The executives in Intel’s Santa Clara headquarters could not get their heads around this. During a conference call with Santa Clara two days later, air-raid sirens went off again. The Israeli team members asked for a moment to relocate, put on their gas masks, and continued the call from their sealed room. A group of Intel workers even set up a wartime kindergarten on the premises, since schools were still closed and if employees wanted to be part of Frohman’s defiant mission, they had no choice but to bring their children to work. On top of their regular jobs, the workers volunteered to serve shifts on kindergarten duty.
The legacy of Frohman’s commitment is still seen in the decisions of new multinational companies to set up critical operations in Israel. And some of these facilities, such as Google’s, were being built around the time of the 2006 Lebanon war.
The explanation for this concerns more than just engineering talent. It is also a matter of less tangible factors, such as a drive to succeed that is both personal and national. Israelis have a term for this: davka, an untranslatable Hebrew word that means “despite” with a “rub their nose in it” twist. As if to say, “The more they attack us, the more we will succeed.”
As Eitan Wertheimer told Warren Buffett at the start of the 2006 Lebanon war, “We’re going to determine which side has won this war by ramping up factory production to an all-time high, while the missiles are falling on us.”10 Israelis, by making their economy and their business reputation both a matter of national pride and a measure of national steadfastness, have created for foreign investors a confidence in Israel’s ability to honor, or even surpass, its commitments. Thanks to Dov Frohman, Eitan Wertheimer, and many others, the question of catastrophic risk, for investors and multinationals looking to do business in Israel, is virtually irrelevant.
CHAPTER 10
Yozma
The Match
John Lennon once said about the early years of rock and roll, “Before Elvis, there was nothing.”
On the success of venture capital and high-tech entrepreneurship in Israel, to paraphrase Lennon, before Yozma, there was nothing.
—ORNA BERRY
ORNA BERRY’S SON, Amit, delivered what would be the $32 million message. Amit had retrieved the voice-mail message for his mom. A vice president from Siemens, the German telecommunications conglomerate, had called. Orna Berry, away on yet another trip abroad to pitch her start-up to bigger companies looking to buy, had missed the call. The message from Siemens marked the beginning of a process that culminated in the first acquisition of an Israeli start-up by a European company. The transaction was finalized in 1995.
Though today it’s a pretty commonplace event—Europeans have invested hundreds of millions of euros in Israeli companies—in 1995, for an Israeli start-up to be acquired by a European company was unheard-of. Orna Berry believes a new Israeli government program at the time, called Yozma, was what made it possible. She also believes that hundreds of other start-ups have had similar experiences because of the government’s initiative.
Berry is hailed as one of Israel’s leading business leaders.1 In 1997, she was named Israel’s chief scientist in the Ministry of Industry, Trade, and Labor—Israel’s innovation czar; in 2007, she became chair of the Israel Venture Association. She earned a PhD in computer science from the University of Southern California, worked for the technology consulting company Unisys in the United States, and then returned to Israel to work for IBM and, later, for Intel.
But in 1992, she was a first-time entrepreneur. She founded Ornet Data Communications with five colleagues from Fibronics, one of Israel’s early tech companies. Ornet Data developed software and equipment for local area networks (LANs), to double the speed of data transmission.
While most users were dialing into the World Wide Web through telephone lines, the Ethernet networking technology was growing as a way to connect LANs—groups of computers that were close together in homes and offices. LANs could move more information, faster, between computers in the network, but bandwidth was still quite limited. Ornet Data’s solution created a switch for these networked computers that, Berry estimated, multiplied the bandwidth fifty times.
Ornet Data had just a handful of employees in Karmiel, a city in northern Israel, and an office in Boston that Berry used when she came through town. In the early days of the company, she flew to the United States repeatedly to try to raise money, but she soon realized there was none available.
“There was no mechanism for early-stage high-risk funding in the absence of local venture capital,” she told us.2
Venture capital is investment funding that is usually put to work in high-growth technology companies. But for most foreign investors, putting money into Israel seemed absurd. To them, Israel was synonymous with ancient religions, archaeological digs, and deadly conflict. Even those investors who had marveled at Israel’s R&D capabilities were spooked by the surge in violence that came with the Palestinian uprising—or intifada—in the late 1980s. This was before Dov Frohman’s decision to keep Intel open during the 1991 Gulf War.
According to Jon Medved, founder of Israel Seed Partners, “You could talk to an American fund until you were blue in the face and say, ‘Hey, come invest in Israel,’ and they would laugh at you.”3
Israel’s dearth of venture capital through the 1980s was also creating other problems. In the West, the role of the venture capitalist is not simply to provide cash. It’s mentoring, plus introductions to a network of other investors, prospective acquirers, and new customers and partners, that makes the venture industry so valuable to a budding start-up. A good VC will help entrepreneurs build their companies.
“It was very clear that something was missing in Israel at the time,” said Yigal Erlich, another chief scientist, who was serving in the government in the late 1980s. “While Israel was very good at developing technologies, Israelis didn’t know how to manage companies or market products.”4
Israeli entrepreneurs had to think globally from the start, creating products for markets thousands of miles and several time zones away. But serious questions loomed: How to customize the product for the market? How to manufacture, market, and ultimately distribute the product to customers so far from the shores of the Mediterranean?
Before the introduction of venture capital in Israel, there were only two sources of funding. First, Israeli start-ups could apply to the Office of the Chief Scientist (OCS) for matching grants. These grants, however, didn’t provide anywhere near the amount of money start-ups actually needed, and as a result, most failed. A government report published in the late 1980s claimed that 60 percent of the technology companies deemed worthy of OCS grants were unable to raise follow-on capital to market their products. They may have created great products, but they couldn’t sell them.5