From Silicon Valley to Beantown, Israeli High-tech Moves East

Israelis are responsible for a huge chunk of immigrant-founded high-tech companies in the U.S., and after years of concentration in Silicon Valley, they are finding a new hub in Boston.

Doron Reuveni is bracing himself for another freezing Massachusetts winter. The CEO of uTest, a start-up that uses the crowdsourcing model to offer a range of software testing services, is a member of a growing community of Israeli high-tech entrepreneurs living in the United States, many of them on the East Coast. “We pay a price for not living in Israel. Usually, it’s the weather and the lack of decent hummus,” quips Reuveni.

According to estimates, 150,000 Israelis, including entrepreneurs and their families, live in California's Silicon Valley alone. Most work in leading technological firms, act as investors or work as investment bankers or attorneys.

Thousands more, like Reuveni, live on the East Coast – in New York, Massachusetts and other states. While many are chastised for living abroad, their involvement in high-tech usually benefits Israel, often through the establishment of R&D centers back home.

According to a joint study by researchers from Duke, Stanford and the University of California, Berkeley, Israelis living in America are the sixth most active group when it comes to founding start-ups in the United States. The study, entitled “America’s New Immigrant Entrepreneurs: Then and Now,” evaluated the rate of immigrant entrepreneurship in the U.S. from 2006 to 2012 and traced the complicated relationship between immigrants to the U.S. and their host country’s economic development.

According to the data, 3.5 percent of all companies started by immigrants in the U.S. between 2006 and 2012 had an Israeli at the helm. Thirty-three percent were founded by an immigrant from India; 8.1 percent by Chinese; 6.3 percent by British; 4.2 percent by Canadians and 3.9 percent by Germans. Adding to the significance of the study's findings is the fact that all the other countries in the top six have a much larger ex-pat population in the U.S. than does Israel. Earning greenbacks, but no green card

The American researchers speak of a “reverse brain drain” – the return of entrepreneurs who gained experience and knowledge in the U.S. to their countries of origin. This is a trend that undoubtedly benefits the Israeli economy. The study found that one of reason entrepreneurs return to their home country is the difficulty they have obtaining a green card in the United States. “My partner has been waiting three years for a green card that will allow him to travel back and forth,” says Reuveni, “even though he’s an entrepreneur and a shareholder in a company whose investors are all Americans.”

Hummus with a side of (computer) chips

The number of Israelis who come to America's shores is also dependent on the state of the job market.

“There’s a very close relationship between Silicon Valley and Israel. That’s how it’s been over the past several years, and that’s how it will be for many years to come. During some years, fewer people move between Israel and the U.S. That has to do the state of the high-tech industry,” says attorney Ayelet Torem, a partner in the high-tech department of the law firm Amit, Pollak, Matalon and Co. and the former head of business development at the California Israel Chamber of Commerce. Her clients include American and European venture-capital firms, and she has worked closely with Israel’s business community in Silicon Valley.

When it comes to companies in the computers and communications industry, India is the only country whose immigrants have founded more American businesses than Israel. In this sector, Israelis own 28 percent of the market. In defense and aerospace, that number is 6 percent; while Israelis have also founded 4 percent of the software companies and 3 percent of the companies in the innovation/manufacturing-related industries.

At TheMarker’s request, the researchers provided additional data about the Israeli entrepreneurs’ activity. Thirty-eight percent of the companies founded by Israeli entrepreneurs over the past six years were in the

innovation/manufacturing-related services industry, 25 percent were in the software industry, 13 percent were in the computer chip industry, 13 percent in the computers/communications industry, six percent in the environmental field and another six percent in the defense/aerospace industry.

The closer to Harvard, the better

One of the most surprising statistics from the report is the population distribution of the Israeli entrepreneurs among various U.S. states.

Contrary to what may have been expected, 44 percent of Israeli entrepreneurs who started a company in the U.S. between 2006 and 2012 chose to settle in Massachusetts over Silicon Valley. Only 25 percent chose California. Thirteen percent decided on New York, six percent on Arizona and a similar percentage on Georgia and Nevada. The population of Israeli entrepreneurs is the second most dominant in Massachusetts – once more, after entrepreneurs from India. Israeli entrepreneurs founded 16 percent of the companies started by immigrants in that state. The corresponding rate in California was 3 percent, and in New York it was 7 percent.

These statistics are no surprise to anyone who lives and works in Massachusetts, is familiar with the lively industry there and knows the Israeli high-tech community. “I live here for a reason, and it’s not the weather,” says Reuveni, who picked Massachusetts as the place to start his company after an unsuccessful attempt to raise funds in Israel. “There are universities such as MIT and Harvard that create interesting minds, which is important when you want to start a company with a development element. Also, when a CEO starts a company here, he’s usually looking in an international direction. It’s hard to run development, sales and marketing in Europe and Israel when you’re working with a 10-hour difference between time zones. It’s much easier to fly to Israel or Europe from Boston or New York. That makes it very attractive for an entrepreneur who wants to start a company, and that’s why I chose Massachusetts, as opposed to San Francisco, as the place to start my company."

A big fish in a small, Google-free pond

Reuveni also admits that financial considerations steered him east, as well.

“The distance between Tel Aviv and San Francisco is much greater in terms of geography and cost of living for a company that has its development office in Israel, is just starting out and wants to market its product and create business in the U.S.," he says. "It’s much cheaper in Massachusetts, and the state also supports the creation of businesses and individual taxation. There’s less competition in worker recruitment, too. When you start a company in Silicon Valley and want to recruit employees, you’re competing with Facebook, Google and all the big names. In Massachusetts, you have access to places like MIT, and competition in recruiting workers is a bit easier,” he says.

Even with all its advantages, though, Boston has one serious, chick pea-flavored deficit.

In Silicon Valley, Israeli entrepreneurs can be found feasting regularly at Oren's hummus, the eatery founded by Silicon Valley-based Israeli entrepreneur and investor Oren Dobronsky. Boston, however, has yet to welcome a branch of the franchise.

“I told Oren he should open a branch here, but it seems he’d rather stay in Palo Alto with its mild weather,” Reuveni says.

No sabich, but plenty of silicon

What Boston does have a branch of, however, is the venture-capital industry. Despite the fact that high-tech was once known to be in a totally exclusive relationship with Silicon Valley, Boston is now proving itself as fertile ground for companies and investors.

Amnon Shoham, a partner in the Israeli venture-capital firm Cedar Fund, has lived in the Boston area for over a decade.

“I came to Boston in 2000 after I saw that the area had a strong entrepreneurial infrastructure,” Shoham says. “A lot of the companies that we invested in moved their work to the U.S., and we wanted to be a fund that worked with companies on both sides of the ocean. We picked Boston because it’s more convenient to work with Israel from the East Coast than from the West Coast. Those additional three hours make a difference when it comes to overlapping work hours and flight time.”

Cedar invests in companies with connections to Israel: companies that were started by Israeli entrepreneurs in the U.S., or companies that were started in Israel and expanded their work to the U.S. They include PeerApp, which operates from Boston but has an R&D center in Israel, and CloudLock, which started in Boston and expanded its activity to Israel. Cedar also invested in Guardium, which was sold to IBM in 2009 for more than $200 million. Guardium, which was started in Israel, built its activity up in Boston.

According to Reuveni, over the past few years there has been an effort to change the East Coast’s conservative image. “[Mark] Zuckerberg, who went to Harvard, tried to raise money here from investors who had started out in Boston, such as Battery Ventures. After he was turned down, he moved to Silicon Valley. Because of that, and for fear of a brain drain from MIT to Silicon Valley, the university and investors are making a lot of effort to keep the young people in Massachusetts.

There are all kinds of incentives that help them get ahead here and in New York.”
As part of the change, connections with Israel have become stronger at the governmental level. The governor of Massachusetts visits Israel every year. “In Massachusetts, people discovered that these connections with Israel create lots of jobs and contribute to the state’s economy. Cedar’s companies alone have created hundreds of jobs over the past few years,” says Shoham.

A blue-and-white flak jacket

In Israel, local entrepreneurs who pack up for the U.S. tend to take a lot of flak. It’s said they don’t contribute to the Israeli economy, and their move leaves behind a brain drain.

American-based Israelis tend not to agree.

“If a company whose business department is located abroad has sales of $30 million, its R&D department in Israel will double in size," says Shoham.
He uses the Israeli company Onaro, which was sold in 2008 for about $120 million, as an example.

"Onaro came back to Israeli and opened a branch of NetApp – so both the knowledge and the wealth came back to Israel," he says. "It’s impossible to sell outside Israel and keep the entire team in Israel only. It has to be on both sides.”

For his part, Reuveni sees Israeli entrepreneurship abroad as a form of patriotism.

"I don’t see it as a brain drain, but rather as something that does good for Israel," he says. "Most of the companies have a development department or some activity in Israel. It’s not right for an entrepreneur to ignore the Israeli market. It’s an excellent market to learn what’s suitable and what works. We also have important clients in Israel and significant income from there.”

And according to Torem, the attorney, a lot of these entrepreneurs will come back to Israel after only a few years abroad. And when they do return, they bring back tools that can boost their home country significantly.

“I see very experienced entrepreneurs coming back to Israel,” she says. “Many times, they create more startups in Israel.”

AP
Haaretz