February 18, 2002

Tel Aviv, Israel, joins Cambridge, England; Helsinki, Finland; Bangalore, India; Singapore; and Hsinchu-Taipei, Taiwan on the list of high-tech hot spots.Technology-based companies may not be the market darlings they were just a year ago, yet high tech is still a driving force in the world’s economy. And Northern California’s Silicon Valley stands as the highest example of success for developed countries striving to build technology-based economies. Emulating the model, however, requires a number of key elements: entrepreneurs willing to take risks, venture capital, the ability to produce and market products globally, and a supportive government.

In his new book “Cloning Silicon Valley: The Next Generation High-Tech Hotspots,” author David Rosenberg says Israel, along with five other regions, is well-equipped to become one of the world’s leading technology centers. As a reporter based in Jerusalem in the early ’90s, Rosenberg observed first-hand the Israeli affinity for teamwork, the nation’s access to U.S. markets and an almost ingrained willingness to take risks. Over the course of a year, he traveled the world researching other countries with developing technology industries. Besides Tel Aviv, Israel, Rosenberg identified five other technology clusters: Cambridge, England; Helsinki, Finland; Bangalore, India; Singapore; and Hsinchu-Taipei, Taiwan.

A journalist for nearly two decades, Rosenberg has specialized in high technology for the past 10 years. His work has appeared on Reuters and the Dow Jones Newswires as well as in The Jerusalem Report, The Jerusalem Post, Red Herring, The Wall Street Journal and a host of other publications. Rosenberg is now a correspondent for Dow Jones Newswires and writes a column, Current Account, for the Jerusalem Post international edition.

In a recent e-mail interview, I asked Rosenberg about Israel’s strengths and weaknesses in technology and whether Israeli culture supports or discourages the growth of technology businesses.

Q: What makes it necessary for a technology cluster like Israel to be global?

A: It has to do with the structure of global technology markets. No single country, with the exception of the United States, can serve as a market for a high-tech company. For Israel, the home market is too small and doesn’t set the bar for technological leadership. Israeli companies have to be geared to selling in the United States virtually from the start because the United States is the reference market, the one that will determine for Europe and the rest of the world what the leading product is and which way a certain technology is going. Gearing an Israeli company to the U.S. market means a lot more than exporting. You need a strong presence in the United States early to sound out market developments and competition and to form alliances.

Q: How successful are Israeli companies at establishing a U.S. presence? Why is this so important for overall success?

A: They are better than virtually anyone else in the world. That’s partly a function of having no choice. A European or Asian company can get enamored of the idea of building a national or regional business before getting a foothold in the United States because they have national and regional markets to address. This is a wrongheaded strategy, but one startups are tempted to make. Being in a tiny country in the tech-poor Middle East, Israelis don’t have any such conflicts. It’s America or bust.

Q: How is Israel’s high-tech community similar to Silicon Valley? How is it distinctly different?

A: Of the six “Silicon Valleys” I looked at, Israel’s probably comes the closest to California’s. It seems that the elements that went into the original Silicon Valley very closely matched Israeli culture. Other countries have had a harder time doing it and have had to adjust the California model more.

Where Israelis differ is probably in their loyalty to the companies they work for: In the heat of the technology boom they were less likely to jump jobs quickly. Teamwork, which is an essential part of the Silicon Valley equation, comes easier for them.

Q: What is it about the Israeli army that produces so many people capable of technology innovation? Do you think army experience encourages greater risk-taking?

A: Risk-taking is certainly an element of that, but I think the key factor is the way the army teaches technical skills. People elsewhere in the world generally learn them by sitting in a classroom and learning theory and only later apply it, usually in their first jobs performing small and unsophisticated tasks. The young men and women who enter the army high-tech units are immersed in their learning and move rapidly from theory to working in the field, often in just a few months. Once they’re in their postings, they are assigned tasks defined as problem solving, and that becomes their approach to new projects. People are given important jobs and often rise to a managerial post in the army at a young age. All this matches nicely with the needs or work style of high-tech industry.

Q: You mention in your book that Israel’s army is a more robust breeding ground for technology ideas and entrepreneurship than the universities. Do you see this changing in the future? How do the universities and armed forces work together, if at all?

A: I don’t see that changing. I think the role of universities the world over in creating innovations for the high-tech industry has been exaggerated. Most of what goes on in the high-tech world is incremental improvements on existing technology that address specific problems and market needs. Because of the army’s emphasis on problem solving it has an edge over the university as a training ground and also as a seed bed for new ideas.

The Israel Defense Force is interested in telecommunications-related technologies and, fortunately for Israeli high tech, telecommunications has also been at the heart of high tech over the past decade. Were that to change, obviously the army’s role as a breeding ground for new technology would diminish, although the values and work habits it teaches wouldn’t. Just as an example, the army has little need for the skills demanded by the biotechnology industry and, interestingly, Israel has been less successful in building companies in this segment, despite the wealth of biotech talent.

Q: With the demise of Internet startups, what are Israel’s strengths in technology?

A: Israelis quite correctly understood that in the Internet world their strengths were not in forming dot.com companies, which were, more than anything else, marketing oriented. Instead they focused on the plumbing of the Internet, the hardware and software needed to make it run. There was a popular expression in the ’90s to the effect that Israelis will make their money selling shovels to the gold miners. Of course, if the gold miners fail, there’s no market for shovels, either, which is the story of the last two years in metaphor.

Israel’s software and hardware strengths in telecommunications are quite wide-ranging so when the global industry recovers Israel will be well-positioned to grow with it. Data security, especially since Sept. 11, has become a more important factor and Israel is particularly strong in this segment.

Q: What are some of the bigger obstacles facing Israeli technology growth?

A: Israelis have two critical flaws. One is poor marketing ability. This has become almost a cliché, but the fact is it’s true and the problem is exaggerated by the fact that Israel is too geographically remote from major markets. The second is poor skills in managing large organizations, which has certainly been a factor in Israel’s failing to produce its own Nokia. It’s doubtful whether Israel should want to have a company of Nokia’s size, but on a more basic level it does deter the development of a strong handful of medium-sized multinationals. I think in many cases it’s the reason Israeli companies go the merger and acquisitions route rather than continue as independent operations.

Q: What kind of management skills do the people running Israeli companies have? Is this an area where they need work?

A: Good managers are virtually everything. Israelis are slowly disabusing themselves of the notion that all you need is cutting-edge technology and the rest of your business plan will solve itself. (They’re learning) that’s not the case at all. Lots of good technology doesn’t meet market needs, and if it is poorly sold or positioned, it won’t compete with products that are less innovative but better marketed. A startup manager must be thinking well beyond simple product development to what market he’s addressing, who his likely competitors and allies will be, and how he will position his product – and do this all from the outset. These are all critical questions unrelated, at least directly, to research and development, and they all can only be answered by being close to the United States market.

Q: Is the concept of networking an inherent Israeli characteristic? How is networking in Israel similar or different than in the United States?

A: Israelis have an easier time of it than most Europeans or Asians, and it’s a big asset. It’s interesting that forums like First Tuesday (a worldwide technology-oriented networking organization) never took off here; it seems in Britain they need those kinds of support tools. The obvious difference with America is that Israel is so much smaller so there is basically one network – that is, everybody knows everybody.

Q: How has the Israeli government and technology industry improved the risk-reward ratio for entrepreneurs in the past decade?

A: The single most important thing the government did was to set up the Yozma fund (through the office of the Chief Scientist) in 1993 to spur the development of venture capital. That model has been used elsewhere, too, with much success.

The Chief Scientist’s research and development subsidies are more controversial as a tool for helping the industry, especially now that there is so much venture capital out there. Aside from that, however, the government has been more of a burden to the industry than a help. The whole controversy of taxing foreign investors’ capital gains, which has been solved, at least for now, is a classic example of how the industry has to fight just to have a level playing field with foreign competition.

Q: So there are plenty of venture capital firms in Israel now compared with the early ’90s when they were virtually non-existent. How many are there today and how important are they, compared with foreign VCs, to Israeli technology companies?

A: There are about 80 domestic funds today and there are also quite a number of foreign funds that have or are committed to investing in Israel. Obviously venture capital is the lifeblood of the startup company.

Foreign VCs have a distinct advantage over their Israeli counterparts, from the point of view of an investing company, because they can provide an entrée into the U.S. market. Israeli VCs have tried to offset that by setting up U.S. operations, but obviously they can’t equal what a U.S. fund can offer. On the other hand, Israeli funds, like national VCs anywhere in the world, have a lot of local knowledge that foreign funds would have difficulty obtaining. Ideally, Israeli and foreign funds should be working together through syndicated financing, which is quite common. Typically Israeli funds will do the seed funding and bring in foreign funds for follow-on financing. The fact is the demand for private equity financing is so great relative to the reserve of capital Israeli funds have that there is room for both.

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Jason Harris

Jason Harris

Executive Director