Israel may give Silicon Valley a run for its money

Richard Beales
Silicon Valley gets direct flight to Israel
Silicon Valley gets direct flight to Israel

Israel has more tech startups and venture-capital funding per head of population than anywhere — even the United States. That's a refrain at a Forbes summit for more than 600 under-30 entrepreneurs from around the world taking place in Tel Aviv and Jerusalem this week. Tel Aviv's ocean frontage and spring sunshine even give it some of the look and feel of California's Bay Area. In fact if the denizens of Silicon Valley aren't careful, more of their Israeli peers could eclipse them.

That already may be happening in areas like cyber security. After all, local and international news outlets reported that it was an Israeli company, Cellebrite, which helped the FBI break into a locked iPhone at the heart of the recent high-profile court battle — now moot — between the U.S. government and Apple.

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Another example is Mobileye, an $8 billion U.S.-listed, Jerusalem-based leader in autonomous-vehicle technology and software. It could easily become one of the big winners from the broad push toward driverless cars, via a plethora of gadgets and chips deployed to help humans drive better.

The United States is still far and away the world leader in startups overall. Four areas – Silicon Valley, New York, Los Angeles and Boston – topped the 2015 ranking of startup "ecosystems" produced by Compass, a consulting business. But Tel Aviv came in fifth, ahead of London, two other U.S. cities, Berlin and Singapore.

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And it's still mainly America that has produced publicly listed tech behemoths with valuations in the hundreds of billions of dollars like Apple, Google and Facebook. Many Israeli tech successes, like Mobileye, look elsewhere for listings, if they don't sell themselves first. The obvious reason is that the country's bourse is a smallish market where the biggest tech investors don't play. The Tel Aviv Stock Exchange reported just $224 billion in equity market capitalization at the end of February. The U.S. Nasdaq market is some 40 times larger.

Silicon Valley companies going global have been running into legal and anticompetitive roadblocks – think the expansion of car service app Uber, for example, in the first category and Google's European push in the latter. Israel's relatively small size, meanwhile, gives its startups an edge when crossing borders. In a country with a population of just 8.4 million, virtually any business that is going to succeed needs to have a plan to go international from the start.

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U.S. upstarts have the luxury of a huge home market. Perhaps rendered complacent by higher valuations and pay than elsewhere, according to Compass, some don't bargain for the challenges when they try to launch elsewhere. It isn't enough to just drop in a local representative or two – to "land and expand" as Ophelia Brown of VC firm LocalGlobe put it. Beyond legal aspects, products, branding, colors and even fonts need to work everywhere.

The enmity at close quarters across most of Israel's borders makes it a markedly less comfortable place to live and work than Silicon Valley. That hasn't stopped big global tech firms like Google – which incidentally bought crowd-sourced traffic and navigation app Waze, another Israeli creation, for over $1 billion in 2013 – setting up research and development centers here. It's also the source of one of the country's great tech advantages. Most young people must spend several years in the armed forces. One destination for some of them is an elite cyber-intelligence operation known as Unit 8200.

This particular corner of the military gets its pick of young Israeli recruits to bring into its team, which numbers perhaps 5,000, according to a panel at the Forbes event. That probably means more than 1,000 alumni a year, hardened by fast-evolving challenges and literally life-and-death deadlines. Nadav Zafrir, the unit's former commander, now runs Team8, which invests in and develops cyber-security startups. The majority of his recruits formerly served in 8200, he said on Monday.

Universities matter too, of course, as can the kind of government backing that has helped Tel Aviv build its version of Silicon Valley's cluster of mutually enhancing businesses and institutions. Jerusalem is getting in on the act, with its former tech entrepreneur mayor, Nir Barkat, aiming to boost the Israeli capital's startup culture. That'll keep Tel Aviv on its toes.

With about a third of the Forbes audience from Israel, the entrepreneurial energy is palpable. There also seems to be a greater hunger than in Silicon Valley, driven perhaps by the often daily existential threats that face Israel and entities like Unit 8200. The United States will surely be the biggest tech market for a long time yet, but it may be due for a dose of cutting-edge disruption from the Middle East.

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Commentary by Richard Beales of Reuters Breakingviews.

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