Bursting the Bubble of Israel as a Startup Nation

Israel prides itself on being a high-tech hub, but the reality is that ambitious companies eventually look overseas to truly thrive, with an increasing number heading to New York.

NEW YORK − Joey Low, an American-Jewish businessman, does not hide the fact that he is nuts about Israel. He took part in funding the reality-TV program “Hashagrir” ‏(“The Ambassador”‏), and has participated in the Herzliya Interdisciplinary Center’s Elevator project, which aspires to promote young entrepreneurs. Now he is taking things to the next level. He has rented office space in the center of Manhattan and is looking for Israeli startups that are taking their first steps at marketing their products in the United States. The deal is simple: free work space in return for shares in the company.

So far, Low has invested in 15 Israeli startups since last month − some $200,000 in each − and he’s on the lookout for additional prospects. He explains that his incubator, Star Farm Ventures, is not a charity. “I believe that these companies have a [good] chance to go forward and succeed,” he says. “I am convinced this will contribute to improving Israel’s image and good name. We focus exclusively on Israeli companies, because we believe in Israeli high-tech. There are those who say that Israeli companies coming to work in America should work in an American environment, around other American firms, but I think Israeli companies can benefit from being in a work environment surrounded by other Israeli companies. We will give the Israeli companies access to the American network, and we will expose them to a variety of American businessmen who can help them.”

Lior Aharoni represents the first Israeli company to use Low’s incubator for their New York business operations. He is the cofounder and CEO of EQuala, which developed a social radio app for music-sharing. He met Low by way of the IDC Elevator program ‏(Low is on its board of directors‏). EQuala, which is based in Tel Aviv, has existed for a year and released its product on the market about three months ago. The app has a few thousand users today, and Aharoni is hoping for a big breakout. He has plans for collaboration with artists, and in the meantime has forged ties with record labels, artists and promoters.

“We are truly fortunate,” Aharoni says. “We enjoy extraordinary conditions for a startup: we are located in the hottest area in the center of Manhattan, and that is quite the privilege − convenience and location and also the possibility of hosting people and showing them that you’re serious. I have a nice office, a proper lobby, and an impressive conference room.”

At Star Farm Ventures, which is situated on 21st Street between Fifth and Sixth Avenues, we also met Guy Eldar, 29, from AppMyDay, a young company from Tel Aviv that has created an application for participants in such events as weddings, bar mitzvahs and trips. Eldar had arrived in New York just the day before. “We’ve generated income from day one,” he says, “but it is clear to us that the big market is here. In Israel we worked with Orange and Bank Hapoalim, and right now we are in negotiations to develop apps for the Taglit-Birthright program.”

In an adjacent room sit Ohad Frankfurt and Lior Degani, who arrived in New York a few weeks earlier to promote the activity of their company, Swayy. “We didn’t expect to get such a nice office,” they say. The app they developed enables small- and medium-sized businesses to manage the contents of their Twitter, Facebook and LinkedIn accounts, and saves them time and money. “Our product has been operational for two months, and this is a big opportunity for us,” they add.

In recent years New York has become a global high-tech center, and today is considered second in importance in the United States to Silicon Valley. The heart of New York’s young high-tech industry is in the Flatiron District ‏(named after the eponymous triangular building, completed in 1902, that stands at 23rd Street, at the convergence of Broadway and Fifth Avenue‏), which has drawn many companies to it thanks to relatively low rents. Gradually, the local high-tech industry began to expand, and the startups extended beyond the neighborhood’s boundaries.

Israelis are an important part of the trend: Many of the companies they established in New York operate from there − firms such as Taboola, Outbrain, Boxee and Kaltura. The names are foreign, and the skeleton, flesh and the soul, too, are Israeli.

Guy Franklin, an accountant with the firm Ernst & Young, was surprised to discover precisely how many Israeli startups are based in the city. “Every few days I discover another Israeli company whose representatives are coming to New York,” he says. “I decided to gather the companies and mark them on a city map, and so far I have collected some 150 of them. I thought it would assist in connecting the Israeli community, help the startups find employees, and vice versa. Another purpose is to showcase the Israeli success here.

“The development of high-tech in New York is impressive. We get new clients all the time, and a lot of them are Israeli companies. A few days ago Brayola arrived, a company that runs a website for buying bras; GetTaxi operates from here, and so does the company MyCheck, which lets you pay at bars and coffee shops through your cell phone, one of whose owners is Bar Refaeli.

“The flow of Israelis here is unending,” he continues, “and is part of a general trend. In the past, Boston was the second-most important city in the high-tech field after Silicon Valley, whereas today New York is second. The Israelis come here for very practical reasons − not just because the market is here, but also because it is easier to find investors in New York than in Tel Aviv.”

That was the motivation behind the move of Bizzabo, a startup that has developed a social networking app for conferences. “We succeeded nicely in Israel, but the big market is in the United States,” explains cofounder Alon Alroy. “I believe that, in terms of promoting the product, it is important to come to the U.S. as early as possible, because that way you can get rapid feedback from the market. It’s true that in Israel there is access to capital and there are excellent programmers, but there is no market.”

Euan Robertson, who until last month ran New York’s municipal Center for Economic Transformation, says there are currently some 2,000 startups operating in the city, most of which were established in the city or moved there in the last five years. He estimates that some 200 of these are Israeli companies, or companies affiliated in some way with Israel. “That is an impressive number,” Robertson says, “especially considering the fact that Israel is such a small country.”

Discovering the secret

Robertson visited Israel a few months ago as the head of a 25-member delegation that included academics, city-hall officials, entrepreneurs, businesspeople, and other people from the high-tech industry. The goal was to discover the secret of the Israeli high-tech industry, he says. They also visited Israeli companies that may consider relocating to New York, as well as the Technion − Israel Institute of Technology, in Haifa, which serves as a hothouse for the creation of Israeli startups.

“We want to encourage Israeli companies to move to the city,” Robertson says, “but we also want to encourage New York companies to launch activity in Israel. We plan to invite 20 Israeli companies to visit New York to study the possibility of operating here.”

“New York is the new Silicon Valley,” says the Israeli-born entrepreneur Adam Neumann, who runs the commercial real estate company WeWork. The company has 10 buildings − most of which it manages and a few of which it owns − that house startups galore. “In New York they realized that the finance industry, which was and still is the most important industry in the city, has changed, and that the city needs another economic anchor,” Neumann says. “The direction of Mayor Michael Bloomberg was to strengthen high-tech, and therefore City Hall grants incentives to high-tech entrepreneurs, and it has a liaison [officer] who helps us to promote projects and overcome bureaucratic obstacles. The clerks and elected officials go out of their way to help − for example, through tax breaks. New York was always a cool city, but there was no high-tech here. The more technology companies move here, the more enthusiastic people in the field are to move here.”

Eyal Bino recognized this potential, and two years ago he founded the platform WIN ‏(Worldwide Investor Network‏), which helps bring startups to New York from around the world. To date, WIN has held 10 conferences that were attended by some 50 companies, 12 of them Israeli. Four of those companies managed to raise capital or will shortly be receiving capital in the range of $3 million to $5 million.

Bino, who grew up in Bat Yam and played basketball for Hapoel Holon, looked for a basketball scholarship to an American college, and that’s how he wound up at Kean University, New Jersey. Later, after studying business, he spent five years working at BrainPOP as vice president for business development. “I received a lot of requests from Israeli entrepreneurs who were looking for investments and business development, and I realized there was a problem in raising money,” he says. “It is relatively easy to raise the seed money − up to $1 million − but it is harder to raise the second round, of between $1 million and $5 million.

“Here we try to help them,” Bino continues. “Worldwide there are loads of startups that are trying to operate globally, but they do not have the know-how, ties and ability to raise money in the American market. On the other hand, the investors in New York in the high-tech field went mainly in the local direction − unlike the investors in Silicon Valley, who were open to companies from all over the world.

“Silicon Valley is undoubtedly bigger, and there is more money there, but today there is a lot more money in New York for startup investment than people think. That is how the idea came up to create a platform that would connect promising companies just starting out, from around the world, with local investors and mentors in New York − an ecosystem that would link [rookie] entrepreneurs with the money and experience available here in New York. I wanted to create an Ellis Island for startups, including Israeli ones.”

Among the Israelis here, there are not many women in management positions. Shani Peled is an exception. Peled, the CEO of the Internet-marketing firm Socialterminals, has lived here for eight years. “I chose New York out of personal considerations,” she says, agreeing with the song that asserts if you make it in New York, “you can make it anywhere. Companies also develop much faster in New York than elsewhere in the United States. In Silicon Valley, I get the sense that they do more resting on their laurels.”

Peled, who grew up in Yehud, did her military service in Mamram ‏(the Israel Defense Forces’ center for computing and information systems‏). After the army she worked for New Dimension Software, which was acquired by BMC Software. “After two years of working, everything was overly settled for me, so I sought a change.”

She moved to the eco-village of Klil in northern Israel for what she terms a period of spiritual growth, studied Buddhism, and eventually “came down from the mountain,” as she puts it − and joined ECI Telecom. As part of the job, she traveled the world and came to the conclusion that New York was what she wanted. About two years ago she founded Socialterminals, which specializes in Internet marketing for small- and medium-sized companies. Her company has an office in Tribeca with 16 people on staff; a development center in Minsk, Belarus, with 23 people; and customer-marketing centers in Los Angeles, New York and Israel, as well as partnerships throughout Europe.

Why don’t we see more women running the Israeli startup companies opening offices here?

Peled: “It is a reflection of what is going on in the industry. There are not a lot of women executives in the high-tech field, in Israel and also in the United States. This is also the case in New York, which is a very liberal city. Women aim or are directed toward being a support force, not entrepreneurship. In the field of advertising and marketing, for example − which is a creative field and very progressive − you find more women in senior positions on the creative and support side of things, but the management is still male. Women may manage to reach the rank of vice president, but the top executive is ultimately the man. So what is happening with the Israeli companies is no different from the situation in the United States.”

Hanukkah and Christmas

“It was clear to me that we needed to go to the United States,” says Eran Gilad, the CEO of Tracx with an office on 27th Street, which specializes in collecting data from social networks and blogs, and then creating social intelligence that serves marketing and sales organizations in real time. “Ordinarily, startups begin to grow in the local market, generate financial strength and then head overseas. In our case, the Israeli market was too small and our neighbors weren’t Swiss.

“Moving here was a wise decision, because we need to be as close as possible to the market,” Gilad explains, “and that is how we became a global company very fast. In addition, we raised money from American funds with the object of becoming better connected to the market. New York is going through a fascinating process − a transformation into a startup center, which began thanks to proximity to the media companies, to venture capital funds, to the financial market, to law firms that specialize in technology. It suits companies that want to grow quickly.

“Today we have American manpower and an American identity, but we pay respect to our being Israelis. At our office we celebrate Hanukkah and Christmas, and I tell the American employees what Hanukkah is and why the Maccabees fled to Modi’in and not Tel Aviv.”

The main dilemma for entrepreneurs who decide to immigrate to the United States is where to set up their business: in Silicon Valley, where some of the world’s biggest companies are located; or in New York, which is taking its first steps in the field.

“Our central consideration was that since the product undergoes changes in keeping with the demands of the market, there must be a connection between the market and the development team,” Bizzabo’s Alroy says. “The time difference between Israel and New York is smaller than between Israel and San Francisco, and from this viewpoint New York is easier. Moreover, the high-tech scene in New York has received a huge push, and there are lots of technology events there.

“New York also has an advantage socially speaking, because of the large number of Israelis operating here,” Alroy says. “There is a powerful Israeli gang here, and there is lots of mutual help that makes for a softer landing. We light Hanukkah candles together, there are Friday night dinners and social acquaintanceships. Part of my strategy is to make use of the Israelis who are here. When I telephone, they make time for me. But I prefer the employees to be American, because they will have an easier time selling my product.

“Silicon Valley is still the center of American high-tech, and we occasionally make sorties to San Francisco. The truth is that, to this day, I don’t know which is the right thing. If we conclude that moving to the West Coast is a better fit, we may do that, but for the moment New York seems to me more suitable.”

Adds Tracx’s Eran Gilad: “We debated whether to open an office in Silicon Valley, because the social networks market is more active on the West Coast. On the other hand, we thought that for a startup that had only just defined its professional DNA, it was problematic to operate at a 10-hour difference from the other part of the company, which sits in Israel. It’s especially complicated when the work processes are still evolving and when you are recruiting a new management team, which is supposed to keep in constant touch with Israel. It was important to us to maintain a balance between the market’s demands and the development body.”

“We chose New York because all the advertising agencies are here, because you can get a direct flight to Israel from here, because the time difference is smaller compared to the West Coast, and because New York is still New York,” says Amit Avner, the CEO of Taykey − a leading advertising company on the social networks − which has raised $21 million to date from the venture capital fund Sequoia. “Here you are close to your clients,” Avner says. “When I am located near the offices of the major companies, I have a better understanding of their problems.”

“The pace in New York is very fast, and you have access here to the finest minds and talents in the world,” adds Naor Amiel, the CFO of Eyeview, a company working in the field of online video advertising. “A great many potential clients are on the East Coast, and also the managements of big and small companies. I visited Silicon Valley last year, and I get why technology companies operate from there,” Amiel says. “It is a very entrepreneurial area, less buttoned-down. On the other hand, in New York there is a lot of money waiting to be invested in young companies. There are countless events that are attended by investors, who are trying to spot the next product or to invest in companies in the initial stages. There are a lot of good companies, but they suffer from poor planning and from not being in the right place.”

“You need to be where your market is, and if your market is in Nebraska, you move to Nebraska,” says Gil Eyal, until recently the chief of American operations at Mobli, which develops a platform for sharing photos and videos with people who have common interests. One of the investors in the company is the actor Leonardo DiCaprio. “Mobli is half startup and half media company, and its content is what is going to win,” Eyal says. “The major media companies are in New York, and there are great opportunities to collaborate with the big organizations that operate in New York. From Israel it was a lot harder for us to reach them. Also, DiCaprio’s investment was made possible because Mobli is located here: He heard about the company from a friend who used our app, and he came to New York and wanted to meet up. We met and there was excellent chemistry.”

This spring, Eyal founded a new startup called $ocial. It attempts to help celebrities profit from their activity on social networks, in contrast to the situation in place today, wherein the companies make the money − not the celebrities providing them with the content.

No resting on laurels

When the Israeli entrepreneurs contemplate success in New York, they have a good example: 5min Media, which was founded in Israel seven years ago and has come a long way since. The company, which moved part of its activity to the United States in 2008, was bought by AOL for $65 million in 2010, and became its video arm. The company’s senior executives were integrated into AOL’s management: Ran Harnevo, the senior vice president for video, is responsible for all of AOL’s video activity; Tal Simantov is vice president of video marketing and strategy; and Hanan Laschover is vice president of video technology and general manager of the Israel office.

Simantov says that when 5min Media was taking its first steps, it was obvious to him and his friends that there was no choice but to open offices in the United States as well. That was also the condition imposed by some of the company’s investors: They demanded that the company, or at least its management, be based in New York − where the big market and advertising agencies are located. Besides, it was convenient for the investors to have the company be in the area, so they could keep a close eye on it.

Many of the Israeli entrepreneurs say that, despite the great aspirations and the potential to succeed in New York, working in Israel has its advantages. “I miss the Israeli audacity,” Tracx’s Gilad says. “I like the creative head of an Israeli programmer, who asks direct and sharp questions and doesn’t take orders dutifully. We look for smart and affable people who are open to change. It isn’t easy to find people like that, because a central part of WASP culture is the wish to avoid confrontation. So sometimes you have to dig to understand what the employee is thinking and wants. Sometimes there are misunderstandings between the Americans and Israelis, and I tell our staff that even if there are problems of a cultural nature, work on the assumption that the intention on all sides is positive.”

“Israeli chutzpah needs to be compartmentalized,” $ocial’s Eyal says. “If used correctly, it is an amazing tool, but most of us mistakenly think the Americans will take us as we are. A statement such as ‘You have to understand’ sounds innocent in Hebrew, but in English it sounds aggressive and contemptuous. Here you do not say ‘You’re wrong,’ but rather, ‘That’s interesting, but let’s look at it from another angle.’”

Are you considering moving back to Israel?

“The greatest sacrifice I make for my career is not living in Israel, and I would like to go back, but the truth is that I would not have got to where I am professionally without living in New York. I can be talking to someone and he says to me, ‘Come to a meeting in two hours’; I go down to the subway and that’s it. There is willingness among the Israelis who live here to help out new entrepreneurs. Everyone I approached helped me, and I help everyone who approaches me. The door is always open, and the Israeli brotherhood is an excellent tool. But there are no gifts here: No one is going to do the work for you. You have to bring value to the table and not rest on your laurels.”

One of the prestigious projects Israelis are a part of in New York is the new university that is slated to rise on Roosevelt Island, in the East River, on a site that once housed a hospital. About a year and a half ago, the Technion and Cornell University jointly won a competition to build the graduate school for technology in the city, to serve as a base for the high-tech industry here. The project will cost about $2 billion, most of which will be raised by Cornell. When the university is up and running, a decade from now, it will have 2,000 students. Today, eight students are enrolled already studying in it.

Prof. Craig ‏(Chaim‏) Gotsman, who is the Technion’s point man on the project, anticipates that both faculty and students from the Technion will be coming to New York in the next few years to participate in the process of setting up the university. “I am the sole Technion representative [in New York] at the moment, and another two professors will be arriving in the fall,” he says. “We are in the process of recruiting faculty members from around the world, says Gotsman, stressing that the Technion does not intend to send hundreds of its people from Israel to New York. “There will not be an airlift from Israel to here.”

Gotsman says this is a golden opportunity to build a university from scratch, and dubs it “the MIT of New York.” “The school will offer two-year graduate programs for master’s and doctoral degrees. Graduates will get a dual degree − from Cornell and the Technion. For the students, the jewel in the crown will be to work at high-tech companies with which the new university will be affiliated [as part of their studies].

“It is important to us that the graduates not go out into the world only as engineers, but as entrepreneurs,” Gotsman adds. “The mission of the campus will be to help develop New York’s economy as the global high-tech capital, and realizing this vision requires manpower. We don’t want just to fill the ranks at Google and Yahoo, but rather to create new companies. Therefore, in the admissions interviews, we will place emphasis on entrepreneurial skills and on people with entrepreneurial DNA.

“This project catapults us from the status of an Israeli academic institution to that of an international academic institution. To be at the top, you’ve got to be international. Only a third of the students at MIT are Americans. That’s not going to happen tomorrow in Haifa, so instead of importing internationalism, we’ll export it.”

 

AP
Natan Dvir
Tanya Low