Israeli Tech Sends Mixed Messages

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It's one thing for Schwed to urge entrepreneurs to stay at home. He's already made it big. But what of the nation's newbies? The topic was hotly debated among 20 or so entrepreneurs and bloggers one night over dinner in Tel Aviv. There's no denying the farm-team arrangement has benefited Israel greatly. The biggest hits have had their headquarters in Silicon Valley, and that the Valley's ability to steer a company to a NASDAQ IPO has made many Israeli families very rich.

Better At Improving Than Innovating?

Many around the table agreed it's possible to build a company in Israel that could end up being acquired for a tidy sum. Two of the attendees spoke from personal experience. Yaniv Golan sold social search company Yedda to Time Warner's (TWX) AOL in November and Alex Sirota sold Foxy Tunes to Yahoo in February, each for undisclosed though no doubt respectable amounts of money.

But several entrepreneurs have bigger ambitions than an acquisition. And while many concur you can find good technical talent and gutsy risk takers in Israel, they also contend you can't build a huge, billion-dollar standalone company—particularly one focused on the Web. I heard many pitches in Israel. Many went a lot like this: "Meet [name goes here]. His company is just like [name of big U.S. Web 2.0 startup], but better." The implication, according to some, is that Israeli entrepreneurs aren't as adept at innovating as they are at ripping off existing Web ideas and doing them better.

Others argued that in cases where Israeli Web entrepreneurs moved first, they were quickly outpaced by sexier U.S. counterparts who had better designers, marketers, and user interface experts. "You're never going to see a Daniel Burka come out of Israel, because we can't do design," says Roi Carthy, an Israeli startup consultant, investor, and contributor to TechCrunch. He was referring to the main designer of Digg and Pownce.

U.S. Venture Capital Investment Still Down

Unlike a lot of 1990s founders who handed their companies over to VCs and Valley veterans, this younger generation of Israeli entrepreneurs wants to be at the helm when their companies go public. But these youngsters are also practical enough to know they need to come to the Valley for that to happen.

Consider U.S. venture capital investment in Israel. Investment fell off a cliff in 2000 and 2001 and since then has been mired in the $1.4 billion range, according to Dow Jones/VentureSource. Only about 200 Israeli companies a year raise money from the U.S., a smaller number than from the Britain, France, and China. Meanwhile, the big tech bellwethers are increasingly building new R&D outposts in areas such as India and Eastern Europe that are rich with engineering talent—but cheaper.

In the 1990s Israel proved it had chutzpah and a willingness to take risk. But if it wants to have Web cred, it needs to deliver good ideas—that it can use in a tech world that's more about creativity and even media than sheer mind-boggling coding ability.

Israel at a Turning Point

Just ask the people at Jerusalem Venture Partners, one of the nation's oldest and most successful venture firms. It's incubating companies focused on media and content, seeking to augment Israeli's entrepreneurial spirit with its unique storytelling culture and creativity. The firm is even using highly technical animation software to produce a film called The Wild Bunch about a group of flowers that holds off evil weeds. Granted, many Valley firms would shy away from building an animation studio and financing a film, but the concept is undeniably Israeli—and that's what makes it such a good idea.

Indeed, Israel's startup community is at a turning point. If Schwed's wish is going to come true, more Israeli startups will need to take comparably 'wild' risks. They'll need to generate big ideas and innovate creatively, and maybe then Silicon Wadi will move beyond being the Valley's most reliable outpost.

Sarah Lacy has been a business reporter for 10 years, most recently covering technology for BusinessWeek. Her book, Once You're Lucky, Twice You're Good: The Rebirth of Silicon Valley and the Rise of Web 2.0, will be published by Gotham Books in May, 2008. She is also Silicon Valley host of Yahoo Finance's Tech Ticker.