Startups in Israel: A Revealing Paradox.

Publié le 18 Juillet 2012

Israel has two key elements needed to succeed in the information-technology sector: Nobel Prizes (symbolic of the quality of high-level education) and the capital to invest  in startups. Both are things that make Silicon Valley so strong.

You just need to bring the two together. This is the function of  Yissum, a company created by the Hebrew University in 1964 with the goal of “protecting and commercializing” the intellectual property created by its professors.

Hervé Bercovier , vice president of research for 8 years, was active in managing the company. “Anything a professor creates in their professional field belongs to the university, which gives it to Yissum,” he says. First, Yissum verifies whether or not the idea can be patented. Then, it takes care of the sale. If the patent is sold, the professor gets 40% of the revenue and their lab receives 20%.” This allows the university to profit, but the main goal, according to  Bercovier, is “to test ideas.”

According to the company’s site, it has generated 7,000 patents and spun-off 72 companies. Yissum’s commercial products “generate more than 2 billion dollars in annual sales.” 

The state’s role in innovation tends to be minimized, even in Silicon Valley, but Israel mobilized significant financial resources towards the goal. Its best-known initiative is  Yozma (Hebrew for “initiative”). Founded in 1993, the fund is based on twin criteria: the state adds 50% to the capital raised by private investors, but, if the company succeeds, the investors can buy back the company’s private shares after 5 years. As Dan Senor and Saul Singer writer in  Start-up Nation, “the government shares all the risks [and] offers investors all the rewards.”

This approach has attracted investments from the major players: Intel, Microsoft, Google, HP, etc.

You also need that special moment to capture investors’ attention : that moment when someone sells a startup no-one believes in for what seems for a huge amount. This happened in 1998 when AOL acquired the chat software, Mirabilis (later  ICQ), for $400 million.

“I’ve been in startups since I was a kid,” says  Yossi Vardi, father of one of Mirabilis’ founders (he invested in the company as well). “I didn’t understand why 100 thousand people were downloading the program, so I decided to solve that mystery. It took me three years to turn it into a unified user-experience theory.”  Though we can’t know how much this research added to his fortune, Vardi more than succeeded.

The country “owes its success to the alliance between a lot of small local businesses and large multinationals looking for innovation. He believes that when Intel invested in 54 startups and IBM invested in 11, “they brought their managerial capabilities and gave us access to the global market.” This is always difficult for small countries like Israel.

Jeremie Berrebi, who, along with  Xavier Niel (shareholder in the French newspaper, Le Monde) manages the Kima Ventures fund, says that “the ability for founders to survive the road-bumps is obviously one of the biggest problems when you invest early. ” But he also thinks that there are enough large operations (in hundreds-of-millions of dollars) for quick resales to happen.

Israeli startups are promising enough to attract investors from around the globe, but not yet strong enough to achieve global success. It’s kind of a good paradox to have.

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