BUSINESSWEEK ONLINE: AUGUST 30, 1999 ISSUE

International -- Spotlight

A High-Tech Mecca on the Coast...Spawns a Startup of Another Stripe (int'l edition)

Drive 10 kilometers north of Tel Aviv along the main highway, and you'll come to some of the finest beaches in Israel. But they're a little hard to find amid the forest of huge construction cranes. And the cranes aren't building sybaritic hotels for sun worshipers. Rather, they're erecting temples to the gods of high technology. For this is Herzliya Pituach, a neighborhood of Herzliya and the epicenter of Israel's tech industry--otherwise known as the Silicon Coast. Here, global giants, veteran Israeli companies, and a welter of startups are nestled between the highway and the sea.

Israel may be stuck in a slow-growth slog, but you wouldn't know it from the Silicon Coast. While the overall economy has grown by 2% over the past three years, high tech is exploding by 15% to 20% a year. The sleek buildings--housing such global tech giants as Cisco Systems, 3Com, and Motorola--began to go up in the mid-1990s, and lately the rush has only intensified. Seven real estate projects, totaling 100,000 square meters, are due to come on the market in the next two years. ''Even with the huge amount of new construction, prices have remained stable,'' notes Snapir Erez, a top real estate broker in the area.

Besides the companies themselves, venture-capital and high-tech investment firms have been crowding in--over 20 in the past three years. ''It's by far the most convenient location,'' says Allan Barkat, general partner at Apax Partners & Co., a leading international venture-capital fund. His firm was the latest to make the move--in February--from Tel Aviv to a new six-story office block with superb views of the Mediterranean. The building is part of a 50,000-square-meter complex under construction. ''Around half of the over $2 billion in venture-capital money in Israel is managed out of Herzliya Pituach,'' says Barkat. The firms have spawned scores of startups, including such recent successes as Commtouch Software Ltd., which makes E-mail software and went public last month on Nasdaq, and Butterfly VSLI Ltd., which develops wireless communications for ships and was sold in January to Texas Instruments.

RUSH HOUR. One big factor in the move to Herzliya Pituach is price. At $16 per square meter, monthly rents are 30% to 40% lower than comparable space in Tel Aviv. But unlike towns farther afield, this city of 100,000 offers quick access to Tel Aviv. An added benefit is the easy commute. ''By moving here, I'm able to walk to work,'' says Oded Rose, general partner at Walden Israel, a subsidiary of San Francisco-based venture-capital firm Walden International Investment Group. While others may not be so lucky, most people who work in Herzliya Pituach do avoid the horrible Tel Aviv rush-hour traffic.

But the real lure is the short commute to money. ''A startup in Herzliya barely has to leave the door to get capital,'' says Orna Berry, chief scientist at the Industry & Trade Ministry. She likens the charged atmosphere to Silicon Valley, though it's unlikely the Silicon Coast will ever grow that large. On the other hand, in between meetings in Herzliya, you can always drop over to the beach.

Herzliya's boom has attracted dozens of eateries, ranging from McDonald's to fancy French and Italian restaurants. But if you're looking for the watering hole of the high-tech wheeler-dealers, head straight for Arcaffe. ''We've taken the marketing concept of Starbucks and married it with the quality of Italian coffee,'' says Sara Shemer, 49, the Israeli founder of Arcaffe.

Drawn by the bustling tech scene, Shemer, a mass communications expert, opened the cafe in 1995. She did so after learning the art of coffee and sandwich making in Italy. The place became so popular that she has opened four more in Israel. Shemer claims that at $1.8 million in average annual revenues each, her outlets bring in more than twice as much as the typical Starbucks.

Last year, the second Herzliya outlet opened only a block and a half away from the first. The decor features the latest in Italian high-tech industrial chic, with gleaming metal counters and concrete floors. In the works are at least 10 more Arcaffes in Israel. And Shemer even has plans for a New York branch. Can Silicon Valley be far behind?

By Neal Sandler in Herzliya





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A High-Tech Mecca on the Coast...Spawns a Startup of Another Stripe (int'l edition)

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