Start-up Nation

CHAPTER 10

Yozma

The Match

John Lennon once said about the early years of rock and roll, “Before Elvis, there was nothing.”

On the success of venture capital and high-tech entrepreneurship in Israel, to paraphrase Lennon, before Yozma, there was nothing.

—ORNA BERRY

ORNA BERRY’S SON, Amit, delivered what would be the $32 million message. Amit had retrieved the voice- mail message for his mom. A vice president from Siemens, the German telecommunications conglomerate, had called. Orna Berry, away on yet another trip abroad to pitch her start-up to bigger companies looking to buy, had missed the call. The message from Siemens marked the beginning of a process that culminated in the first acquisition of an Israeli start-up by a European company. The transaction was finalized in 1995.

Though today it’s a pretty commonplace event—Europeans have invested hundreds of millions of euros in Israeli companies—in 1995, for an Israeli start-up to be acquired by a European company was unheard-of. Orna Berry believes a new Israeli government program at the time, called Yozma, was what made it possible. She also believes that hundreds of other start-ups have had similar experiences because of the government’s initiative.

Berry is hailed as one of Israel’s leading business leaders.¹ In 1997, she was named Israel’s chief scientist in the Ministry of Industry, Trade, and Labor—Israel’s innovation czar; in 2007, she became chair of the Israel Venture Association. She earned a PhD in computer science from the University of Southern California, worked for the technology consulting company Unisys in the United States, and then returned to Israel to work for IBM and, later, for Intel.

But in 1992, she was a first-time entrepreneur. She founded Ornet Data Communications with five colleagues from Fibronics, one of Israel’s early tech companies. Ornet Data developed software and equipment for local area networks (LANs), to double the speed of data transmission.

While most users were dialing into the World Wide Web through telephone lines, the Ethernet networking technology was growing as a way to connect LANs—groups of computers that were close together in homes and offices. LANs could move more information, faster, between computers in the network, but bandwidth was still quite limited. Ornet Data’s solution created a switch for these networked computers that, Berry estimated, multiplied the bandwidth fifty times.

Ornet Data had just a handful of employees in Karmiel, a city in northern Israel, and an office in Boston that Berry used when she came through town. In the early days of the company, she flew to the United States repeatedly to try to raise money, but she soon realized there was none available.

“There was no mechanism for early-stage high-risk funding in the absence of local venture capital,” she told us.²

Venture capital is investment funding that is usually put to work in high-growth technology companies. But for most foreign investors, putting money into Israel seemed absurd. To them, Israel was synonymous with ancient religions, archaeological digs, and deadly conflict. Even those investors who had marveled at Israel’s R&D capabilities were spooked by the surge in violence that came with the Palestinian uprising—or intifada—in the late 1980s. This was before Dov Frohman’s decision to keep Intel open during the 1991 Gulf War.

According to Jon Medved, founder of Israel Seed Partners, “You could talk to an American fund until you were blue in the face and say, ‘Hey, come invest in Israel,’ and they would laugh at you.”³

Israel’s dearth of venture capital through the 1980s was also creating other problems. In the West, the role of the venture capitalist is not simply to provide cash. It’s mentoring, plus introductions to a network of other investors, prospective acquirers, and new customers and partners, that makes the venture industry so valuable to a budding start- up. A good VC will help entrepreneurs build their companies.

“It was very clear that something was missing in Israel at the time,” said Yigal Erlich, another chief scientist, who was serving in the government in the late 1980s. “While Israel was very good at developing technologies, Israelis didn’t know how to manage companies or market products.”⁴

Israeli entrepreneurs had to think globally from the start, creating products for markets thousands of miles and several time zones away. But serious questions loomed: How to customize the product for the market? How to manufacture, market, and ultimately distribute the product to customers so far from the shores of the Mediterranean?

Before the introduction of venture capital in Israel, there were only two sources of funding. First, Israeli start- ups could