Israeli Tech Sends Mixed Messages

Many of the country's tech startups have moved to Silicon Valley or set up outposts there. Now they need to innovate and take risks at home

by Sarah Lacy

I got conflicting signals from the doctor I visited during a recent trip to Israel. I had come down with bronchitis while abroad and sought a physician to make sure I could travel home safely. He pronounced me "crazy" for wanting to fly while still unwell, but when I threw a fit, he conceded, "There is no catastrophe! No one is dying!" he said. That was the opening I needed, and I made my flight.

Dr. Schmule's prognosis was hardly the only set of mixed messages I took away from my travels through a country that's rich with thousands of years of history, but celebrating only 60 years of nationhood. The contradictions are especially pronounced in Israel's tech corridor, which shares Silicon Valley's entrepreneurial spirit and innovative drive and has produced more NASDAQ-listed companies than any other country outside the U.S.—despite Israel's small domestic market, comparative dearth of venture cash, and periods of political and religious strife.

Little wonder many Israeli startups have long felt compelled to relocate to, or build substantial outposts in, Silicon Valley. Case in point: Check Point Software Technologies (BusinessWeek.com, 5/13/08) (CHKP), the company that invented the firewall and rose to stardom and a $20 billion valuation in the late 1990s. Check Point's soft-spoken yet brusque founder Gil Schwed earned the moniker "Gil Gates." Like many Israeli companies in the 1990s, Check Point set up dual headquarters, one of them in Silicon Valley. Sure, you can start a tech company anywhere, but if you want it take off, you need a beachhead on the Peninsula—right?

Hot Debate in Tech

That may have been the case in the past, but not so now, Schwed says. Some of his arguments will sound familiar: Silicon Valley has become an echo chamber, where bloggers parrot each other's ideas and innovators mimic their peers' achievements. There's too much venture capital chasing too few smart, innovative ideas. There's too much competition for talent.

Besides, young Israeli entrepreneurs should stay put and help transform their homeland from a Silicon Valley outpost into a tech hub in its own right, Schwed argues. For all Israel's homegrown tech cred, drive around parts of Tel Aviv or San Francisco's sister city, Haifa, and you'll see a lot of familiar names on buildings: Google (GOOG), Yahoo (YHOO), Applied Materials (AMAT), Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO). Some companies commonly referred to as "Israeli"—take chipmaker Zoran, for instance—are headquartered in the Valley. Israel has a tech scene many places would die for, but can it ever become more than Silicon Valley's farm team? Should it?