Israeli Company That Pioneered Flash Drives Has Lessons for the Start-up Nation

M-Systems was a rare case of an Israeli start-up creating both a consumer hit and hundreds of jobs.

"Dov had amazing timing. It couldn't have been better," says one former M-Systems employee, recalling the $1.5 billion sale in 2006 of the high-tech company that Dov Moran founded and led.

"Today, the DiskOnKey is technology with a glorious past," says the former employee, referring to the company's brand name for its USB flash drive, an external digital memory device. "On the other hand, how would our lives have been in the 1980s without cassette tapes?" His meaning is clear - USB drives were a very important and useful product in their heyday, but no longer.

But the story for the devices isn't quite over. Fifteen years after they were first invented, USB flash drives continue to be sold throughout the world and the story of M-Systems continues to fuel Israeli high-tech dreams, as proof that Israel can spawn large technology companies. In addition, the proceeds from the buyout continue to finance and generate new startups to this day.

The oft-repeated story about the inspiration for DiskOnKey is that Moran simply wanted to make a PowerPoint presentation, but found that his computer wouldn't boot when he arrived at the meeting. The experience taught him that people needed a device with enough memory to carry a PowerPoint presentation in their pockets – something that portable memory products of the time couldn't do.

Before USB flash drives became available, the main medium for portable computer memory storage was the 3.5-inch floppy disk, with its 1.44 megabyte capacity. Of course, there was also the CD-RW, a compact disc with about 700 MB of storage space, but it required special hardware and software to burn data onto it.

The first commercially available USB flash drive had 8 MB of storage capacity; today, devices with 8 GB capacity – 1,000 times as much - are sold retail for under NIS 30. The product has become such a commodity that is often handed out as a promotional freebie at exhibitions and conferences. The flash drive's storage capacity grew rapidly and continues to climb, while prices fall. Some USB drives sport 512 GB capacity, the size of many computer hard drives.

But, while the technology has improved and become cheaper, the value of the product has diminished. When the USB flash drive was introduced, email services were much more limited. The most popular service at the time was Microsoft's Hotmail, which provided no more than 2 MB of storage. Large files couldn't be emailed as atttached files at all, which opened up a large market for USB devices. M-Systems' DiskOnKey arrived just in time to meet the need.

Storage drives out, cloud computing in

The turning point came on April 1, 2004, with the public launch of Google's Gmail. The company claimed its email accounts would accommodate 1 GB of memory, 500 times more than Microsoft's. It sounded so absurd that many mistook it for an April Fool's joke. As things turned out, that date marked the dawn of Internet cloud computing. Google allowed users to send email attachments of up to 10 MB, which it later increased to 25 MB. The storage capacity for Gmail accounts has also escalated.

In 2008, Dropbox introduced its popular cloud storage service, quickly followed by other storage providers. This "cloudization" has been accompanied in recent years by the rise of smartphones and high-speed communications networks, rendering physical devices for transferring large files largely obsolete.

M-Systems was founded in 1989 and registered its USB flash drive patent 10 years later. The Kfar Sava-based company didn't invent flash memory, which had been around for a long time, but it realized that USB connectivity, designed to connect peripheral equipment like printers and scanners, would soon become a standard feature on PCs and laptops. "Let's put flash memory on a tiny disc and connect it to USB," they said at M-Systems. We'll create software for the computer to identify the new connection as if it were an additional drive." It was brilliant.

The company's first product was officially launched in September 2000 under the name DiskOnKey and the first computer maker to accommodate it was IBM. The DiskOnKey quickly became a smash hit, a fixture in the pockets of every businessman and student. In 2004, M-Systems signed a strategic agreement with SanDisk, its largest competitor, and two years later SanDisk acquired the company outright. SanDisk continues to develop flash memory storage devices and remains the world's top vendor of USB memory drives.

"Work for marketing people"

"The DiskOnKey isn't dead," insists Moran. "A year-and-a-half ago I met with SanDisk's retailing manager and he told me they were having a record year in DiskOnKey sales. I asked him who's buying them nowadays and he replied that they've discovered it in South America."

M-Systems also serves as a paradigm for large Israeli high-tech companies that shun quick exits in favor of building large companies. It was traded on the Nasdaq Stock Market and employed 1,000 workers at its peak.

"Today there are many headlines about applications being created quickly and sold quickly," says Moran. "There's nothing wrong with that, and it also draws attention. But a mix is needed, so that, alongside the small companies, which we have in abundance, there should also be large companies. Small companies provide work for engineers, but work must also be provided for people in logistics, sales and other areas. I don’t get particularly excited when an Israeli company is sold: I'm happy for the founders but not for the country. I would be thrilled if more billion dollar companies would sprout here."

Asked about his own exit, Moran says: "I didn't see the sale as a tremendous achievement." He points out that the company had already gone public and was selling its products on a large scale.

"This was a company that grew in sales from $1 million a year to $2 million and then $4 million," he recalls. "In 1999 we scratched up $30 million in sales. There aren't many such companies anymore in Israeli high-tech.

"What would have happened if we weren't sold? That's hard to say, especially since high-tech underwent a crisis in 2008," says Moran. "But at M-Systems we had SSD (solid state drive) technology and agreements for it with companies like HP and Dell. This technology had been neglected but now it's a fantastic field, where companies involved are sold for billions. I don't think Anobit Technologies, which was sold to Apple, had anything substantially different from the technology we had in 2006."

Do you feel any regrets?

"Of course not," replies Moran. "I'm racing forward and hope to produce some substantial successes. The sale of M-Systems allowed me to invest in many more companies. The money, as far as I'm concerned, will go back into the community. I am currently invested in 15 companies and surrounded by wonderful folks. Not everything will succeed, but I see some very nice things sprouting."

Eyal Toueg