Cisco’s Israel Bet

zika

Cisco’s announcement in June that it will invest $15 million in Israeli venture capital funds — one targeted at security technologies, an area of strategic interest to Cisco, the other focused on supporting the integration of Israelis and Arabs — is yet another example of how the U.S. tech giant is playing a key role in shaping both Israel’s economy and its society.

Israel has proved particularly successful at attracting big U.S. tech giants: IBM has had a presence in the country since 1949 and has opened its biggest by far R&D labs outside the U.S. and companies like Microsoft, Intel and more recently Google and eBay have set up operations in the start-up nation. All have helped spur the ecosystem by acquiring start-ups.

Cisco is no exception. In March it purchased Intucell, a maker of self-optimizing network software, and last year it snapped up NDS, which specializes in next-generation video services software, for $5 billion. The latest acquisitions bring the number of Israeli start-ups acquired by Cisco since 1999 to 11. (See the table for more details about the acquired companies.)  And the company is on the prowl for more, in areas such as core networking infrastructure, cloud infrastructure, wireless infrastructure and software, and cloud-based software and services related to network management.

But Cisco’s involvement with Israel goes well beyond buying start-ups. It employs some 2,000 people in Israel and during his June visit Cisco CEO John Chambers announced three new initiatives: research and development focused on cyber security; the creation of security consulting services; and the launch of a pilot training program on information security. Cisco Israel, which is headed by Boaz Moaz, is also involved in a project led by Sweden’s ViaEuropa to build a nationwide high-speed fiber optic network, helping make Israel become the first end-to-end digital nation.

And it doesn’t stop there. While fueling the start-up ecosystem and upgrading infrastructure aids Israel’s economic growth, through its other investments and the creation of new programs to include Israeli Arabs and ultra-orthodox Jews in the tech sector, Cisco is helping change the very fabric of Israeli society and building bridges between Israelis and Palestinians.

Economic integration of disenfranchised groups is good for business and for society, says Zika Abzuk, a senior manager at Cisco Israel responsible for business development. She is credited with initiating and leading programs for Cisco in the Palestinian territories and for working to integrate Arab Israelis and Haredi into Israel’s tech sector workforce. (See the story about high-tech Haredim on pages 4 and 5.)

Cisco first invested in Israel through two dedicated Israeli funds set up by prestigious Silicon Valley venture firm Sequoia, investing half the money in Sequoia 1 and Sequoia 2, then moved to make more than 20 direct equity investments of its own. But now that the VC sector in Israel has matured Cisco is interested in putting its funds to work in different ways. “The investment in funds that John Chambers alluded to in June is a commitment to a regional fund dedicated to connecting Israeli technology and innovation with that in the broader Middle East in order to foster and leverage Arab and Jewish entrepreneurship,” Yoav Samet, Cisco’s San Jose, California-based senior director for corporate development, said in an interview with Informilo.

The new fund builds on work that Cisco started five years ago to help make the Palestinian territories into a new high-tech hub. Chambers took a trip to Ramallah in 2008 to see Palestinian Authority president Mahmoud Abbas and followed up by jump-starting growth in Palestine’s ICT sector with an investment of $15 million. In addition to its own direct investments, Cisco brought other high-tech firms into the region to invest in Palestinian firms as well as prompting the launch of new funding vehicles. Cisco and its high-tech partners, together with organizations including the European Investment bank (EIB), pumped more than $78 million into the Palestinian high-tech sector in the last few years.

“We started with outsourcing and helped a few companies to connect with Cisco,” says Abzuk. “This was very successful so then we went to Microsoft and Google and HP and shared our success stories and also encouraged them to outsource. We ended up writing a sort of cookbook for outsourcing to the Palestinians.”

Cisco’s investments in outsourcing services, training and support were followed by additional multimillion-dollar investments in capital funding. In 2008, there were no active investment funds in Palestine but as of March 2012, Cisco invested $11 million in a combination of venture and growth capital funds. That included a $5 million investment in Sadara, the first venture capital fund focused on the ICT sector in Palestine and a $6 million commitment to the Palestine Growth Capital Fund, which provides private equity growth capital investments and management support to small and medium enterprises in Palestine.

When Cisco began its initiatives in the West Bank, the ICT sector’s contribution to the Palestinian GDP was less than 1%. With its help and that of others in the sector that figure is now over 6% and, according to a Cisco white paper “Palestine is now on the brink of becoming a high tech global hotspot.”

All of this success was achieved through what on the surface seems an unlikely partner and program champion for the Palestinians: Israelis working at Cisco Israel. “Beyond economic success, this partnership has also generated immense social benefit, forging new professional relationships between Israelis and Palestinians,” concludes a case study commissioned by Cisco.

That’s promising not just for the tech sector in the Palestinian territories but also potentially for Israeli-Palestinian relationships, a dividend with potentially bigger payoff and bigger impact than any of Cisco’s traditional investments.

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