to collect frequent flyer miles and gain a free trip along with their owners.

Anyone for Paris?

Once upon a time, cynics said “El Al” stood for “Every Landing Always Late.” But in the early 1990s, El Al found itself plagued by a chronic case of corporate jet lag due to passengers’ last-minute duty-free shopping sprees before boarding. At one point, fed up with having to hunt down bargain-hunters, an El Al plane took off on time – leaving seven tardy passengers in the lurch. When questioned by the press, a company official explained: “It’s out of the question that every morning, on almost all flights, we act as if we were a taxi outside the Tel Aviv Central Bus Station – yelling ‘Paris, Paris, Who is going to Paris?’ before taxiing away.”

Speaking of Paris – in 1990, on one El Al plane bound for the French capital, an asthmatic passenger found he had forgotten his medicines in a Tel Aviv hotel room. While there were emergency medical supplies on board, according to news reports, after consultation with El Al’s doctors, the pilot was instructed to fly at 31,000 rather than 43,000 feet – despite the additional fuel consumed at lower altitudes – in order to maintain optimal conditions for the passenger.

In terms of conventional cargo, in 1987 El Al was flying high, grabbing ninth place among trans-Atlantic cargo carriers. At the time, the company’s ads sported a picture of a “flexible” cargo plane with the head of a giraffe and the body of an elephant bulging out of the roof of the cabin, under the caption – “You won’t believe what we’ll do for your cargo.” In 1987 a quarter of the company’s revenues came from carrying almost anything. But one contract was definitely not El Al’s dish: Approached about transporting Canadian ham to Europe – still on the hoof – El Al feared a negative reaction among its religious clientele, and rejected the lucrative offer, hams down.

Indeed, religious clientele constitute a third of the passengers flying El Al. Beyond the sweeping demand that the company refrain from flying on Shabbat, in June 1987 El Al agreed not to fly over the Temple Mount – until the coming of the Messiah. The airline then introduced special plastic liners for “flying coffins” that haredi elements demanded to prevent “mid-flight leakage of the “tum’a” (unclean spirits of the dead) in the presence of Kohanim. And in 2002, a haredi cohen asked to be allowed to zip himself up in a body bag during take-off to avoid close encounter with the tum’a purported to be rising from the Holon Cemetery located directly in the takeoff path from Ben-Gurion Airport. The request was turned down, but air control agreed to detour all flights slightly to avoid flying directly over the cemetery.

One case of “special handling” involved some very special hand-baggage: In a race against time, an American Red Cross representative collected 572 blood samples from Jews of Lithuanian lineage at blood banks in Carmiel near Haifa and the Sheba Medical Center outside Tel Aviv. Packing the contents in an insulated picnic box, the American sped to catch a 2 am El Al flight back to the US – in the hopes of finding a match for a 20-year-old woman badly in need of a bone marrow transplant.

From $4,500 to $60,000 in one flight

One of the most unforgettable humanitarian gestures to which El Al was a part took place on Flight 316 from Tel Aviv to London: Among the passengers was four-year-old Moran Kadosh, on her way to London for a liver transplant. The child was accompanied by a doctor and her parents – who had a mere $4,500 in their pockets to finance surgery. When the child’s plight became known to fellow passengers and El Al flight employees, they organized a spontaneous collection at 35,000 feet. The captain announced over the public address system that Moran’s life was in danger. By the time the jumbo landed at Heathrow, 400 passengers and crew had gathered the $60,000 needed to pay for the transplant.

Another unforgettable episode centered on a volatile pilgrim from Latin America. While politics can make strange bedfellows, the lady in question presented a genuine enigma: Halfway to Tel Aviv, she stripped to the buff, telling a bewildered El Al steward – “I want Shamir! – referring to then-prime minister Yitzhak Shamir. In another case, a passenger got up in mid-flight, walked to the front of the plane and sought to open the door to the cockpit. Diplomatically detained by a cabin attendant who asked where he was going, the passenger replied that he “only wanted to step out for a breath of fresh air…”

In September 1970, the Popular Front for the Liberation of Palestine skyjacked four airplanes. Few know there was a fifth target – an El Al flight, where the midair attempt was foiled by the pilot, who plunged the aircraft into a 14,000-foot nosedive, throwing the two armed terrorists for a loop, allowing passengers and crew to overpower the pair, including a traveler purported to have clobbered the male assailant over the head with a whiskey bottle before the air marshal took over.

Going in the other direction, in the 1980s a group of Greek pilgrims arrived at Ben-Gurion Airport after an Easter pilgrimage carrying 20 burning candles in glass containers they planned to take on board as carry-on baggage. The candles had been lit in the Church of the Holy Sepulcher and they wanted to take the “holy flame” home with them. Not wanting to disappoint the passengers, the cabin crew agreed to stow one lit candle in a galley stove and return it to the group after landing.

While efforts to go the extra mile may raise questions whether any air carrier can hold a candle to El Al, the ultimate case of going out of the way for passengers was Operation Solomon: the historic June 1990 airlift of 15,000 Ethiopian Jews to Israel in 24 hours, using IDF and El Al planes. El Al made aviation history… and The Guinness Book of World Records, for transporting 6,500 passengers in 10 aircraft.

Printed by courtesy of The Jerusalem Post.