Jerusalem of Silicon: Capital’s Startup Scene Turns Hot

After more than a decade of slumber, the capital’s high-tech industry is booming once more, bringing in companies, venture capital funds – and money. How did it happen, and what can be done to duplicate the model elsewhere?

A high-tech conference in Jerusalem for the ultra-Orthodox community in May 2014.
Neeman Levaby

In 1993, when Elie Wurtman decided to launch a startup, it was clear to him that it would be in Jerusalem. Those were the heady days before the dot-com bubble burst, and Wurtman – an experienced entrepreneur and investor who was born in the capital – built not just one company but three. The largest of them, Delta Three, had a peak market cap of almost $2 billion and employed 250 staff in the Malha high-tech park.

“Some seven years later, toward the end of the millennium, there were 2,000 people working in Jerusalem in the ecosystem of startups and venture capital funds,” recalls Wurtman. He mentions Erel Margalit’s Jerusalem Venture Partners fund (JVP); BRM, founded by the Barkat brothers; and Shlomo Kalish’s Jerusalem Global Ventures.

“During that period, Jerusalem had more resources than anywhere else in Israel – academia, a high-quality population, more funds and multinational corporations such as Teva and Intel. It was fertile ground for the high-tech and startup industry,” says Wurtman. Way before Tel Aviv became one of the hottest cities in the world, Jerusalem was on fire, he says.

But then, that bustling Jerusalem scene began to recede. The second intifada (2000-2005) was difficult, with the capital suffering more than elsewhere in Israel and emptying out, he recounts. Big money also fled because of the bursting dot-com bubble. “I was 31, and it suddenly felt that the nuclear winter had arrived. In the early 2000s, that young creative energy began drifting to Tel Aviv.”

Later, Israel became famous as the Startup Nation, even though in reality this “nation” existed mostly in three places in and around Tel Aviv. Jerusalem and Haifa were the high-tech periphery.

Now, things are changing again: Tel Aviv and its environs are no longer alone. Startups are sprouting elsewhere in Israel, and the best example of this is Jerusalem.

Until a few years ago, any Jerusalem entrepreneur looking to launch a startup would simply pack their bags and move to Tel Aviv. Since 2012, though, more and more entrepreneurs are finding it possible to build a startup in the Holy City – without having to compromise. For young entrepreneurs, this offers a ray of hope amid the capital’s otherwise bleak prospects, suffering as it does from a brain drain and young people leaving en masse. But for the older generation such as Wurtman, who remember the good old days from 20 years ago – and the drought in-between, too – it truly is a renaissance.

Old and new

The startup 40Nuggets is a great example of why things are happening in Jerusalem right now: The offices of this young company, which was founded in 2012 and has 13 employees, are on the second floor of a commercial building in the Talpiot industrial zone. It was a cosmetics store not long ago, and a carpentry shop still operates down the corridor. This mix is characteristic of other buildings in the area and reminds you of San Francisco, where workshops and warehouses were also converted into offices for startups.

40Nuggets shares workspace with other local startups and has created an inspiring work environment. “At first, we worked in rented apartments and the Hebrew University library,” recalls founder and CEO Aharon Horwitz. “After we raised money, we decided to open a space that our team would occupy and that would also serve as a center for creativity in Talpiot and as part of the community. We received an offer to join a [technology] incubator outside the city, but we refused. We don’t want to travel far from our homes and are committed to the city,” says Horwitz.

Yoni Reif

That local loyalty is prevalent in Jerusalem’s high-tech scene. These are young people, mostly in their 30s, sometimes younger, who grew up in the capital during the second intifada and are now playing an important role in the city’s rebirth and growth.

They are passionate about the idea and see the development of local industry as a personal mission – one that will allow them to continue living in the city, which previously boasted few employment opportunities for people their age.

“The people of Jerusalem are connected to the city,” says Ephraim Zuriel, the CEO of EZsave – another startup located in Talpiot. Originally from the West Bank settlement of Ma’aleh Adumim, Zuriel is a graduate of the AtoBe high-tech accelerator at the city’s Azrieli College of Engineering. He represents the unique social mix of Jerusalem, which has a very different DNA to Tel Aviv’s. For example, there are a lot more religiously observant people and English-speaking immigrants. “When we started to hire employees, we put an emphasis on recruiting ultra-Orthodox Jews,” says Zuriel. “There is a large population [of them] here, including those with the relevant training. I am a businessman, but for me this is Zionism.”

Together, the Jerusalem high-tech community – entrepreneurs, social events organizers, mentors, accelerator managers and investors – enabled this reawakening. “Those who remain in the city are those who care about it not deteriorating into Tehran or Bnei Brak,” says Hanan Brand, one of the cofounders of the Made in JLM nonprofit, which promotes the city’s high-tech community and is a partner in Cornerstone Venture Partners.

At war since childhood

“We have been fighting here since childhood, and it’s not an easy choice,” adds Brand. “There’s a unified urban identity here, and everyone who remains is in love with this wounded city. That’s why it’s much easier to start processes and inspire action. It’s impossible to import it from outside, with grants, government money, incubators or public relations. As an investor, I can’t say the companies here are better or smarter than somewhere else. But you won’t find anywhere else in the country where they have the fire in the eyes of entrepreneurs here, or the sense of pride that ‘The future of this city is on my shoulders,’” he adds.

Made in JLM, whose red shirts have long symbolized Jerusalem high-tech, has data to support this local pride: Some 500 startups are now operating in the capital, compared to 300 in 2012; the pace of founding new startups has quickened from 25 in 2012 to 200 in 2014, with another 100 for the first three quarters of 2015. The funds raised have grown nicely, too – a sign of investors’ faith. In 2012, 24 companies raised $55 million in Jerusalem, but by 2014 this figure had more than quadrupled to some $225 million. And in the first nine months of 2015, Jerusalem startups raised $243 million.

At the same time, the number of groups investing in these startups also rapidly expanded: In 2012, seven venture capital funds operated in the capital – the best known being JVP. This number has more than doubled to 15 today, though some of these are still at the money-raising stage.

One of the fastest growing investment groups is the OurCrowd investment platform, launched by Jon Medved, which allows private investors worldwide to participate in the investment process.

Jumpspeed Ventures, founded and managed by Ben Wiener, is intended for investing in young Jerusalem companies, while Wurtman’s PICO Ventures has raised $35 million. The number of high-tech accelerators has grown from none to 20 in just three years.

Jerusalem startup veteran Elie Wurtman

It may be hard to remember, but Jerusalem has actually seen a number of major exits. The best, and biggest, example is Amnon Shashua’s Mobileye, which trades on the New York Stock Exchange with a market cap of over $6 billion (after hitting a high of twice that amount). It is one of the capital’s largest high-tech employers, with some 700 workers. It will also soon have a new office building of its own.

The older generation plays a slightly different tune to the younger one: Wurtman tells of how, for a decade, he watched his Jerusalem colleagues leaving one after another for Tel Aviv. Some, such as Gil Shwed of Check Point and Noam Bardin of Waze, were a huge success in their new homes.

The elements that triggered the new startup scene in Jerusalem actually existed for decades. So what caused the rebirth of Jerusalem as a bustling center of high-tech and venture capital? The first stage was local initiatives such as Siftech, which was founded in 2012 by Hebrew University students as a Students’ Union project. Siftech’s first steps were to organize community events and create a meeting place to encourage new opportunities, and later an accelerator was established.

At the same time, municipal political movements strengthened and changed the mood. “After the election of [Mayor Nir] Barkat, personal activism strengthened in the city. People felt they had influence, and it really connected with the entrepreneurial character,” said Dana Mann, a partner in PICO Ventures, and previously a partner in OurCrowd. Later, these independent initiatives began to receive support from various authorities (such as the Jerusalem Development Authority) and political groups.

Many groups are now trying to take credit for the success, but it seems it is actually the combination of authentic grass-roots action and the support and help provided by municipal organizations that gave Jerusalem innovation its boost.

The financial incentives offered by the JDA include a founding grant of 120,000 shekels to 500,000 shekels ($30,000 to $126,000) for high-tech companies starting off in Jerusalem and employing between 3 to 20 employees. The grant is based on 50,000 shekels for every employee living in Jerusalem and 40,000 for other employees.

City hall can afford such grants because Jerusalem is allocated special budgets that other Israeli cities aren’t. But money isn’t the main reason for the recent boom, says deputy mayor Ofer Berkowitz, who cites “energy” and “social forces” as the main drivers for the startups’ renaissance.

The Har Hotzvim industrial zone in Jerusalem.
Ofek Aerial Photography