The Chips Are Up: Israel’s Semiconductor Industry Is Enjoying a New Lease on Life

Recent advances in areas such as artificial intelligence and autonomous vehicles are creating demand for powerful new devices. Startups in Israel are angling to fill the space

File photo: A Smart concept autonomous car Vision EQ fortwo model is pictured at Brussels Motor Show, Belgium, January 18, 2019.
Francois Lenoir / Reuters

Like most of his buddies from his old technology unit in the Israel Defense Forces, Orr Danon planned on founding a cybersecurity startup when he returned to civilian life. “We had a lot of ideas about cybersecurity for the internet of things,” he recalled. “It’s an important area, but we reached the conclusion that it didn’t really interest us.”

Meanwhile, Avi Baum, who was at the time working for Texas Instruments and met Danon through army connections, introduced him to all the hardware and security challenges facing the growing artificial intelligence field. “We decided to attack this problem and build a new chip,” Danon said.

Ten years ago it looked like the world of chips and semiconductors – the crowning glory of Israel’s high-tech industry – seemed to be fading away. Investment in startups was in decline and entrepreneurs moved on to other areas. But as Danon’s decision illustrates, the chips are no longer down.

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According to figures from Startup Nation Central, a high-tech industry group, there has been a steady growth in fundraising by chip startups. The year 2017 was especially strong, with $384 million raised.

Last year saw a small pullback, but 2019 looks to be a new record-breaking year, with $360 million raised just in the first six months – much of that due to a giant $170 million round last month by Innoviz, which develops chips for self-driving cars.

What’s behind the sudden change in fortune for the field is the huge amounts of data that is being uploaded onto the internet, breakthroughs in AI and the growth of smart transportation technology that has created demand for a new category of chips and processors that can deal with complicated tasks.

AI and smart transportation is virgin territory yet to be conquered by the industry giants, thereby leaving unusually attractive opportunities for startups in Israel and all over the world. In Danon’s case, he, Baum and a third partner, Hadar Zeitlin, formed Hailo in 2017 (a fourth partner, Rami Feig, died in 2017, shortly after the company was founded). Hailo develops AI chips used in connected devices like smartphones, drones and autonomous vehicles.

“We’re trying to define from scratch the way computers are built,” said Danon.

AI chips are the hottest area of the chip industry today. They are processors designed to perform the most sophisticated AI tasks, including identifying images, sound and text, translating and extracting information from large amounts of data. They are the key to making the self-driving vehicle a reality.

CPUs not up to the task

Most traditional software, from Oracle databases used by business to well-known consumer products like Excel and PowerPoint, are designed to run on central processing unit chips made by Intel and similar companies based on the serial execution of sequential computer commands.

In recent years, however, researchers and developers have created AI applications using so-called neural networks, which mimic the activity of the human brain by processing multiple tasks simultaneously. For example, using neural networks, you can train a computer to accurately identify an image of a cat, similar to how a baby learns to do it. CPUs are not up to the take.

“We had to begin from scratch and build a processor for new and completely different needs,” said Eitan Medina of Habana Labs, an Israeli startup that has developed two AI processors.

Nvidia, a U.S. company, was the first to identify the solution. It realized that the graphics processing units, made for applications like computer gaming, were in fact just the thing for AI applications. Today it controls 7% of the global market for AI trips, according to the market research firm Gartner.

Since then, other companies have been developing a wholly new architecture specifically for AI. They include chips designed for data centers and for connected equipment. Others are used for training (teaching machines to learn new capabilities from existing data) and inference (putting the learned capabilities to use).

The big names in the tech world have all entered the game. Intel did it through purchasing a company called Nervana Systems, Google developed a tensor processing unit for its data centers and Amazon launched the Inferentia AI processor at the end of 2018. The latter was developed by the Israeli startup Annapurna Labs, which Amazon acquired three years earlier.

That still leaves a lot of room for startups.

“In the past when the semiconductor industry was focused on mobile devices, there were standards that set clear boundaries and created barriers of entry to startups,” said Medina. “Every chip that went into a telephone needed to integrate into the existing operating system and hardware. There was a fantastic amount of innovation but the coupons were all clipped by a small number of big companies.”

The AI revolution has changed everything all at once. “Here there is no established language, methodology or applications that have been in use for years. The big companies are no longer enforcing standards and no dynamic of barriers has been created,” Medina said. “AI has a new language and new applications, and customers are open to looking at more efficient processors for new kinds of applications.”

That change has been buttressed by the trend of internet companies entering the fields of software and chip development.

“In the past, chips came from Intel, Qualcomm and few other large companies, and Apple, followed by companies like Google and Amazon, began designing chips themselves,” says Ben Rabinowitz, managing partner of Amiti Ventures, which has invested in several semiconductor startups.

On the Israeli scene, many see the top player as Habana Labs. Its founders include the serial entrepreneur Avigdor Willenz, who previously founded chipmaker Galileo, which sold to Marvell in 2000 for $2.7 billion.

Habana Labs has raised $120 million to date. Its two processors are Goya (inferencing) and Gaudi (training).

Hailo, which has raised $25 million from investors, recently launched its Hailo 8 processor, which is used for deep learning by connected devices. NeuroBlade, a startup that recently exited from stealth mode, has raised $27.5 million to date and is developing AI processors for servers and connected devices.

Other Israeli startups are developing AI chips for specific applications. Among them is Inuitive, which is backed by the veteran tech entrepreneur Shlomo Gadot and has developed a chip for machine vision applications. It has raised $100 million from investors. Working under the radar, out of Kiryat Gat, is Xsight Labs, also backed by Willenz.

Tech investors understand that the high stakes in the AI industry mean that the world’s biggest tech companies will be shopping around for startups to acquire. That means quick exits and stellar valuations, whetting investor appetites.

Eyed by Amazon

In fact, TheMarker has learned that Habana Labs changed its strategy for product development as a result of conversations with Amazon executives. One industry source, who asked not to be identified, said he expected Amazon would eventually buy the company.

AI is only part of the story of the semiconductor industry 2.0. Innoviz, which has raised $252 million to date, is developing a sensor for self-driving cars. TriEye has raised $17 million for similar technology; and Autotalks is quietly raising capital for so-called vehicle-to-everything (V2X) communications for manned and autonomous vehicles.

“The car has become a data center. There’s a race underway to develop autonomous vehicles and to upgrade security and for entertainment and audio systems. We saw this trend four or five years ago, and we started investing in chips for cars,” said Rabinowitz, who invested in Autotalks.

On the other hand, not everyone is convinced it’s the dawn for a new era for chips.

“It’s true that the situation has improved, but hardware remains a difficult field for small companies. It’s not at all certain all of them will survive,” said one industry executive who asked not to be named. “There’s a lot of hot air. Many of these small companies haven’t proven themselves and many of them are running into serious trouble.”

Rabinowitz agreed that investors have to be careful and must take into account what big players like Amazon, Google and Microsoft are planning. “We’re turned down good ideas that would be running up against powerful competitors,” he said.

In fact, Startup Nation Central figures show that the number of chip startups in Israel has remained practically unchanged since 2014. Then there were 100, and in 2018 there were 107.

Gadot admits there has been a lot of hype around AI and self-driving cars. “It’s no baby boom or a return to the days of glory. Israel is strong in chips thanks to what happened in the early 2000s, but investors are still looking for then next big thing, like [the navigation app] Waze.”