Tel Aviv: The Start-Up Nation’s Hub

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When a local venture capitalist discovered that New York City Mayor Michael Bloomberg had published a map of the city on Facebook pinpointing all of the city’s start-ups he offered a case of fine wine to the first person in Israel who managed to produce a similar guide for Tel Aviv. An immigrant from NYCserving in the Israeli Defense Forces took him up on the challenge and created one for Israel in just two days.

The map showed that the center of gravity for the tech sector has moved away from Haifa and Herzliya to south Tel Aviv. The story also “says a lot about the turn-around speed here and the speed at which people will start up companies,” says Michael Eisenberg, a partner at Silicon Valley venture firm Benchmark Capital, the Tel Aviv-based VC who launched the challenge. “The percentage of Israelis who are willing to respond to a challenge or take the risk of starting a company is significantly greater than anywhere else in the world.”

Entrepreneurship has always been part of the city’s DNA, says Tel Aviv Mayor Ron Huldai. It was founded by 66 families who built the city from sand so he likes to say, ”the city itself was the first start-up.”

Today the city has an ever-swelling population of entrepreneurs. Walk anywhere in Tel Aviv and you are likely to bump into someone who has a business plan in one pocket and the phone number of DLD Co-Chairman Yossi Vardi in the other.

Vardi founded his first technology start-up in 1969 and has gone on to be involved in more than 60 Israeli tech ventures. He has taken seven companies public and sold many other — the most famous of which was ICQ, the first Internet instant-messaging company, which was acquired by AOL for more than $400 million. Vardi has plowed his gains from ICQ and other successes back into start-ups, serving as an angel investor and mentor to scores of Israelis.

Along with Vardi a new generation of angel and early-stage investors has emerged. Serial entrepreneur Yair Goldfinger (see his profile on page 3) is an active angel investor. And Avichay Nissenbaum and Yaniv Golan, two other Israeli serial entrepreneurs, have created a new $25 million fund called lool ventures to invest in the next generation.

Meanwhile, incubators and accelerators are mushrooming all over the city. Israeli venture capital firm Genesis runs an incubator called The Junction. A facility called The Library, located in the heart of Tel Aviv’s business district, within the municipal library in the Shalom Tower, offers start-ups co-working space and other facilities. IDC Elevator, co-founded by Tom Bronfeld and Ori Glezer, launched in February. Microsoft has opened a Windows Azure accelerator in Tel Aviv and Google is opening a Tel Aviv center that will house start-ups later this year.

While not all investors are fans of the incubators and accelerators Nissenbaum says he sees them as a positive.  “There is now a broad ecosystem for young people to go to an incubator or an accelerator and learn to become entrepreneurs,” he says. “All of these vehicles will produce even higher quality companies at the end of the day.”

All of this activity fits well with the city’s plan to position itself as a global hub for high-tech and innovative companies. To that end, the city is trying to make itself as attractive as possible to lure creative people, using not just the beaches but cultural projects as a draw.

It appears to be working. “You need lots of talent to build great companies and talent is drawn to cool places,” says Eisenberg. “Today the cool places are San Francisco, Tel Aviv, New York City and Berlin, in that order. The innovation is coming from those cities because they are attracting clusters of engineering, creative and design talent.”

Eisenberg, who has lived in Israel for 19 years, says that in the last six months he has seen a growing number of non-Jewish executives saying they would love to move to Tel Aviv because it is such a cool place. “That never, ever happened before,” he says.

While all of that is good news, “the critical thing for Israel is for some entrepreneurs to build Facebooks and not just features,” says Eisenberg.

“The Israeli venture funds have a habit of selling too early,” he says. “The math only works if you get very big outcomes. To make up for lots of losses you have to have big outcomes so selling the good ones early is never a good idea.”

Israeli has not built any big-tech companies since Amdocs and Checkpoint. But that could change soon. Market observers say there are now many tech companies in Israel with $40 million to $60 million dollars in annual sales. “One of the problems was that in the past they would all be sold off to large U.S. corporations, but that trend may be changing,” says Rubi Suliman, technology co-leader in the Tel Aviv offices of PricewaterhouseCoopers. He predicts that some of those companies will have initial public offerings. “We have close to 100 companies in that range — I don’t think we have ever been in that position,” he says. “Five or 10 could IPO and become world leaders.”

Benchmark’s Eisenberg agrees. “There is a cadre of entrepreneurs who want to go all the way and want to build world-beating companies out of Israel,” he says. He cites Conduit, Wix, Outbrain, Ctera and Panaya as examples. (For more on these companies see Israel’s Top 25 Hottest Start-Ups on pages 10 and 11).

If these predictions prove true the start-up nation won’t just add some dots to its local map; it’s likely to gain an even more prominent position on the tech sector’s global innovation heat map.

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