Dan Singer - Start-up Nation

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 apply to the Office of the Chief Scientist (OCS) for matching grants. These grants, however, didn’t provide anywhere near the amount of money start-ups actually needed, and as a result, most failed. A government report published in the late 1980s claimed that 60 percent of the technology companies deemed worthy of OCS grants were unable to raise follow-on capital to market their products. They may have created great products, but they couldn’t sell them. 5

Second, Israeli companies could apply for what are called BIRD grants. Created from $110 million put up by the U.S. and Israeli governments, the Binational Industrial Research and Development (BIRD) Foundation created an endowment to support U.S.-Israeli joint business ventures. BIRD gave modest grants of $500,000 to $1 million, infused over two to three years, and would recoup funds through small royalties earned from successful projects. 6

Ed Mlavsky became the executive director of BIRD when, in 1978, he made an offhand comment at a meeting of the U.S.-Israel Advisory Council on Industrial R&D. BIRD had been established two years earlier, but the foundation had not funded a single project. The council was meeting to choose a successor to run the foundation, and members were disappointed with the flock of candidates. Mlavsky, born in England but by now an American citizen, said, “Gentlemen, this is horrible; even I can do a better job than any of [the candidates].” The committee thought this was a great idea and tried to convince Mlavsky to quit his job as executive vice president of Tyco International and move his family to Israel. Mlavsky’s wife wasn’t Jewish and he didn’t have a strong emotional connection to Israel, but at the urging of Jordan Baruch, the U.S. assistant secretary of commerce for science and technology, Mlavsky went to Israel to, as he says, “interview for a job I did not want in a country in which I had no wish to live.” His wife was supportive; she had visited Israel in 1979 and fallen in love with the pioneering culture of the still young country. So Mlavsky took a sabbatical from Tyco, put their furniture in storage, and went to Israel. He would end up staying in the position for thirteen years, until he cofounded Gemini, one of Israel’s first government-funded venture capital firms. Part of what appealed to Mlavsky was an openness in Israel to experiment with any idea, which he didn’t fully appreciate until he was on the ground and immersed in Israeli life.

Mlavsky called BIRD a kind of “dating service,” because he and his team played matchmaker between an Israeli company with a technology and an American company that could market and distribute the product in the United States. Not only that, but this matchmaker would subsidize the cost of the date.

Most of the U.S. tech companies BIRD pursued had limited R&D budgets. Because they were midsized to large publicly traded companies, they were skittish about dipping into the quarterly revenues to pay for costly research.

Mlavsky recalls, “We came to [U.S. companies] and said, ‘There is this place called Israel, which you may or may not have heard of. We can put you in touch with smart, creative, and well-trained engineers there. You don’t have to pay to hire them, relocate them, and you don’t have to worry about what happens after the project is over. We will not only introduce you to such a group—we’ll give you half the money for your part of the project and half the money the Israelis will need for their part.”

To date, BIRD has invested over $250 million in 780 projects, which has resulted in $8 billion in direct and indirect sales. 7

The impact of the BIRD program far surpassed mere revenues: it helped teach burgeoning Israeli tech companies how to do business in the United States. The companies worked closely with their American partners. Many rented office space in the United States and sent employees overseas, where they could learn about the market and their customers.

In the absence of equity financing, BIRD provided a shortcut to American markets. Even when the venture failed, there was tremendous learning about how to create products designed for markets, as opposed to simply developing technologies.

By 1992, nearly 60 percent of the Israeli companies that went public on the New York Stock Exchange and 75 percent of those listed on the NASDAQ had been supported by BIRD. 8American venture capitalists and investors were beginning to take notice. And yet 74 percent of high-tech exports out of Israel were generated by just 4 percent of high-tech companies. 9The benefits were not being widely dispersed. If new tech companies couldn’t get BIRD or government grants, they had to master the art of “bootstrapping”: using personal resources, connections, or any other means to cobble together funds.

Jon Medved tried bootstrapping when he went door-to-door to sell his father’s optical transceivers in 1982. At the time, the company consisted of just ten people working out of an actual garage, building optical transmitters and receivers. Medved admitted that he had not taken a single math or physics class in college and knew nothing about the nuances of the business that his father had put together. He also didn’t know Hebrew.

“I would speak before groups of Israeli engineers who knew nothing about fiber,” Medved recalls, “and give them a lecture about fiber optics. If they ever asked a tough technical question, I’d hide behind their Hebrew—‘I can’t understand you, sorry!’ ” 10Medved did write a business plan for the company, and he developed revenue projections on the first spreadsheet software available on his suitcase-sized computer; but, like Orna Berry, he found fund-raising to be impossible.

Chief scientist Erlich became fixated on ways to overcome the funding challenges facing entrepreneurs. But there was some opposition: “Don’t waste your time and money on new, small companies. They’re a losing proposition,” detractors told him. 11Instead, government economists called for increased funding and partnerships between Israel and the big multinational companies, which at this point were employing thousands of Israelis.

There was also another challenge bearing down on Israel at the time: how to deal with the nearly one million Soviet Jewish immigrants beginning to flood the country. The government believed that to absorb these immigrants, the Israeli economy would have to create half a million new jobs. With one out of every three Soviet immigrants a scientist, engineer, or technician, Israel’s high-tech sector seemed to be the best solution. But existing R&D centers alone would never be able to handle that many new employees.