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To read more, check out the first part of the interview, Venture Capitalist Chemi Peres: Opening Israeli Ventures to New Markets

Knowledge@Wharton: When you started Pitango some years ago, you were running the Mofet Israel Technology Fund. What led you to start Pitango? What have been the successes and failures?

Peres: I was working in a software company. My responsibility was to address the issues of marketing and business development. I was being approached by young entrepreneurs. Many of them used to work for multinationals and had decided to leave their companies and start their own businesses. They came to us [because] we were a software company with resources and lots of people. They wanted us to help them, to fund them, to do this, to do that. I always told them, “Look, we’re an operating company. We either buy the company, or we license your product. But we’re not going to give you money for a 10% or 20% [stake] in your company and then cope with all the problems of managing your company. That is not what we do.”

I started to see lots of brilliant ideas. That was in the early 1990s. At the same time, we started to see the emergence of software. The barrier to start a company, cost-wise, reduced dramatically. The notion was that maybe we were on the verge of a new era, where people would be able to raise small amounts of money and start a software company, and do their own business.

When I looked around, I saw these people did not have any way to fund their ideas. Banks would not give them money and financial institutions don’t do that. Operating companies did not want to invest in minority stakes.

So I went to the CEO of our company. And I said, “Look. I’m being approached by different people who have great ideas. We may want to have some of those products. But this is not the type of company that should run these projects, because these are different products; we are doing our thing, and they are doing other things. So, why don’t we build a vehicle that will help those companies finance their dreams, their ideas? If something is successful, we as a company can either buy the company, or we can benefit from it in a way that will not distract us from our main business.”

Then we heard that the Israeli government was coming out with two programs. The first was called Yosma, which in Hebrew means “initiative”. Basically, the Israeli government set up Yosma with $100 million and a mission statement to set up venture funds that would be $20 million in size. The government would put $8 million, or 40%, into each company. Investors would get the opportunity to take the risk. But they would also be given the opportunity to buy the government out if the fund succeeded. So there was a privatization mechanism built in.

The second program involved the government’s insurance arm Inbal. This was the other side of venture capital. The government said, if you want to create a venture fund, you can do it on the Tel Aviv stock market. You can raise money on the Tel Aviv market. We will give the investors, the shareholders, a downside [protection] mechanism. If you buy a share at $1, you can sell it back to the government for $0.80 at any time in the next five years.

We picked the Inbal road. In order to take a company public on the Tel Aviv stock exchange, you needed to have $1 million in equity. The CEO of the company agreed to give me around $500,000 and expected me to get other people to invest. I got a few business people, individuals and an investment bank that thought it was a great idea because it would give them a pipeline to take companies public. To make a long story short, I took that $1 million and went to the stock market. In January 1993, I managed to float the company on the Tel Aviv Stock Exchange and raise another $6 million. And I started to invest.

My partner who [later] started Pitango with me was running a fund in the Yosma program. He created a $20 million fund. We started to co-invest, and became friends. Our initial investments were quite exciting. We were very successful. Our first investment was in a software company that was addressing issues of running software on networks. At the time, you used to run software on PCs, but then the network appeared. In many offices, you started to have problems that were created by the fact that you were part of a network. It was a company that Intel acquired. It was our first profitable investment.

The second one — VocalTec — was the first company in the world to do voice-over IP. Later on, we took it public on the New York Stock Exchange. Almost every company that we invested in was very successful. The challenge for me was to run Mofet as a public company. Public shareholders want quarterly reviews and reports. They want complete transparency. And start-up companies experience crises all the time. You cannot be completely transparent; if you are, all the employees will run away and all the investors will run away.

I thought it was time to understand what the venture capital business was all about. I took a plane and flew to Silicon Valley. I met the VC community. I understood how it works. Then, when I came back, I decided that running a venture fund as a public company was not a good idea. You need to do it as a partnership. It is also a long-term business. Besides, you need size; you need to have more human and capital resources in order to support a company to growth.

In 1996, I picked up the phone. I looked at all the funds that were created through the Yosma and the Inbal programs. And there was this guy Rami [Pitando cofounder Rami Kailash]. And I thought, “He’s a good investor and we have good chemistry.” So I went to him and said, “Look, I’m leaving Mofet. The other shareholders did not agree to sell me their shares and take it private. So, I had to sell out. I’m going to start a venture fund in a Silicon Valley way. Let’s do it together.” And he said, “What do you have in mind?” So I said, “I intend to raise the first fund without government support. I want to raise more than $100 million. With $100 million, you can really run a business.”

And he said, “We’re thinking of raising our second fund, maybe $30 million.” I said, “If we join forces, based on our track record and the group of people around us, we can get $100 million. If we cannot, nobody in Israel can do it.” And he said, “OK. I like the idea.” We joined forces. We raised our first fund, which was $125 million. It was the first fund to raise more than $100 million.

Ever since, every three years, we have had a wave of fundraising. For the next three years, you build your portfolio and continue to monitor the portfolio. The first wave was in 1993. The second was in 1996-1997. The third was 1999-2000. Then, due to the crisis, it took a little bit longer — to 2004. And then 2005-2008. Now we’re doing our sixth fund, the sixth wave. Slowly, there will be a shift; there will not be waves. We are at the end of the wave system.

We raised $1.6 billion altogether. We’ve invested in more than 180 companies. The lesson we learned is that you really need to focus on great entrepreneurs. First and foremost, it is the people you invest in. Any business plan that is presented to you will change route, because the world is changing all the time. You need somebody who can adapt to changes, who can be a leader, who can bring the right people and attract the right investors.

Knowledge@Wharton: What kind of leadership qualities do you look for?

Peres: Persistency. Vision. An open mind. And somebody ready to do everything to make the company successful. Not opportunistic. Somebody who has a long-term view and is willing to take the risk. Ready to learn and keeps learning all the time. These are very unique people. We like domain experts. In many cases, they become evangelists. We usually invest in companies that are creating new categories that are big enough to create the critical mass before they start to expand the company. We are looking for people who are committed, honest and the kind who can grow with the company. That is, of course, something that no one can predict. We try to invest with very good people, first and foremost.

Knowledge@Wharton: Because we’re talking about leadership, let me end with one final question. What is the most important leadership lesson that you learned from your father and your mother?

Peres: My father is a great person to follow. One of the first lessons is something he told me which has guided me throughout my life. He said, “There are no desperate situations, only desperate people.” That was one thing I took with me to my military service, to the academy, and the business world. Secondly, he told me that if you want to achieve something big, you have to cross a desert. Nothing is simple. So you need to prepare yourself to cross a long desert. You don’t know where it ends. You don’t know when it ends.

Thirdly, you need to be a part of a team and not ahead of the team. You walk the way that others will walk with you. You do not try to make them feel you are the only one who knows where to go and what to do.

In Pitango, we do that by saying we are supporting the best people in Israel, creating their vision. If there is a success, it’s their success, not ours. It’s not because we knew what to do and we told them what to do. What we do is really important. It’s not about making money from this company. It’s about changing the culture of Israel, and allowing entrepreneurs to build big dreams.

My mother was completely different. From her, I learned to be modest. My mother used to say that when a person dies and is buried, you will find nothing in his pockets. At the end of the day, everything you do is left here. Try to help people; get the best out of people. Do not go after materialistic things, but go after something that is meaningful.

The thing is that my parents never taught me. They just did their things. And I learned.

Additional Reading:
Israeli Venture Capital: Between a Rock and a Hard Place
Israel’s PicScout: Where Risk-taking and Entrepreneurial Drive Are Part of the DNA
To Get Venture Capital Funding, Know the Risks and Tell a Good Story

The post Venture Capitalist Chemi Peres: Building a Vehicle to Finance Entrepreneurial Dreams appeared first on Israel Knowledge@Wharton.

Israel has acquired a reputation as a “start-up nation” because of its large number of innovative entrepreneurs, and venture capitalist Nechemia “Chemi” Peres has been involved in funding them from the very start. When the Israeli government rolled out its initial initiatives, Peres was one of the first to take advantage of them, launching the Mofet Israel Technology Fund, a venture capital endeavor that traded on the Tel Aviv Stock Exchange. Today, he is co-founder and managing general partner of Pitango Venture Capital. The nature of the game is changing, he told Israel Knowledge@Wharton in an interview conducted late last year, and the country needs to diversify both its sources of funding and its markets.

The first part of the edited transcript of the conversation appears below. To read the rest of the interview, check out part two, Venture Capitalist Chemi Peres: Building a Vehicle to Finance Entrepreneurial Dreams.

Knowledge@Wharton: What are some of the key issues facing the Israeli economy?

Chemi Peres: In 2012, Israel shifted its economy from an emerging market to a developed economy. During that year, Israel was accepted as a member of the [Organisation of Economic Co-operation and Development] OECD and our GDP per capita crossed $30,000. I think the challenges are related to how you grow an economy in a country that has very small local and regional markets. It needs to focus on global markets. So the challenge is to build an economy that is based on exports. Until recently, we did not have a lot of natural resources. We have now found some [natural] gas in the sea, which becomes very significant. But it’s still an economy that is not based on natural resources. The issue is how you build an economy that needs to compete on a global basis. This [also creates] challenges for the educational system: How do you build a state [focused on] science and technology and continue the growth when you also have a limited number of people who can be employed in the high-tech sector?

If you look at the high-tech sector in Israel, it employs roughly 10% of the workforce. Half are working for multinationals that set up offices or R&D centers in Israel. They try to buy more startups in order to grow the critical mass and focus on major challenges in innovation. Lots of multinationals are really focused on deep innovation in Israel. The other half of the high-tech workforce is working in start-up companies. The ability of these companies to scale locally is limited.

So the second challenge will be to scale some of these companies and you need to recruit a lot of people quickly [to do that]. I think that what we’ve seen in the past 10-15 years is that the number of customers who are globally buying products in the technology sector has grown from one billion to two billion. So the opportunity to build a bigger company today as opposed to 20 years ago is changing dramatically. Today, we are also on an accelerated mode, because more people will join the middle classes and increase consumption of technology products. But the challenge is to overcome competition, to be able to focus on the right pockets of growth, and maneuver and scale through different cultures and different geographical locations.

I want to add another challenge that I’m worried about — the fact that we have natural resources. Once you can benefit from natural resources, you become lazy. I think what keeps Israel so vibrant is the fact that we don’t have natural resources. We have, therefore, to focus on innovation. I hope that that atmosphere — the culture of the start-up nation — will keep going.

Knowledge@Wharton: From what you have described, there are two very interesting forces at work in the country: The first is the need for Israeli companies to go global relatively early, because of the absence of a domestic market. This implies the dependence of the Israel economy on the export market. But the primary markets of Europe and the U.S. are both slowing down or have already slowed. How do you think this is going to affect the prospects for Israeli companies? What strategies do you see them adopting to adapt?

Peres: The strategy is basically to be open to new markets and to develop the same kind of relationships [with other nations] at the strategic level that we have had with the U.S. or Europe. We have to develop that in the Asia-Pacific region, Latin America and other areas. And the venture capital [VC] community and the entrepreneur community are investing more time and effort today in going to China, India, Russia, Brazil and other places. At the end of the day, when you start a company in Israel and you set it up globally, it doesn’t really matter if you go to the airport and take a flight to New York or San Francisco or Beijing or New Delhi.

You still have to build the kind of cultural bridges that we have so easily done in the U.S. and Europe. Israeli society is based on European immigration and the U.S. has always been a target for our educational system and job fulfillment. So Israel is much more geared toward the Western world. But I think that we’re very quick to adapt. As VCs, this is something that we do. In our previous funds, 80% of our investors were U.S.; 20% were European. In the new funds, we’re raising money in India, China, Russia, Korea and Brazil. We try to address those global networks in order to help our companies grow into those areas.

At board meetings in companies like Pitango, 10 years ago you would hear the pitch analyzing the sales of the company by dividing the world between the U.S. and the rest of the world. Today, the sales analysis is much more globally oriented.

I think that more than other countries that have a strong local market, we are oriented toward moving and changing direction to suit different pockets of growth in different geographies. And Israelis are trained to travel and to adapt to new cultures and new environments very quickly.

We’re also a society of immigrants. We never had a deep tradition that we had to break. I think what is important in the new age is your ability to adapt to a change very quickly. Israelis are quite good at that. It gives us some kind of advantage when we talk about addressing new markets and new cultures.

Knowledge@Wharton: When you talk about the sources of funding becoming more global, where is the money coming from? How is it changing the kinds of products and services that Israeli companies can provide to the global market?

Peres: A start-up company depends on venture money and angels. At some point in time, they need to start depending on customers. When the stock market was hot and strategic global players were inquisitive, funding came either from a global player buying a company or a NASDAQ offering. But these days, companies need to build their funding upon customers. They need to be focused on the kind of business model they will develop and the need in the market. But they still need the initial funding from the VCs.

What has happened is that the IPO opportunity has gone away. But global companies are still inquisitive. In the venture market, we are seeing more funding done in the early stage, but also in the later stage. In our portfolio companies today, we need to build a longer runway if we want the company to get to an IPO at some point in time. There is a balance between how we fund them as VCs and how they manage to sell products and get money from customers.

If you want to focus on the way venture funds are financing companies, I think the sources of funding are more diversified today. When we started to build Pitango 20 years ago, we were targeting financial institutions, endowment funds — people who were supposed to have stability in their investment. But as we saw the subprime crisis and then the global financial crisis, we understood that nobody is immune. We, therefore, decided to address the funding of our funds the same way that we address our investments.

Early in the process, Pitango decided to be diversified by sectors and by stages of investing in portfolio companies. We adopt the same approach today when we raise money. So we diversify ourselves by geography. We have for the first time investors from Korea, India, China, Russia and, hopefully, from Brazil. At the same time, we decided to also diversify the type of investors, because we no longer want to be completely dependent on financial institutions; they may suffer from lots of problems. We raise money from high net-worth individuals, from family offices, from endowments, and also from corporate sources — whoever is interested in being part of the technology game.

One of the other challenges I have mentioned: Israel will never be a strategic place to grow revenues on a global scale. You’ll go first to India or China. So how do we attract investors? We manage to attract them by deep innovation.

The second challenge is the fact that we are a local market that is very small and barely a regional market. What we’re trying to do today is break through and create a regional market. If you start a company in Israel, you have to bridge immediately to global markets. If you start a company in Silicon Valley, you are in a local, regional and global market without moving. We want to get to that point. When we do that, we’ll be very, very competitive on a global basis.

Knowledge@Wharton: How do you get to that?

Peres: One of the things we did is look at the region and look at our society. What we discovered is that in order to grow our economy, to strengthen our local market and the regional market, we need to do two different things. To strengthen our local market, we need to make sure that the entire society is participating in the start-up nation game. The population in Israel is very small — 7.8 million altogether and 1.2 million [Israeli citizens that] live outside Israel. Non-Jewish minorities account for 1.6 million. And there are a significant number of ultra-religious people who do not participate in the workforce.

We decided to address that issue by opening the strategy of Pitango saying that we’re not only investing in Israel, we are investing in Israelis. So we address the 1.2 million people that live outside Israel, in Silicon Valley and New York, and we say, “If you want to do something in innovation, we would be a partner.”

The second thing we started almost three years ago was to address the non-Jewish community in Israel. We created a new fund completely focused on investing in the Israel-Arab minority. We’re talking about 1.6 million people. When we looked at that market, we saw there were no funds, activities and limited entrepreneurial activity. There are no exits in this market, no M&As, no IPOs, no nothing. Then we looked at how our industry needs to grow, because in the technology sector you can create jobs, but you don’t have enough people to fill those jobs. In the early 1990s, we managed to do that by absorbing one million newcomers, mainly from Russia — highly-skilled, highly-trained people who were absorbed in the high-tech society and contributed to growing the GDP to $30,000 per capita. But if you want to go to $40,000, where do you bring the people from?

We said we have 1.6 million people, and many of them are highly educated; they are highly motivated. A lot of them are young. So we decided to set up a fund that would focus on the young generation within the Arab community in Israel. Al Bawader is the first fund that is operating in this area. We did it together with the Israeli government. They matched our funding. We managed to raise $50 million. We have already concluded seven investments within the Israeli-Arab community. We want to be the first to bring a company for an IPO and the first to be acquired by a strategic partner. We believe that by doing this we will be able to stimulate that community.

This community, which is about 23% of the population, generates between 7% and 8% of our GDP. We [need to] grow that GDP, raise the standard of living and create jobs. We’ve seen the Arab Spring; if you neglect it for a second, you will have problems.

The Middle East is the youngest region in the world. The average age is below 26. It has one big advantage: 350 million Arab speakers. There are an additional 60 million living in different places. If you think about the Arab Spring, there is a major opportunity we can leverage economically in Israel. I’m talking about the Arab Internet or Arabic-speaking Internet market, which we believe is coming up and will be a great opportunity. This is where the world needs to invest today.

There is a completely aligned interest — global interest — to start growing the Middle East. I think the Internet is the way to do it. It will help the young generation to create jobs. It will bring knowledge. It will bring education. It will bring communication. It will bring efficiency into the market. I think that, if the Arab world, with the support of global companies, creates an Arab-speaking Internet market, it will contribute to the growth of the region.

At the end of the day, one of the challenges for Israel economically is to integrate into the region. Here you have a local play, which is also a regional play and potentially a global play. I think Israel has a great advantage because it is a start-up nation that has lots of connections in the world and lots of entrepreneurs who have started successful companies. If we take the Arab community in Israel and have Arab and Jewish entrepreneurs working together, we can contribute to the growth of the Arab-speaking Internet market and the growth of the economy in the region.

I think this is a unique opportunity. The challenge is to draw the attention of the business community to a market opportunity that has not been in existence. That’s part of what we are trying to do at Pitango. We see lots of entrepreneurs, lots of businesses. We are starting to see our first Arabic companies emerging on the Internet. We’re now building an accelerator for early-stage companies to get the young entrepreneurs in the Arab community in Israel connected to young Jewish entrepreneurs. Together, they can build the best Internet companies in this region.

Knowledge@Wharton: Can you give me any examples of the investments you’ve made?

Peres: I won’t mention names because it’s always sensitive. Today, there are 250,000 Arabic websites. Let’s say that about 85 million people are connected to the Internet in the Arab community. So the ratio between the number of websites and the number of users is actually one website for every 310 people. If you look at the U.S., the average is one website for every two or three people. If you look at the global ratio, it’s one website for every 10 users. That means that the content gap in the Arab world is about seven million Arabic websites.

We know that they are eager to have Arabic websites as opposed to English websites. So there’s a big opportunity. And we see that everything that works in the Western world is starting to happen in the Arabic world, whether it’s e-commerce, shopping, travel…. In Al Bawader, we invested in a company that is bringing health care services. We have a company that is starting to sell electronic books in Arabic. And we have companies that are working in media space. We have a company that is doing travel. These are companies that have great Arabic entrepreneurs, mentored and supported by Israeli entrepreneurs, working shoulder to shoulder. We think the opportunity is just amazing.

The Arabic language is the fastest-growing language today on the Internet. The potential of this market is bigger than the Russian market and the Spanish-speaking market. It’s unbelievable. There’s a huge opportunity. What we need to do is get the coalition of the multinationals, as well as the business community in Israel and in the region, to focus on this market.

Knowledge@Wharton: You referred to the challenges Israel faces within the region. What are some of the barriers that you have faced in trying to implement this strategy? How are you overcoming those obstacles?

Peres: The first barrier was the perceived risk of investing in Israel, a troubled society that does not have peace in the neighborhood. To address that, we said: “Look, it’s not Israel’s economy; it’s a global economy. We are selling our products around the world. When our companies are raising money, they’re raising money around the world. When they go public, they go public around the world. When they are being acquired, they are acquired by global strategic players. All we have in Israel is the innovation.” That’s one thing.

The second thing we are saying is that there’s no safe place around the world. My best example is that we were once contemplating holding one of our meetings in New York. It was scheduled for October 2001. We cancelled it because of September 11. It was the first time we cancelled a limited partners meeting.

We had one of our companies headquartered in the World Trade Center. The reason the company was saved is that they did not obey any of the advice that was given at the time of the attack — stay where you are and do not move. The Israelis there decided to evacuate immediately. The company was up and running the following day. So we say that there is no safe place today from terrorism. The world has moved from wars to threats and risks. And threats and risks are everywhere.

Third, we say, look at what’s happening in Israel. We have 300 R&D centers run by major global players. Israel has been, interestingly enough, the first destination for many people who decided to go global. When Warren Buffett did his first transaction outside the U.S., it was the purchase of 80% of a company called Iscar, close to [Israel's] border with Lebanon. He did the transaction at a time we had a dispute on the border. He paid $4 billion. Buffett said that if you are looking for oil and gas in Israel (at the time, he didn’t know that we would find gas in the sea), you just go to the Middle East but don’t stop in Israel. However, if you are looking for innovation and you reach Israel, you don’t need to go any further.

The second example is the VC community. If you look at the VC community in Silicon Valley, they have never invested in companies beyond a 30-minute drive to a board meeting. They actually thought that the most exciting global sources of innovation were Sunnyvale, San Mateo, Palo Alto and Menlo Park [all in California]. But today, if you look just from this window to the next building, you will see Sequoia, Benchmark and Greylock. All of them set up shop in Israel before they went to India and China. They thought there is something here that’s worth exploring.

The third example is one of our portfolio companies that was acquired by Apple. It was the first time Apple acquired a non-U.S. company and the first time they set up an R&D center outside Mountain View, Calif. A lot of people are doing their first globalization through Israel. I think that people understand that this is a vibrant democracy. This is a start-up nation. It’s not just a nation of start-ups; it’s a nation that by itself is a start-up. It started and succeeded against all odds. We had wars before we had a country. So I think that is the way to mitigate the risk: When people come and visit Israel, they go back and tell the story of how it is here, how it feels here. Others understand that there are a lot of risks perceived, but they’re not real.

I think another thing that helps us is the move from television to the Internet. In television, you switch on CNN or one of the channels and here is a terrorist attack which took place at some place. Maybe a few people were killed. It is broadcasted to every home. But if you have the Internet, you can choose where you go and what kind of content you consume. Then you shift from the broadcasting to learning and understanding. Television was very bad for Israel, because every attack was multiplied and augmented dramatically. But Israel is quite safe. We’re a powerful country. We’re a powerful democracy. Israel is here to stay. Once people visit here, and they start doing business with the Israelis, they understand we are a technology economy, a global play. The economy in Israel has grown over years, based on its high-tech engine. And that high-tech engine is continuing to grow more vibrantly than ever.

Knowledge@Wharton: You’ve referred a couple of times to the game-changing nature of the discovery of natural gas.

Peres: Right.

Knowledge@Wharton: What kind of investment opportunity and risks for global investors do you think that creates?

Peres: This does not create a risk; it creates an opportunity for Israel. First, lots of countries around the world are looking for energy. They are looking for international strategic collaborations with Israel. So, that’s an opportunity for Israel. I’m saying that every dollar that is invested in Israel, every office that is opened by a multinational, and every deal that is closed with a multinational or with a state strengthens the Israeli position. It makes the country more secure and safe.

Secondly, I think that what we do today in Israel on resources — energy supply and water supply — can support our neighboring region. The Middle East suffers from water and energy problems. Israel can provide some of these resources. If the government plays it right, we’ll increase our security by having more international players buying an interest in this natural resource. We will also be able to distribute it in the region and help our neighbors. We can build the kind of economic relationship that enhances security. If the high-tech sector plays the regional game with the Israeli-Arab community, we can build a much stronger economy in the Middle East. That will reduce the tension and help the Arab Spring really shift to the right direction. Today, with the age of the Internet, everything has opened up and people are highly aware of what’s going on. Leaders cannot play the same role they played before. They cannot hide from the public. Everyone is scrutinized. You can see every bit of what he or she does. If there is no message for the young generation and for the future, they will be thrown out.

I think we’re getting into a very promising time with regards to where the Middle East can head. We have all the ingredients. The only thing we need to do is be proactive and start investing. I think that the economy is the bridge — the tool to change the region. I think leaders are led; they do not lead. Reality forces itself on countries. People understand that the world is starting to move so fast that, if you stay behind, you put your country at risk. So you have to play the game and you have to be part of the global trends.

Knowledge@Wharton: Following the Arab Spring, do you think that there will be more cross-border capital flows within the region?

Peres: We think that Israeli technology in different areas — agriculture, water, energy, Internet, whatever — can be a significant addition to the Middle East. There are already investors from different countries. There is a lot being done under the radar screen, major projects between Israelis and Arabs. But much more can be done. We can contribute to health care, food security, energy….

Take, as an example, the Nile River. The Nile crosses 11 countries. Among them is Egypt, which is the largest Arab state in the region. Since they signed the Nile Basin Agreement in the early 1990s, the populations have grown dramatically and the allocations of the Nile have changed dramatically. Egypt is at the end of the Nile. Now, the Nile loses a lot of water because of different problems and the fact that it flows a long distance. There is technology today that can bring more water to everyone. Instead of having all the countries fight over the water allocation, let’s use technology and share more water in the region.

Israel can play a major role in these kinds of things, because we have lots of technologies in water that can actually provide more supply and mitigate scarcity. If there is a risk in the Middle East, it’s definitely around the Nile, because Egypt is unwilling to change the agreement and Ethiopia is trying to get more water. They have grown from two million to 20 million [people]. The game is changing. And technology is the way to deal with it. Israel has a lot to offer, in agriculture, in water, in all those areas.

Additional Reading:
Globalization of Technology Ventures: Lessons from Israel
How Will Egypt’s Political Upheaval Impact Israel? The View from Jerusalem
Middle East: When Peace Comes, Revival and Reconstruction Will Follow

The post Venture Capitalist Chemi Peres: Opening Israeli Ventures to New Markets appeared first on Israel Knowledge@Wharton.

Jonathan Medved is one of Israel’s leading high-tech venture capitalists.

What excites him today is that Israel has this “hoard of 10,000 successful entrepreneurs” — a fertile catchment to tap for new ventures. At the same time, says Medved in this interview with Israel Knowledge@Wharton, tomorrow’s successes will be those that marry global finance and markets.

An edited transcript of the conversation appears below.

Knowledge@Wharton: What are some of the strengths and the potential weaknesses of the Israeli economy?

Jon Medved: I think Israel has been lucky for a bunch of reasons. No. 1 is that our banks didn’t fail; they were prevented by regulation from doing a couple of things that turned out to be, in retrospect, bad things to do. For example, leverage: in the private housing market, you can never walk in and buy a house with a 100% mortgage. Here it was 50% of appraised value, which means way below 50% of real value. Our real estate market is probably still overheated. But it didn’t cause any banking crisis.

Knowledge@Wharton: What’s the solution to the real estate situation?

Medved: Here in this country?

Knowledge@Wharton: Yes.

Medved: Releasing some land by the government. The government controls 90% of the land. As the government eases up on that, it will bring prices down. The issue is that 70% of Israelis own their own homes. We have one of the highest homeowner percentages in the world, more than America and far more than countries like Germany. So you have to be very careful. You want to enable young people to get into the market and calm it down. But you don’t want to make everyone [figuratively] poor at once. The government has been building programs to enable younger people to get special mortgage privileges, and people are getting into the market.

But we didn’t have a banking crisis around mortgage issues here. And our banks were not very active in terms of buying these newfangled debt instruments that were packaged and sold all around the world. [Israeli financial institutions] were simply either not that innovative at the banking level, or prevented from being so. Our banks are very strong and very profitable.

In general, the discipline in terms of the budgetary process has also been rather good here. The problem now is that because we had a little war and there’s increasing social protest in the country — demanding more equality, more social spending — the budget is at risk. There has been talk about the need to cut as much as 15 million shekels ($4 billion) out of the budget. This is not easy for a small country like Israel.

Lately, our taxes have gone up. We had a very strong record of consistently lowering taxes. But now they’ve raised capital gains from 20% to 25%. And I guess we’re going to see some additional taxes.

Knowledge@Wharton: If you look at the size of the Israel economy, it’s relatively small compared to the larger economies. As a result, it is to a large extent dependent on exports.

Medved: Absolutely.

Knowledge@Wharton: The biggest markets — 70% — are the U.S. and Europe.

Medved: That’s correct.

Knowledge@Wharton: What potential risks does the Israeli economy face because of problems in the U.S. and Europe?

Medved: We are very exposed to both the U.S. and Europe. Luckily, the things we export are those that people need. They are not luxury or discretionary items. They’re basically technology. Unless the technology sector completely tanks worldwide, I think some of these slowdowns will be mitigated because of our focus.

If you travel to Silicon Valley today, it seems that the economy there is a separate economy from the rest of the U.S. There is not a lot of unemployment there. Housing prices never really dropped at all.

Europe is a huge trading partner for us. The problems in Europe are a little scary. But, if you look at the data, Israeli exports to the U.K. went up over 50% from 2010 to 2011. So it was a particularly good year for us in the face of a slowdown in Europe.

Technology represents well over 50% of our total exports. We will be moving into natural resources. There was the huge find of natural gas here in very deep water. That will be coming on line first for the domestic market, probably by early 2014. Exports will start this decade. Those efforts will represent additional opportunities for Israel to do well economically.

They have their own set of pitfalls. You want to avoid some of the [associated] problems that come with these natural resource windfalls. You want to make sure that you take the Norwegian route and build a good set of sovereign funds to invest this for the future of the country. What doesn’t go there should go into infrastructure and education; we need to make sure that our human resources are being developed.

Knowledge@Wharton: Do you believe that if gas prices come down significantly because of oversupply it will be possible for Israel to economically develop its own gas resources?

Medved: I’m not an expert on natural gas. But the people who are developing these fields are quite adept. It’s a partnership today with a large American corporation, Noble Energy. And the good news is there was a huge sale of one of the fields to an Australian gas entity. I’m sure these people are not dumb. I’m sure they’re watching the news. I think that in general there will be fluctuations in resource prices; there always are. But I think the future for natural gas is extremely positive. This is also good for our economy in terms of getting rid of coal-fired, electrical generation. This is a good thing for Israel and for the world.

Knowledge@Wharton: You made a very persuasive case for Israel as a startup nation. Lots of countries have entrepreneurs and mergers & acquisitions and buyouts. But the way you brought together all of the factors — including [the importance of a] high degree of risk tolerance and immigration — make a very compelling case. The nature of entrepreneurship, though, is that there is both success and failure. If you were to address investors who are interested in looking at a large number of Israeli startups, who want a sense of guidance on where to place their bets, what would you tell them?

Medved: … I’ve been involved in the Israeli tech business for 30-odd years, both as an entrepreneur and as an investor. I’ve managed a venture capital fund. I’ve been an angel. I’ve been a founder of companies. I’ve been a public CEO. I’ve sort of done most of this stuff.

What’s exciting for me today is the ability to invest in people with proven track records. I mean there are a lot of risks involved in investing in innovation. But you start with people and the fact is that you can invest in people who’ve been successful. There’s no guarantee they’re going to be successful again. If you have a choice between two entrepreneurs, the one who has actually failed will make a better investment than the one who hasn’t tried. But there’s no question that the person who has tried and succeeded makes the best investment.

Today, the fact that we have this hoard of 10,000 successful entrepreneurs running around the country makes people like me drool. It makes investing a lot easier. You’ve got to check out the deal. You’ve got to make sure they’re doing the right thing. But these people have track records.

What I’ve done is built a website called ourcrowd.com. At OurCrowd we select what we think are the best and most interesting angel investment opportunities. We put our own money to work in these investments, and then we make them available to a select, exclusive group of accredited investors. You have to join OurCrowd. Once you’ve joined, we bring to you these opportunities. We’ve negotiated the deals. We sit on the boards. We act like a venture capital manager; the difference here is you’re building your own portfolio. You’re basically selecting the kinds of deals and the kinds of entrepreneurs you want to invest in and the amounts of money you want to deploy as part of our operation. This is a new way to actually aggregate angels from around the world who want to take advantage of a global hotspot such as Israel.

Knowledge@Wharton: I’ll come back to Ourcrowd.com, but I have another question first. If you look at the array of Israeli high-tech startups, which of these are the most instructive failures? Sometimes you learn more from failures than from successes.

Medved: You always learn from failures. I can look at my own career. I’ve had some spectacular failures. The thing which bites me is timing. I can get the trends right, but if you don’t get the timing, you’re too early. Take, for example, video conferencing. I saw video conferencing for the first time at the Seattle World’s Fair — I was a little kid — in 1962. It took a long time for that technology to really become mainstream and for people to make money.

In 1998, some guys walked into my office with this great idea. They had come back from a backpacking trip in Thailand and wanted to send videos to their families in Israel. They couldn’t do it. They said, “Look, we can use the Internet and we can put videos up there and people will put up their own videos and everyone else will want to watch them.” It sounded like a great idea. I loved it. In those days, there was no broadband. We invested in this company. It was called Earth Noise. It grew very fast. We hired the CEO of TV Guide to run the company. We raised money. Then, in 2000, the bubble burst. Most of our investors said, “Forget it. No one’s gonna want to watch video on the Internet. It’s not an interesting business.” We were shutting this company down at the end of 2001 after struggling to keep it alive. And, of course, in 2002 the gentlemen from YouTube started their business. So you can be right, you can actually even execute but, if your timing is off….

I think that there are some spectacular entrepreneurs here in this country who have had huge successes, followed by failures, followed by successes. I can think of people such as Ariel Maislos who built a beautiful company called Passave, which was providing fiber to the home. He sold that for $300 million. Then he built a company called Pudding Media, which was a failure and lost several million dollars. And then he built a company called Anobit, which he sold to Apple for $400 million.

I can think of Dov Moran who sold his company M-Systems for a billion and a half, and then had a very ambitious program called Modu to create a new, very interesting cell phone technology. That lost over $100 million. You can look at Shai Agassi who sold his company for $400 million to SAP and then went on to great things at SAP. He has now done Better Place. It’s certainly not a failure, but they’ve spent millions of dollars and the jury’s out.

I think as an entrepreneur you have to realize that you can’t win all the time. You should celebrate and learn from your failures because they’re going to happen. The fact that people can fail big and succeed big is good. I think that the key thing is dreaming big. One of our lead investors would always come to us and have an annual review. And the message was “take more risk.” Some of my partners and I found this surprising, because you’d expect the big institutional investors to tell you: “Mitigate the risk. Watch out for this.” But here were the big investors saying “take more risk” because they understand the innovation and venture business is really about those outliers and about having the exceptional outcomes. And you only get that from taking real risk.

Knowledge@Wharton: Last question about Ourcrowd.com, looking at the year ahead, what kind of investments are you recommending to your qualified investors?

Medved: We’re recommending them all. We like them all; we’re putting our money into them all and letting people make their own decisions about what makes sense and what areas they like. The areas range from clean technology, e-commerce, social… everything. Big data. Software as a service. And we’re doing security now. There’s a whole range of opportunities. We’re polymorphously perverse.

Our idea is to automate the angel business. This has been a great business, but it’s been ad hoc. It’s been basically a couple guys and gals getting together in a room, listening to a pitch. It’s been very local. There really hasn’t been a global angel network. Now there’s this angel list, which is a great initiative. We want to be the place that people who are angels come to find the Israeli deal flow and to join other angels who are making these investments. This is only for accredited investors. It’s only for people who are willing to invest $10,000 or more in a given deal. We’ve got checks already for $400,000 for a specific deal. We’re very excited. This is new ground we’re charting.

I’m happy at age 57 to be back being an entrepreneur. I wish I had a few more hours in the day, but I’ve got a great team. And I’m excited because it really becomes a global story and a global activity. I’m now going around the world — Brazil, the U.S., India, the U.K…. The idea is that you can now link people up around the world in very early stage investments. I think that there’s a lot of both power in terms of the investment side and, ultimately, in terms of business development and assistance to the companies, by building these communities of investors who can now not just support the companies they’re putting money into, but also help them grow and get a global presence. Today, if you’re not global from day one, you’re losing it. That, again, is one of the advantages we have in Israel; we don’t really have a domestic market. Our companies either go global or they go nowhere. I think that using the power of the web for this is going to be very exciting.

Additional Reading:

From Haifa to Herzliya, the Fertile Ground of Israeli Innovation
Global Social Impact from the Innovation Nation
Israeli Venture Capital: Between a Rock and a Hard Place

The post Venture Capitalist Jon Medved: Why Israeli Firms ‘Go Global or Go Nowhere’ appeared first on Israel Knowledge@Wharton.

Gidi Grinstein is founder and president of the Tel Aviv-based Reut Institute, a non-partisan, non-profit strategy group that focuses the efforts of Israel and the Jewish diaspora. It has a large canvas: On the one side is the Israel 15 program, which aims to make the country one of the top 15 economies over 15 years. On the other is an endeavor to transfer Israeli expertise in areas such as medicine to other parts of the world. Far more ambitious is the Tikkun Olam initiative, named for the Hebrew phrase meaning “repairing the world.” “It is the beginning of a long journey,” says Grinstein in this interview with Israel Knowledge@Wharton conducted in December 2012.

In addition to his work with the Reut Institute, Grinstein has served on various government panels and delegations. In addition, he was the founder of the Yesodot Group for reforming Israeli governance, a member of the Kol-Dor Group for global Jewish peoplehood and a founding member of a group that worked to realize the vision of the Birthright Israel program.

An edited transcript of the conversation appears below. 

Knowledge@Wharton: What are some of the key economic and political issues facing Israel?

Grinstein: … We have the Iranian issue, which I believe will be the No. 1 issue on the agenda. If I go even deeper, we — the state of Israel — need to go through a deep realignment of our presence in the world. As a consequence of the Cold War and then the era of American dominance following the 1990s and the early 2000s, Israel is very heavily focused on the West. We have very significant emerging powers in the East and other places. We need realignment of Israel’s presence around the world.

Knowledge@Wharton: What are some of the economic issues at the forefront?

Grinstein: I think that the No. 1 issue of Israeli society today is the crisis of the Israeli middle class. We’re seeing a phenomenon that is not dissimilar to other places. I call it the triple whammy of the middle class: the stagnating and even slowly decreasing real salaries, the rising cost of living, and the decreasing quantity and quality of government services. So the middle class in Israel is required to do much more with the same dollars or the same shekels, and that’s a major crisis.

Knowledge@Wharton: You talked earlier about the need for Israel to realign politically. That seems to be the case even in economic terms because the Israeli economy is dependent on exports to Europe and the U.S. and those economies have slowed down. I wonder if you could speak a little bit about how an economic realignment toward the emerging economies might come about.

Grinstein: I am actually more confident on the economic and the business realignment because of the dynamism of the Israeli market and the business community. Today, when you travel to China, to India and places like Vietnam or South Korea, Israel is disproportionately represented in terms of the business community. This is a growing trend. I recently flew to China and it was very difficult to get a ticket. The flights are full. People are focused.

The major challenge that I was speaking about is of government, and also of broadening the relationship between our society and the societies in the East. But not just in the East. I’d like to mention Australia, South Africa, Argentina and Brazil. Turkey is also an example of a country where we need a broader and deeper relationship.

What we had with America for the past decades, perhaps century, is a deep understanding of each other’s society. If you look at Israeli leadership, so many of them spent significant time in the U.S., working or going to school. We don’t have that level of acquaintance with the East. And this is a major challenge.

The problem is that the government is unlikely to be able to allocate the resources necessary for such realignment. This is why the Reut Institute is talking about a different approach for engaging the East. We want to bring into the fold organizations that are on the cusp of foreign relations. We’re talking about hospitals, museums, think-tanks, universities. These are institutions that can, with the right kind of incentives, create deep relationships with parallel institutions in the East. They can allow a broader and deeper relationship of the state of Israel with these societies.

Knowledge@Wharton: Are there any examples to demonstrate what you’re talking about?

Grinstein: Yes, we have the Ben Gurion University. We believe this can be a major outpost for foreign relations of the state of Israel and of Israeli society in terms of its engagement with the world. The Ben Gurion University has two major assets that are very valuable for the world. First, it sits on the edge of the desert and there are millions of people around the world who are struggling with the expansion of deserts. There is knowledge here that could be extremely valuable to other societies. The second major asset this university has is that it is an address for the indigenous Bedouins, a nomadic community that lives in the Naqab, which is the desert in southern Israel. That knowledge of engaging an indigenous community, a nomadic community, with all the associated challenges, is very valuable for other countries.

Let me mention one more example. At Wolfson Hospital [in Holon, south of Tel Aviv], there is a project called Save a Child’s Heart. It’s about bringing children from all over the world, but primarily from Africa and the Middle East, for critical life-saving heart treatment. Here you’re taking knowledge that Israel has created — world-class knowledge in terms of heart treatment — and making it an asset for engagement with the world.

Knowledge@Wharton: It’s clear that deepening human relationships and strengthening human resources are very critical. There are also some interesting opportunities Israel has in terms of natural resources. The discovery of natural gas has been described as a game changer. How do you think that’s going to affect Israel’s relationship with its neighbors?

Grinstein: I doubt if it will affect our relationship with our immediate neighbors because our relationship with them has never been about energy. It’s been about the basic acceptance of our existence in this area, specifically the right to self-determination of the Jewish people in this land. This has been the major challenge for many years. Some Arab people and leaders and societies reject that. Others accept it.

I think that the Arab Spring may be the beginning of a positive dialogue because Israel was scapegoated in the Arab world for all internal problems. Now, hopefully, many more Arabs will understand that Israel is not the source of their problems and coexistence is possible between the state of Israel and its neighbors.

Knowledge@Wharton: Your think-tank has a report called Israel 15, which calls for making Israel one of the top 15 economies over 15 years. How can this come about?

Grinstein: First of all, let me say a few words about the urgency. The Israel 15 vision is a response to a major challenge and potential crisis that we have in our society. Israel is one of the leading countries in the world in terms of quality of population, level of education and skills etc. This is evident in almost any leading North American university; you can see a disproportional presence of Israelis, both in the student body and faculty.

But the quality of life here is ranked 30 to 40 in the world. We are No 1 in the gap between the potential of the people and the quality of life. If we want to make Israel attractive to the talent in the country and the talent that has left to acquire education and experience, we have to improve the quality of life.

Transforming a society is a very rare phenomenon. This is the vision of my organization. We did extensive comparative research. One of the most interesting things we found is that the foundation for a leap actually comes from the public sphere, not necessarily the public sector, but the public sphere. I’m talking about creating a vision, a shared vision for society, mobilizing the serving elite, the people who have the resources, money, education and access to serve this vision. It’s about values. There is a shared common denominator among countries that have made the leap. It is on the values, about long term, about investment, about saving, about inclusiveness — that everybody gets to participate in growth and benefit from growth.

Then, it’s about certain institutions that have to be in place: For example, an institution that is mandated to explore the world, to identify long-term trends and to see how the state of Israel can be relevant to these trends. It’s about the investments in infrastructure, in human resources, in regulation. It’s also about the different relationship among the labor unions, the government and the employers. And it’s about policies that emphasize the development of the periphery, not just the center, focuses on unique assets and tries to tap into global trends.

These are the key elements. When they are in place, you may begin to see a perfect storm of inclusive growth, which means high growth that is sustainable and inclusive.

Knowledge@Wharton: That’s an ambitious vision. What will be the catalyst that brings about such a dramatic leap?

Grinstein: There’s no single catalyst. You have to get a lot of people focused and working in that direction. One of our concrete projects now is an urban community in Svat, an ancient, poor city we’re trying to turn around. We’re modeling it in order to be able to scale it to other areas; there are 30-50 similar communities in Israel. The moment we figure out how to do it in Svat, we can do it in other places.

We have engaged one of the leading business and economic newspapers here to expand the public discourse on economic development and growth. One of the things we have seen in other countries that have made the leap is that economic development was not the exclusive domain of a few experts in the ministry of treasury or the central bank or the prime minister’s office. It was the subject of very broad, societal deliberation.

Obviously, you work with the government. When we started in 2006, one of our goals was that becoming one of the 15 leading countries in the world should become a formal government objective. This happened in 2011. You can already see ministries building their strategic plans based on that goal. If you look across the administration, there are dozens and even hundreds of people who wake up in the morning with that goal in mind. This is remarkable because when we started we were just four people in the room.

The moment you get all these forces aligned, you may get that perfect storm that we’re looking for and the leap that we’re aspiring to see. We will never be able to show a direct correlation between what we did and what happened. We’re intervening in an ecosystem and there is no direct correlation between cause and effect. We are very small in that ecosystem. But we work as a catalyst and have been working at it for six years. I think we’re making very significant progress.

Knowledge@Wharton: In conjunction with the Alliance for Global Good, you also have a second vision, and this one is not just for the transformation of Israel, but also for the transformation of the world. What I’m referring to is the 21st century Tikkun Olam initiative. Could you explain a little bit about that?

Grinstein: The basic idea here is that Israel and world Jews all together — 14 million people — can and should make a very significant contribution to humanity. So much of the world’s challenges today are at the bottom of the pyramid. And Israel has been absent from the bottom of the pyramid.

Our vision is about Israel and the Jewish world working together to make a significant difference in the lives of a quarter of a billion people. If you ask me, we can go for a billion within a decade. The way we will do it is by following a few principles.

The first principle is to identify and focus on the countries where we have a unique value proposition to give and they have a significant need. Second is focus on areas where we have, again, a unique value proposition for the world. In our view this is primarily on the issue of life at the edge of the desert. Israel has done with the edge of the desert more than most other countries. There are millions, including 90% of the Arab world, who live at the edge of the desert. We can help them deal with their challenges. The second area is prenatal and natal medicine. Israel has had tremendous achievements here that we can take to the world.

We need to constantly build our standing in the world. There are a lot of people working to delegitimize the state of Israel, delegitimize the right of the Jewish people to self-determination. We need to build relationships with emerging leadership who today have no clue or no position on Israel.

This is also a great platform for us and world Jews to work together. Trillions of dollars will be spent on this community. We want a piece of the action in Israel. But the most important thing is it fits the values of our culture, the value of tikkun olam, which [is the Hebrew phrase meaning] “repairing the world.”

Knowledge@Wharton: Repairing the world is a tall order. How far have you progressed?

Grinstein: What we saw when we started is that there are a lot of groups and a lot of great people and great leaders doing very important work on the ground. But there was no synchronized approach, there was no deliberation, there was no shared goal, there was no focus. So we did the research and we engaged a lot of these players to think together on what could happen. We published the report, which is basically the beginning of the journey. That was in April 2012. Ever since, we’ve been presenting the report and getting people to think about it and to talk about it. It’s the beginning of a long journey.

What I can tell you from our experience is that the first step toward achieving such a vision is changing the discourse. This is what we’re trying to do right now. We’re trying to get people focused on a shared objective, focused on specific countries with a significant need where we can bring unique value. Focus on the areas where we can make a difference. Build the relationships that will allow us to move forward. These are the things we are focusing on right now. A year from now we’ll have a lot to report on that.

Knowledge@Wharton: I understand you’re working on your first book. I believe the title is Flexi-Rigidity?

Grinstein: Flexigidity.

Knowledge@Wharton: What does that mean and what is your book about?

Grinstein: Flexigidity is a word I created by merging the word flexibility and rigidity. To explain the book, I’ll tell you what the first page looks like. At the top of the page is the famous quote from Mark Twain who said: “All things are mortal but the Jew. All forces pass but he remains. What is the secret of his immortality?” Then I put in a quote from Darwin who said: “It’s not the strongest of species that survives, nor the most intelligent. It’s the most adaptable.” So Charles Darwin’s answer to Mark Twain’s question is adaptability. And the subhead of my book is The Secret of Jewish Adaptability.

The book basically describes the mechanisms that Judaism has created over 2,000 years to allow adaptation to ensure its survival, security, prosperity and leadership. The last section of the book speaks about the relevance of this ancient society of knowledge to the future of the state of Israel and what does it mean to be a leader that operates in a flexigid society.

Knowledge@Wharton: Let me ask you one last question. How do you define success?

Grinstein: In what context?

Knowledge@Wharton: In work, in life?

Grinstein: For me, these are very different things. Success in life has to do with family, with a relationship with your spouse, with your children and many other things. But if I focus on work, for me success is the ability to achieve the effects that you wanted to achieve. What I mean by effect is not just the accumulation of the resources and the energy that you put in, it’s a whole that is hopefully much bigger than the sum of all your activities. I’m a very small player in the system that I’m intervening in. But what I’d like to see happen is much bigger than what I’m doing. The ability to witness that effect taking place is success.

Additional Reading:
Global Social Impact from the Innovation Nation
Michael Steinhardt Discusses Israel’s Place in the World
How Will Egypt’s Political Upheaval Impact Israel? The View from Jerusalem

The post Reut Institute Founder Gidi Grinstein: Realigning Israel’s Presence in the World appeared first on Israel Knowledge@Wharton.

“What is Barack Obama coming for anyway?”

“Don’t you want there to be talks [between Israelis and Palestinians]?”

“The talks won’t bring peace.”

“You don’t think there can be a settlement?”

“Let’s cut to the chase: Can you [the Arabs] accept that we [the Jews] should be here [in Israel/ the Middle East]?”

“That’s not what is under discussion…”

“But that’s the underlying issue: Are you prepared to accept us here?”

“No.”

With that, the ba’al habasta (market-stall owner) turned to his customer, who had patiently followed the exchange summarized above, with a look of weary triumph that said, in effect, “I rest my case.” The customer — this writer — countered with, “Will you weigh my tomatoes now?”, while the other party to the conversation, a Palestinian Arab from East Jerusalem, got back to his job as a sanitation worker for the municipality, collecting the empty boxes and cartons from the market stalls.

Welcome to Jerusalem’s Mahane Yehuda market, where attempting to resolve the generations-long dispute between Israelis and Palestinians as a prelude to buying fresh vegetables is considered perfectly normal. The kind of interaction quoted above — which was conducted in a very friendly manner, despite its frankness — is an everyday occurrence there. The day it took place could have been just another day in Mahane Yehuda, which has long been a landmark feature of central Jerusalem.

Spread over several parallel streets and connecting alleyways, partially covered and partly still open to the elements, the market is probably the only — and certainly the best — place in which to see, meet, hear and taste the entire, unbelievably broad spectrum of humanity that lives in or visits Jerusalem. By the same token, it is the best place to come to grips with what makes Israelis and Jerusalemites of all stripes tick — and, through observing and listening to them, to get a much deeper understanding of the forces at work in Israeli society.

Markets are about discovery and dissemination of information. According to economic theory, the interaction of many buyers and sellers in a free market creates a process termed “price discovery.” This process works as well — nowadays, perhaps better — in Mahane Yehuda for fruits and vegetables as it does on Wall Street for stocks and bonds. But the outdoor markets of great cities across the world, especially the souks and bazaars of the Middle East, are also agents of discovery regarding — and avenues for dissemination of information about — the social, religious, cultural and political issues and trends that shape the cities and societies that they serve.

Hosting a President

It could have been just another day in Mahane Yehuda and Jerusalem — but it wasn’t. It was Wednesday March 20, and the city and its 800,000-odd inhabitants were readying themselves for a three-day-long disruption to their normal patterns of movement and activity, as Jerusalem and Israel played host to Barack Obama on his first visit to Israel as President of the United States. Even for a city as inured to having visiting VIPs paralyze its regular rhythm as Jerusalem, Obama’s visit was widely viewed as an untimely imposition, coming just a few days before Passover and hence at the peak of the busiest shopping week of the year for the retail sector as households prepare to host seder meals.

In addition to Obama and his entourage of aides, diplomats, bodyguards and others, there were many hundreds of journalists in town to cover the presidential visit. One item on the media schedule organized by Israel’s Government Press Office was a visit to Mahane Yehuda market — presumably with the aim of providing the journalists with a small but concentrated dose of how ordinary people live their lives in Jerusalem. If so, the choice of Mahane Yehuda was wise: This is where a visitor prepared to keep his eyes and ears open, and to clear his head of any ideological baggage, can learn more — and more quickly — about Israel and the issues it faces than perhaps anywhere else in the country.

The natural temptation for guides and visitors alike is to emphasize the dramatic historical events that have dominated Israeli history. Mahane Yehuda, by dint of its position in central Jerusalem, has witnessed and, all too often, experienced these directly. Especially after the Six-Day war in 1967, when Israel annexed East Jerusalem and imposed its concept of a united Jerusalem on the city’s Arab population, Mahane Yehuda became a prominent focus of Arab-Jewish interaction. This was centered for the most part on business and commerce and also included employment of Arab youngsters by Israeli stall-owners, but the interaction took darker forms as well.

Nowhere else in Israel has been the scene of as many terrorist attacks as Mahane Yehuda, with repeated attacks during the period of intensified Palestinian-Israeli violence between 2001 and 2004 — including three in a single month. Boaz Zidkiyahu, one of the veteran vendors in the market, boasts proudly that “the ability of Jerusalemites in general, and of Mahane Yehuda market in particular, to take the hits from terrorist attacks and keep going, is much greater than anywhere else in the country.”

But the real story of Israel, and certainly of Mahane Yehuda, should be sought not — or at least not only — in the periodic outbreaks of violence that puncture its history, but rather in the socio-economic development that took place between those outbursts. This is actually on display everywhere in the market and its environs — if you know what to look for. Hopefully, it’s what the visiting journalists saw and heard — and if so, their visit was probably just in time. The market is already very different from the uniquely Jerusalemite human mosaic that it was only 10 or 15 years ago and, if present trends continue, within a few years it will hardly be representative of anything Israeli or specifically Jerusalemite.

Bridges over Troubled Waters

Not many Arabs, whether Palestinian or Israeli, do their shopping in the market, or shuk as it is called in Hebrew (souk in Arabic). Most of Jerusalem’s Arab population frequents the markets and other retail outlets on the eastern side of the city — which, for all the talk on the part of successive Israeli governments, Jerusalem mayors and their municipal administrations, remains clearly divided into western and eastern sections. These are not halves, because the Jewish west has a much larger population than the Palestinian east. But, as the conversation quoted above illustrates, Arabs are also a feature of the shuk, whether as employees working the bastot (stalls) or as municipal workers — or as customers.

Where Mahane Yehuda plays a unique role is as a bridge across the other dividing line that crosses Jerusalem. This is an intra-Jewish one, a cultural chasm that separates the mainly ultra-Orthodox (haredi) north of the city from the mainstream population in the south, which includes secular, traditional and modern-religious Jews. This socio-religious division has become increasingly apparent in recent years, as the haredi population has exploded and, by consequence, expanded into and ultimately taken over neighborhoods that were formerly mixed or predominantly non-haredi.

The market itself has developed in the shadow of the haredi/non-haredi divide. Mahane Yehuda market runs between Jaffa Road, the central thoroughfare of downtown Jerusalem, and Agrippas Road, which runs parallel to Jaffa Road but to its south. Its centrality, coupled with the fact that it runs on an east-west axis, makes Jaffa Road the physical dividing line between the haredi north and the mainstream south. However, in addition to the cultural and religious gulfs between the two Jewish populations, there is also an economic divide. Haredim are, for the most part, poor and typically have a much lower average standard of living than their non-haredi counterparts (but not than their Arab co-citizens of Jerusalem).

This socio-cultural-economic reality has caused Mahane Yehuda to morph into two different markets. At its northern end, abutting Jaffa Road, the market is still comprised overwhelmingly of traditional-type bastot selling food: fresh fruit and vegetables, cheap confectionery and patisserie products, and some fishmongers and butchers. This is what might be called the down-market market: It isn’t really cheap, because prices in Israel are generally high, but it’s a lot cheaper than most neighborhood shops, while the quality of produce available is generally much higher.

As you walk southward through the market, you move steadily upmarket. The southern end of Mahane Yehuda has taken on a totally different character in recent years. Few shops there sell fresh produce — and their prices on many items are between 50% to 100% higher than those of their down-market peers a few minutes’ walk — make that jostle, on Thursdays and Fridays — away. But most of the shops here are no longer in the fresh produce business. Those that sell food do so in much fancier premises and, indeed, their wares are also classier, not just pricier — for example, imported and high-end domestic cheese purveyed in fromageries, rather than simple, cheap cheeses sold by shops only one remove (physically and business-wise) from the bastot selling fruit and vegetables.

The upscale market now boasts coffee shops, several shops selling herbs and spices, a cigar shop and even one or two jewelry boutiques. Even to the untrained eye, the clientele at this end of the market are obviously a very different mix than the mostly haredi customers in their distinctive black garb at the Jaffa Road end.

The Family Business

Almost at the Agrippas Road end of the market are two shops almost opposite each other, operated by the Zidkiyahu brothers. Yaron, 54, and Boaz, 52, are the two senior members of the five-brother clan — and the story of how this family developed from selling watermelons to become a widely-recognized brand operating through a growing chain of outlets, is a metaphor for the market as a whole, just as the transformation of the market captures, in a microcosm, the currents of change in Israeli society.

It is also the antidote to the “Israel as a global high-tech powerhouse” hymn that has become the standard story about the nation’s economy. Unlike the sophisticated young men with their MBAs and cutting-edge apps that populate Israel’s ‘Silicon Wadi’, Yaron and Boaz Zidkiyahu have no formal education beyond high-school — but they and their business could well serve as a case-study for business students, alumni and many others.

The family’s Israel story began when Yitzhak Zidkiyahu, Yaron and Boaz’s grandfather, emigrated from Kurdistan to what was then Mandatory Palestine in 1938. He made his home in a Jerusalem neighborhood where his compatriots had already established a community, built a house and, together with his brothers, bought a small shop in the Mahane Yehuda market, in which they sold fruit and, in the summer, watermelons.

Yitzhak’s second son, Mordechai, was born in Jerusalem and educated at the nearby Alliance high school operated by a French-Jewish philanthropic organization — and then joined his dad in the shop. The young Mordechai had ambitions that extended beyond fruit, but when and how these were realized was determined by the historical developments that form the backdrop to the Zidkiyahu saga.

Boaz takes up the story, with comments and corrections from Yaron along the way: “The first big expansion came in 1967, after the Six Day War” — which, it must be noted, changed Jerusalem from a backwater to a rapidly-growing city — “when Dad decided to expand into pickles. These were sold from the family’s single shop, so that the product range grew within the same premises.”

But that did not last long. The late 1970s saw sweeping changes in the physical, financial and managerial environment of the market. The Jerusalem municipality constructed a roof over the main pedestrian thoroughfare of the market, making the shopping experience much more pleasant in both summer and winter. Meanwhile, Israel adopted a value-added tax (VAT) and this obliged the stall-owners to undertake a massive modernization, including electronic weighing machines rather than weights and scales as well as proper cash registers that recorded every transaction, to enable accurate book-keeping and the payment of both income tax and VAT.

Far from hurting Mordechai and his brothers, modernization seems to have spurred their development. “In the 1980s,” Boaz says, picking up the tale, “they began offering cheeses and prepared salads, but all on a small scale.” The process continued and accelerated in the 1990s. “The market infrastructure underwent another upgrade: The roof was strengthened and improved paving and drainage was installed — and this spurred the stall-owners to invest and expand their own operations.

“Dad and his brothers rented another store, opposite the one they owned. This allowed them to split their product range along dairy and meat lines — in conformity with Jewish dietary laws — and to broaden the range of products offered in each area.”

Failures and Successes

By then, Mordechai’s sons were in the business and soon in the driving seat. The family now made its first move outside Mahane Yehuda market — and found that strange environments were not always welcoming. “We opened a shop in the Malha mall — a large enclosed mall in the southwest of the city that was slated to be the upcoming commercial and retail center of Jerusalem. But we found that the clientele at the mall were different than our home crowd. The costs — rental, city taxes — were too high for the volume of business we were able to generate. After eight years we gave up there.”

Another direction, in several senses, was the brothers’ attempt to open a shop in the northwestern suburb of Kiryat Shaul, which was becoming a hub for government offices and professional firms. The initial plan was to relocate the store in the Malha mall to there, but that fell victim to opposition from other occupants in the building in which they had bought premises. Instead, they found a partner and opened a restaurant.

But with Yaron spending most of his time in the restaurant, Boaz was left literally to mind the stores in the market — and the long hours and pressure on them both became intolerable. This led them to restructure the whole business, including selling out of the restaurant and concentrating their resources on their “core” operation in the market, which they now expanded — inter alia by reintegrating their own brothers in the family concern. One, Shmulik, had moved to Kfar Saba in the center of the country, but the recession caused by increased violence in the early 2000s had sunk his shop. Another brother, Moshe, had been working for their uncle — i.e. one of Mordechai’s brothers — at his shop in Mahane Yehuda.

The forays outside Mahane Yehuda may not have been commercially successful, but they contributed to making the Zidkiyahu range of products known to and appreciated by a much broader customer base — not just Jerusalemites doing their regular shopping in the market. Israelis from around the country visiting Jerusalem — and even regular visitors to Jerusalem from all over the world –were in the queue outside the shop, especially on Friday mornings.

This recognition eventually led to an offer to the Zidkiyahus from Mega, one of the country’s leading upscale supermarket chains, to open in-store shops in Mega locations. This model, in which Mega takes a cut from the turnover but the Zidkiyahus have no burdensome rent weighing on them, seems to working very well. Three in-store shops are open already — two in Jerusalem and one in Modi’in — and more are set to follow.

Cloudy Future

But — as the cliché goes — “meanwhile, back at the ranch,” things are not so cheery. In fact, the way Boaz and Yaron see things, their situation has reversed itself, so that while the operations outside the market are expanding rapidly and the potential seems enormous, business in Mahane Yehuda is challenging and the prospects — for them and the market as a whole — are cloudy.

“We are not expanding here,” Boaz says sadly. “There was an opportunity to buy the store adjacent to the one we rent, but we deliberately let it pass. Why? Because of the changes that the market is undergoing, both for good and bad.”

“Look, this is not the market we used to know,” interjects Yaron, who feels the changes are far more skewed to the bad than the good, at least for them. “People used to come to do their shopping in the market, now it’s a tourist venue — they come, they eat, they go. That’s good for restaurants and coffee bars, but not for stores.

“The haredi market is also problematic, because they are looking to buy cut-price produce. We were always in the upper end of the market’s spectrum of customers, so that doesn’t speak to us.”

The major practical problem facing the market, according to the Zidkiyahus and other store- and stall-owners, is simple: Woefully insufficient parking is available in the area. Indeed, even access by bus has been sharply reduced by the conversion of Jaffa Road into a pedestrian mall on which a light railway is the only transport available. The vendors are sharply critical of the Jerusalem municipality’s policies vis-à-vis the market and respond to its promises to them with open disbelief.

The Mahane Yehuda’s veteran vendors, among whom Yaron and Boaz are in the front rank, will not let the market wither without a struggle. This summer will see elections for a new representative committee of store-owners which, Boaz says, “could considerably improve the situation — if it is strong and ready to fight.”

That would be in the best traditions of Mahane Yehuda. But the business decisions of the Zidkiyahus and the rationale behind them are the best evidence that the market’s glory days are probably over. Seemingly irresistible socio-economic forces are at work — the widening gaps between higher- and lower-income groups, the rise of hypermarkets on the fringes of big cities that offer cheap prices on fresh produce as loss-leaders to attract shoppers, and the increasing attraction of Jerusalem to an ever-growing flow of global tourists. These look to have a much greater impact on what Mahane Yehuda offers and to whom than the wars and terrorist attacks that the market and its community successfully weathered for decades ever did.

The post How Jerusalem’s Mahane Yehuda Market Reflects Israel’s Transformation appeared first on Israel Knowledge@Wharton.

Technology transfer, the process of bringing research and innovations developed within universities to the open market, is a “lottery business,” according to Benjamin Soffer, manager of T3, the commercialization arm of Technion, the Israel Institute of Technology in Haifa. “You never know which technology will actually make the difference,” he says, “so you try to buy as many tickets as possible.”

In a conversation with Israel Knowledge@Wharton, Soffer discussed T3’s philosophy for spinning off research into start-ups and new commercial products, the importance of involving seasoned entrepreneurs in the process and some of the organization’s recent success stories.

An edited transcript of the interview appears below.

Knowledge@Wharton: What is the mission of Technion Technology Transfer? Can you give a brief overview of your operations?

Benjamin Soffer: The Technion Technology Transfer is the tech transfer company of Technion [the Israel Institute of Technology]. Our role is to make sure that the innovations that are developed within the Technion find their way to the marketplace. In today’s day and age, you know, it’s very important for universities not just to do research, not just to do teaching, but to do technology transfer. At the Technion, we have come to realize that universities that are not able to impact the marketplace by creating jobs, by engaging the community and by building companies to some extent will become irrelevant.

Knowledge@Wharton: How does the technology transfer process at Technion work? How do you go about identifying research that has commercial potential? What are the stages of actually turning that research into a product or a service that people can access on the open market?

Soffer: The number one mission is to increase the level of openness of the institution to commercialization because you have to understand that, at the end of the day, people come to Technion — which is considered the MIT of Israel, certainly, if not the Middle East — to do cutting-edge research, and Technion is considered among the top ten universities in the world. First of all, you need to increase the level of openness of the researchers to commercialization. This is number one. Then, the question is how to bring the innovations that you produce to the marketplace. How do you increase awareness, and how do you create opportunities for these innovations to find their way to the marketplace?

Knowledge@Wharton: When you have several good ideas that could lead to commercial products, what process do you use to figure out which ones to focus on? How do you determine what steps need to be taken to get a product to market?

Soffer: You can tell a lot about a nation by looking at your cultural heroes. Let’s take a look at the United States: Who are the cultural heroes? Of course, you have Bill Gates and Steve Jobs … but you also have the Hollywood actors and politicians. In Israel, for many years, the cultural heroes, so to speak, were the generals — people like Moshe Dayan … and others. But in recent years, people like Gil Shwed [founder and CEO of Check Point Software Technologies, one of Israel’s biggest tech companies], people like Yossi Vardi [one of Israel’s first high-tech entrepreneurs] — the pioneers in the high tech industry — have certainly became the new culture heroes of Israel.

Many of them are graduates of the Technion. You may be surprised to learn that out of the 120 Israeli or Israeli-related companies on the NASDAQ, 70% of the CEOs or COOs are graduates of the Technion. Our main focus in order to commercialize the technologies is finding the right person to take that technology to the market. We have developed what we call EIR, the Entrepreneur in Residence program, whereby we try to marry a very strong entrepreneur with a very strong technology. We use these entrepreneurs as agents of the marketplace within the campus of the Technion.

Knowledge@Wharton: What has been the experience of having entrepreneurs working together with researchers? How have the two groups been able to learn from each other?

Soffer: This is a very interesting dialogue because in academic settings, many of the innovations are technologies looking for a problem. But if you have the qualified, trained eye of a very strong entrepreneur, out of this dialogue some of the most brilliant things can come, and we have witnessed it time and again.

Knowledge@Wharton: Do you find that the entrepreneurs are learning from the researchers as well?

Soffer: Always. Absolutely.

Knowledge@Wharton: One of the best-known examples of tech transfer at the Technion has been the development of a treatment for Parkinson’s Disease called Azilect, which was developed based on research by professors Moussa Youdim and John Finberg in collaboration with Teva Pharmaceuticals. Could you take us through the process of getting this product to market?

Soffer: First maybe we should take a quick step back. In Israel, we have maybe four leading universities — the Technion, Hebrew University and Weizmann Institute of Science. All three leading universities in Israel — Technion, Hebrew University and the Weizmann — have at least one FDA approved drug in the market. And Technion belongs to this quite distinguished club of universities that were able to develop a drug and take it to the marketplace.

You have to remember that this process started about 20-25 years ago when funding from sources like the National Institutes of Health and others was more available. The research was done at the laboratory of professors Moussa Youdim and John Finberg, and later on, it was licensed in a pure, straightforward licensing deal, which, as opposed to deals that are done today, was about a four-page deal. And up until today, it has served us very well. Now, the drug was approved only five or six years ago by the FDA and was launched. This is, again, a good demonstration of how long it takes to develop a drug … in a university setting until it reaches the marketplace.

People don’t always realize that this is a very long and tedious process. So you ask why isn’t it happening, for example, through VCs and why was it directly licensed to a commercial company? I would tell you that this is the right process for drug developments. Between a university and the venture capital world, there is a synchronization problem because we operate in a window that could easily be 10-11-12 years long, and as we see here, even 20. While the VCs are operating in a much shorter window of five, six, seven years. And this gap has to be filled. The question is who will fill the gap? If it’s not the government, it has to be industry. Otherwise, all of this investment will be lost.

Knowledge@Wharton: Could you give us some other examples of research at the Technion that were successfully turned into commercial products? And could you discuss some of the different paths that have been taken to get a product to market?

Soffer: Although we are predominantly an engineering school, the Technion has made some major breakthroughs in medical devices…. One of the companies that we boast in that area is Mazor, which is in the business of spinal [surgery]. When you do a spinal surgery, the doctor [typically] drills right in through the spinal cord. What Mazor allows, using a robotic-aided surgery, is first to see and then to drill. This is a company by professor Moshe Shoham.

Another company, which we started with professor Rafael Beyar, called Corindus Vascular Robotics. Corindus is in the business of remote catheterization. I have a brother, who is a cardiologist at Mount Sinai in New York, and he walks a little bit stooped over because of the heavy lead suits that they need to wear while operating. Imagine for a minute that you sit in a remote location — it can be the adjacent room or it can be another continent — and using a joystick, you can direct the guide wire in the body of patients and do the procedure remotely. This is what is done by a company like Corindus.

Technion companies have raised just in the year 2012 close to $60 million. In the year 2011, it was, again, close to $50 million. In the last three years, they have raised close to $150 million, which in Israeli terms is quite significant. And this is a demonstration of the validation of the marketplace, of industry and the innovation that is coming out of the Technion.

Knowledge@Wharton: When talking about innovation, it seems that for every success, there are dozens of failures. And sometimes more can be learned from the failures than the successes. What have been some of the Technion’s most instructive failures?

Soffer: At the end of the day, what we have learned is that the level of risk at which we are talking is extremely, extremely high, because the level of unknowns on the technology level, on the marketing level, it is extremely high.

This is why in order to successfully launch an enterprise, a company, you need a very, very strong entrepreneur. We see starting a business as sending a spacecraft to space. The first ten minutes that you detach yourself from gravity consumes 80% to 90% of the energy, of the gasoline in this huge spacecraft, and you have to have the right person to inject that energy into the process, and this person is the entrepreneur.

Many think that because it’s a university and a high-risk technology that you can, so to speak, do well with a less experienced entrepreneur. But it’s right on the contrary. To commercialize a technology from a university, you need a very strong entrepreneur who can [communicate with] the marketplace and raise the necessary capital, but at the same time, talk at the eye level with a professor. So, if you ask me, “What is the number one lesson?” — it is to have a very, very strong team that knows how to work together.

Knowledge@Wharton: How does Technion Technology Transfer compare with other Israeli institutions, such as the Weizmann Institute? What about U.S. institutions like MIT, Stanford or even Wharton?

Soffer: This an excellent question because this is part of the metrics that we use to measure ourselves, to ask ourselves, “Are we successful?” First of all, let’s compare apples to apples. Take the research budget. The research budget of Technion is something like $70 million. The research budget of a university like MIT including Lincoln Lab is $1.4 billion. The research budget of Stanford is $700 million. If you just use the income metrics compared to the investment that you make in research, Technion is doing extremely well because we generate today close to $25 million directly from commercialization. This is either royalties, income, equity or dividend.

If you compare it to what MIT is doing, to another leading university, we are doing extremely well. But the point is … these are not the only metrics that you should use. For us, the income certainly is critical, but you need to see the economic development that is done around the Technion. In a city like Haifa, how many companies have established their presence surrounding the Technion in order to tap into the human capital and the resources available here? Companies like Google, Phillips and Microsoft all have and are operating significant R&D centers a ten-minute drive from the Technion campus.

Knowledge@Wharton: So, it’s not only about dollars directly generated but also about the domino effect that is created?

Soffer: You are absolutely right. Again, the issue is not to maximize every deal that we do. We do not try to extract the most economic value from the deals that we do, but we try to do as many deals as possible. In a way, we view technology transfer as a lottery business because honestly, you never really know which technology will actually make the difference, be the paradigm shift. So you try to buy as many tickets as possible.

If you ask me, “What is the philosophy that makes T3, my unit, unique?” It’s that we have adopted a philosophy that if Technion is a huge harbor, we are the tug boat. Our role is to make sure that the research done at Technion will find its way out of the port of Technion as quickly and as effectively as possible. We are not a gateway. And this is something that is changing, and I think it’s very important for the industry to understand.

Knowledge@Wharton: What are some of your top priorities for 2013 and beyond?

Soffer: We are putting a huge emphasis now on stem cells. Just a couple of months ago, we started a drug development and screening company … within AMIT [the Alfred Mann Institute at the Technion], which is an internal incubator that we started with the help of Alfred Mann, a very prominent and a successful businessman here in the United States, that has started many companies…. We all realize now that the [system of] drug development and drug screening is broken, so what [what we] are doing — at the end of the day, the company will help do clinical trials on a chip, as opposed to the way clinical trials are done today. It’s a stem cell company, developing the pick and shovels of the industry, of stem cell research and stem cell development.

The post Technion’s Benjamin Soffer: The ‘Lottery Business’ of Bringing Innovation to Market appeared first on Israel Knowledge@Wharton.

What will the recent elections in Israel mean for businesses and investors, both local and international? In this op-ed, economic analyst and consultant Pinchas Landau notes that over the short run, experts expect pressure on corporate profits to be stepped up — via tighter regulation; more activist consumerism among the general public; new legislation aimed at breaking up conglomerates and ceilings on executive compensation.

As Benjamin Netanyahu labors to construct a viable and stable coalition in the aftermath of Israel’s remarkable general election in January, he is facing the simultaneous need to replace his key economic official. Stanley Fischer announced his resignation from the governorship of the Bank of Israel on January 29, one week after the elections, citing personal reasons for his decision. The much-admired governor has promised to stay on through June 30 to allow the incoming government to appoint his successor and facilitate a smooth transition.

But smooth does not begin to describe the Israeli political and economic scene in February 2013. Netanyahu is the prime minister-designate, but the bashing his own Likud Beiteinu party received at the polls, coupled with the meteoric rise of new parties and leaders, has highlighted the fact that all of the key aspects of Israeli politics — persona, platforms and public opinion — are in a state of flux. The only foregone conclusion left is that the old certainties have crumbled together with their standard-bearers.

Netanyahu knows this better than anyone else after the socio-political upheaval that found expression at the ballot-box on January 22. On Sunday January 20, a scant 36 hours before the polls were set to open, Netanyahu made a last, desperate, gambit to stem the erosion in popular support for the Likud Beiteinu party. He announced his intention to appoint Moshe Kahlon to head the Israel Lands Administration (ILA), the statutory entity that owns more than 90% of the country’s land. The ILA, which decides how much land to sell to contractors, where and at what price, effectively determines the price of land and apartments in the Israeli real-estate sector.

But at 10 p.m. on election day, all three major TV channels broadcast exit polls showing that Netanyahu’s last-ditch effort had had little, if any, impact on the outcome: Likud Beiteinu had captured only 31 of the 120 seats in the Knesset (parliament) — even less than the final opinion polls had predicted. Although this outcome still left Likud Beiteinu by far the largest single party, it represented a major disappointment — and in political terms, a serious defeat — for Netanyahu. The results also represented a major setback for Netanyahu’s ally, Avigdor Liberman, who had served as foreign minister until being forced to resign a few weeks before the election, when the Attorney-General indicted him on a charge of wrongful abuse of his authority.

Liberman is the founder and leader of Yisrael Beiteinu, a party whose primary constituency is the million-odd immigrants from the Former Soviet Union who have moved to Israel since 1990. In a move intended to create a dominant major party of the sort lacking in the existing political line-up, Netanyahu and Liberman had merged their parties at the outset of the election campaign. Likud had 28 seats in the outgoing Knesset and YB had 14, its best-ever result. The two leaders made no bones of their hope and belief that the joint party would exceed their existing combined strength of 42 seats.

Plainly, voters have dashed that hope. To the over-riding question of why that happened may be added a slew of questions arising from Netanyahu’s last-minute move, announcing the appointment of Kahlon: What did he hope to achieve by it — and why did such a shrewd and seasoned campaigner think that this seemingly minor bureaucratic appointment would have a major impact?

A Gambit that Failed

In fact, Netanyahu’s “Kahlon gambit” is a microcosm of the election campaign, which proved to be the most important in at least 20 years. The campaign not only effected dramatic changes in the political landscape — although hardly the ones Netanyahu had aimed for — it also highlighted the enormous shift underway in Israeli society. Kahlon served as communication minister in the outgoing government and, in that role, became a public hero for pushing through a deregulation of the cellular phone industry. That policy change enabled new entrants to bring a badly-needed dose of competition to the telecom market and to trigger a collapse in the price of calls and of the mobile phones themselves.

Kahlon apparently felt that this popularity should gain him a promotion in the next government — and even saw himself as the next finance minister. When Netanyahu made clear to him that he did not share this vision, Kahlon stunned Likud and the public by announcing that he would not run in the next election, but would instead take “time out” from politics. Netanyahu’s announcement that he would appoint Kahlon to head the ILA was therefore a signal that the rift had been healed and that Kahlon was no longer sulking Achilles-like in his tent, but was back in the battle.

Kahlon’s appointment to the ILA was also significant for more than personal reasons — it was not just about the “who”, it was also about the “what”. As noted, the ILA is the linchpin in the Israeli real-estate sector. By making land — and by implication, the construction of apartments and their prices — the focus of his final play in the election campaign, Netanyahu was belatedly admitting that this issue was the central focus of the election.

Amazing as it may seem to outsiders, the Israeli public made clear that in 2013, its primary concern was not the Iranian nuclear threat, nor the threats of further clashes with Hezbollah in Lebanon to Israel’s north, or Hamas in the Gaza Strip on the southern border. Netanyahu, for his part, had made every effort to focus the public on security concerns, where he felt he and his party had a clear edge. Yet, for the first time in Israeli history, an election campaign was focused overwhelmingly on socio-economic issues. The country’s massive security problems and the vexed questions relating to relations with the Palestinians and its other Arab neighbors were pushed into a distant second place.

This reorientation of the political debate was not the result of a clever politician persuading the public to change its thinking. Precisely the opposite was the case: The general public imposed its views on the political establishment. That is why Netanyahu’s “Kahlon gambit” was tried but, being too little and too late, it failed.

The parties and persons who succeeded in the election were those who correctly identified the significance of the grass-roots revolution that burst onto the Israeli scene in the summer of 2011. The winners were those who identified with it and with the young people who conducted it. Their overarching message to the country’s political establishment was, “The old verities of Israeli politics are irrelevant to us; we have a new agenda.”

Three Takeaways

The three takeaways that most clearly emerge from the election all reflect this upheaval in Israeli society. First, the winners and losers lined up on a scale of incumbency (losers) through to “fresh faces” (winners). The biggest losers were Likud and its new partner, Yisrael Beiteinu, because they made the fewest changes to their line-up in both persona and program. At the other end of the scale, the biggest winner was Yesh Atid, a party founded in 2011 by TV host Yair Lapid, who offered the public an attractive electoral list that included people from all walks of life — business, media, academe, the rabbinate and more. Thanks to a late surge in voter support, Yesh Atid (which means “There is a Future”) romped home with an amazing 19-seat haul, making it the second biggest party in absolute terms and the effective arbiter of the composition and policy platform of the next coalition. In one of the many ironies of this election, the apparent winners — Likud Beiteinu and Netanyahu — were the losers; the runner-up will call the shots.

Another big winner was Jewish Home, the remnant of the old National Religious Party, which a young high-tech millionaire named Naftali Bennett had taken over and turned around, as if it were a failing company with a shrinking market share and a soiled brand. Under Bennett’s charismatic leadership and with the help of his deep pockets, Jewish Home succeeded in not merely uniting the national religious constituency, much of which had drifted away to Likud over the previous decade or two, but even reached out to a wider constituency, especially young (and secular) voters in the Tel Aviv conurbation. In the final week of the campaign, Jewish Home fell back from the stunning levels of 15-16 seats that the opinion polls were giving it, perhaps because a chunk of the frothy Tel Aviv vote swung over to Yesh Atid. Still, its 12-seat final showing made it a powerful new player, and its success was the flip side of Likud Beiteinu’s decline.

In terms of the old framework of Israeli politics, with its focus on the future of the West Bank and the Israeli settlements there, Jewish Home is far to the right of Likud, whilst Yesh Atid is pretty much dead center. But in the new politics, in which socio-economic issues are paramount, both are center-right in that they accept and support a market-oriented economy, but they want the economic structure and, most particularly, the social structure to be more equitable. Yesh Atid’s slogan of “equalizing the burden” is the defining phrase for the election, the new politics that surfaced in it and the key issues on which the next coalition will focus.

The burdens that Yesh Atid’s Lapid and Jewish Home’s Bennett both agree must be made much more equal are, first and foremost, that of participation in military or, failing that, national service. The old system, in which a rapidly-growing number of ultra-Orthodox young men are exempted from military service to pursue religious studies while in tandem Israeli-Arab youngsters are also exempted from any form of national service, is anathema to Lapid, Bennett and their supporters. Far-reaching changes in this area are all but certain. These will probably be implemented gradually over the medium term. Still, they will mark a radical change in the structure of Israeli society, making it more inclusive.

The burden-sharing will not stop there. The roots of the election upheaval lie in the outburst of social protest in the summer of 2011. Many people mistakenly thought that this wave of unrest had fizzled, faded and died — but they know better now. That means that the demands for a fairer and more equitable fiscal policy, in which corporations and upper-income earners are not the main beneficiaries of regulations that lower direct taxation while raising indirect taxation, will now be stronger than ever. Netanyahu and his finance minister, Yuval Steinitz, had already recognized the potency of these demands and had reversed course on fiscal policy during 2011–2012. But the new government will be obliged to go further in the areas of taxation and government services. The middle class has served notice, via Lapid and Bennett, that it will not accept the “Republican” policies that Netanyahu and Steinitz have championed.

Left Turn Ahead

The class aspect of the election is important. The implicit “swing to the left” that it points to is another of the takeaways from the election — although its intensity should not be overstated. Further across the political spectrum, the Labour party’s revival under its new leader, Sheli Yachimovich, was stymied, despite — or perhaps because — of her open espousal of social democratic policies and the demand for much higher levels of government spending, even at the cost of a higher budget deficit and greater borrowing. The party did not even approach the 20-plus seats that she had aimed for, ending up with a disappointing 15 and putting into doubt her continued leadership. But to Labour’s left, the avowedly left-wing, politically dovish and economically socialist Meretz party doubled its parliamentary representation to six seats. The Arab-Jewish socialist party Hadash won four seats without difficulty. In short, persistent reports of the total demise of the Israeli left have proven to be not merely premature, but misleading.

The feature of winners and losers — fresh faces and incumbents — is closely tied to the third prominent conclusion emerging from the election, namely that a new generation of Israelis decided to re-engage, by voting and also by actively canvassing for their preferred party. Lapid was probably correct when he said that if the election had been held for people under 35 only, Yesh Atid would have won an outright majority. Indeed, the youth phenomenon was even wider than the class-based one, because it encompassed virtually every party from every section of the Israeli polity, including the ultra-Orthodox and the Israeli Arabs, as well as the overtly right-wing and left-wing fringe parties.

What does all this mean for the business sector and for investors, local and foreign? On the one hand, the short-term consequence is that the pressure on corporate profits via tighter regulation and more activist consumerism among the general public — as well as new legislation aimed at breaking up conglomerates and capping senior executive remuneration — will be stepped up. This will not be merely a fiscal move to plug the budget deficit; it will represent a socio-political move aimed at shifting resources — in a word, redistribution. To this may be added the uncertainty deriving from Fischer’s resignation and the need to find someone to replace him. It will be difficult to find a successor of similar global stature, one who has the standing over both the government and the markets that Fischer commanded.

However, from a medium-term perspective, businessmen and investors can identify what should prove to be more than just a silver lining. The strategy of “equalizing the burden” will lead, in due course, to higher rates of labor-force participation by the two sectors currently responsible for the low (but steadily rising) rate of participation, namely ultra-Orthodox men and Israeli Arab women. It will also lead to more youngsters entering higher education and, if it succeeds in straightening out some of the wrinkles and obstacles that have warped the housing market, it will address the single most powerful factor behind the youngster-driven revolution that generated the election upheaval.

The politicians, old and new, will be more than happy to squabble over who should take the credit for these achievements, if and when these are realized. The alternative, i.e. the absence of significant and visible progress in these areas, will surely lead to an even greater political shake-up in an election that will take place long before the next scheduled date of October 2017.

Additional Reading:

Haaretz: Stanley Fischer — the Israeli Economy’s Single Parent

Huffington Post: Israeli Elections and Foreign Investors

The Guardian: Centrists Gain Ground in Israel

The post What Will Israel’s Landmark Elections Mean for Business? appeared first on Israel Knowledge@Wharton.

Israel has chalked up some remarkable successes in high technology, creating a strong start-up cluster that carries shades of California’s Silicon Valley. The country has spawned hundreds of new companies in information technology and communications as well as biotechnology and, to a lesser extent, clean technology. Between 2002 and 2011, Israeli technology companies raised some $15 billion from investors while the country became a hunting ground for tech multinationals seeking innovations through mergers and acquisitions. During that decade, start-ups gleaned more than $37 billion in foreign capital via initial public offerings or by being bought or merged in cross-border transitions. The value of Israel’s engineering talent is evidenced by the plethora of R&D centers in the country owned and operated by foreign companies. This,development — which has earned Israel the nickname “start-up nation” in some circles — has occurred despite the country being at the center of one of the world’s most politically volatile regions, during an era punctuated by frequent wars and terrorism, and far from the U.S., European and Asian technology markets.

Yet, Israel’s 20-year-old high-tech industry has not performed well against one important measure of success: All of the entrepreneurial and innovative activity has yet to create any large, industry-leading companies. In the Forbes 2000 ranking of the world’s biggest publicly traded companies measured by sales, Israel has a relatively large presence on the list, with 11 companies. Most of these, however, are holding companies geared to the domestic market, which says a lot about how much of the country’s small economy is in the hands of a few business groups. And despite its reputation as a technology center, Israel has only one tech company on the list, the network security company Check Point Software Technologies at number 1,390.

Based on its fiscal 2011 sales, Amdocs, which provides billing and other services to telecom companies, should have made the list, giving Israel a second presence in the ranking, but though the firm was founded in the nation, it is incorporated overseas. Compare that with three other smallish countries with knowledge-based economies, although without the record Israel has of generating start-ups: Switzerland has 45 companies on the Forbes list, three of which are tech companies; Sweden has 25 companies, of which three are tech-oriented; and Singapore was represented by 18 companies, two of which are engaged in technology.

Relative to its small population of 7.8 million people, Israel has an abundance of high-caliber engineering talent, which experts attribute to generally excellent universities and more importantly, an army that invests heavily in developing its own communications and other military technology. That enables large numbers of young Israelis — most of whom are drafted after high school — to receive early grounding in teamwork, leadership and creative problem-solving. These capabilities are then put to use in the civilian sector, both by those who serve in technology units or those in the ordinary service where many are given command responsibilities at an early age. The absence of big, knowledge-oriented industries means start-ups have less competition for the best managers and engineers.

To finance start-ups, Israel has abundant venture capital and a growing cadre of angel investors and companies ready to provide funding. There are incubators and accelerators to provide services, as well experienced attorneys, accountants and bankers familiar with the start-up environment and its special needs. This meeting of entrepreneurialism, engineering talent and venture capital has generated most years between 540 and 670 start-ups annually from 2005 to 2011, according to figures from IVC Research. In all likelihood, many more companies were formed under IVC’s radar.

When Goliath Acquires David

These start-ups follow a similar trajectory. The entrepreneur or entrepreneurs form a small team with the aim of developing a particular product or technology, traditionally in the Internet or business software. Increasingly, though, they are also focusing on fields such as mobile or cloud computing, where costs are low and time-to-market is fast. But the burgeoning firms will take their R&D only so far, perhaps no further than a beta product or some early sales before the start-up is acquired, often by a larger foreign (nearly always American) company. Members of the engineering team become employees of the acquiring company, forming a local R&D unit. The founding entrepreneur may stay on for a while before going on to form another new company. The result is that a promising start-up becomes part of a larger foreign behemoth before it can establish its global identity and grow into an Israeli giant.

Why Israel has failed to leverage its knowledge resources to build sustainable business is a matter of much debate in the country. Some observers have suggested the reason is cultural — an aversion to big organizations, processes and hierarchies that makes it difficult for Israelis to lead, follow and coordinate. In other words, the same factors that make Israel a start-up hothouse prevent it from building large businesses based on its own innovation. Others say it has to do with the risk-reward calculations made by entrepreneurs and investors.

“It’s a young country. When someone gets an order for a significant sum that can significantly improve his and his family’s financial status, the temptation is high,” says Tal Slobodkin, who works in acquisitions, investments and strategy for Cisco in Israel. Since 1998, Cisco has made 10 acquisitions in Israel and invested in 21 companies. “Definitely per capita this is the highest number and even by absolute numbers, this is higher than what we have in India and China, maybe Europe,” he notes.

Cisco is hardly alone in trawling the Israeli technology cluster in search of companies. “It’s easier to be bought,” Slobodkin adds. “Somebody in Barcelona with a great start-up company that could sell to Facebook doesn’t have a Facebook office 20 kilometers away or less. Here in Israel you see that. It’s hard to vet companies when you don’t have any presence.”

In the past, venture capital funds often took a lot of the blame for start-ups selling early, but Slobodkin and others say that is less so the case nowadays. Part of the reason is that foreign VCs are now a much bigger presence in Israel than they were five years ago. With much more capital to manage than local Israeli funds, the prospect of exiting a portfolio company for several tens of millions of dollars is not worth an overseas-based VC firm’s time or trouble. If the start-up doesn’t have the potential to grow and go public, it is hardly worth investing in to begin with, explains the Israeli manager one a major U.S. venture capital firm who asked not be identified.

In fact, the record of Israeli companies establishing and retaining a dominant market position, even in industries they pioneered, is poor. Scitex briefly held the leading position in pre-press design and layoff for the publishing industry before it collapsed during the PC revolution in the 1990s and 2000s. M Systems developed the USB flash drive but was sold to California-based SanDisk, a global leader in flash memory storage products. Metacafe was viewed by some of the world’s savviest venture capitalists as an early rival to YouTube as a video hub, but it ultimately failed. Comverse dominated the voicemail industry and later expanded to billing and other functions but lost traction due to a massive stock options scandal and, now much reduced in size, is feeling pressure from lower-cost Chinese rivals. Better Place, which raised some $800 million to develop a network of electric-vehicle refueling stations in Israel and abroad in partnership with Renault-Nissan, is running out of cash as sales have lagged far behind targets.

Some experts, including Saul Singer, co-author of Start-Up Nation, a 2009 book that lauds Israel’s high-tech industry, have argued that Israel can do perfectly well as a generator of innovation through small companies and has no need to build “an Israeli Nokia.” But the Israel tech industry’s narrow focus on start-ups and R&D companies comes at a cost to the wider economy. While Israel has enjoyed strong growth over the last decade, avoiding the fallout of the global economic crisis, and its unemployment rate is low by current Western standards, by other parameters it is faring poorly.

Weak Performance

Labor productivity has fallen behind leading Western countries and in 2011 was just $33.80 an hour, putting Israel 23rd among the 34 Organisation for Economic Co-operation and Development (OECD) countries, just behind Greece. Israel’s relatively low jobless rate belies the fact that the labor force participation rate is low. There are many reasons to account for this, among them the large and growing population of ultra-orthodox Jews whose men generally shun work for religious study. Much of Israeli business is dominated by domestic monopolies or near monopolies where the absence of competition gives firms little incentive to be either more efficient or more innovative.

Technology is the industry where Israel is supposed to have a comparative advantage. But that advantage is not being shared by much of the economy. The industry’s start-up focus means its employment base is narrowly focused on engineers and others involved in R&D. Although start-ups, like other small enterprises, are often lauded for their job-creating power, the fact is they create few jobs. Figures from the Israel Association of Electronics and Software Industries found that Israeli tech companies with 20 or fewer employees accounted for just 1.5% of total employment in the Israeli high tech industry. Those employing between 20 and 50 people made up 3.1%, those with 50 to 100 employees accounted for 6.7% and companies with 100 to 200 each on their payroll were 14.6%. Nearly three quarters of all employment in the industry was from companies with 300 or more employees.

A study by the recruitment firm Ethosia Human Resources produced for the financial daily Globes last year found that of the 10 biggest employers in Israel’s technology sector, three are defense companies that specialize in military electronics employing 36,000, and three are local units of foreign multinationals, with 14,000 people on their payroll. The four top Israeli non-defense companies together employed just 11,300 people.

The Ethosia study also shows how little employment Israel’s technology sector provides in other kinds of jobs normally found in business. Ethosia counted 198,500 people in technology, of which it had defined job categories for about 169,000. Of the latter, close to a third were employed as software and hardware engineers and designers. Among other categories, the industry employed more physicists (4,433) than it did people in sales (4,158) or finance (3,702).

Israel’s start-up obsession, however, may be changing and not only because of the demands of foreign venture capital funds. Besides industry veterans like Check Point, Amdocs, Nice Systems and Orbotech, new category leaders are emerging in semiconductors (Mellanox, EZchip), web analytics (Conduit, Babylon and Kaltura) and the Internet (Allot Communications and Wix) to name a few. “It’s true that we don’t have hundreds of multi-billion-dollar companies, but it’s a small country and you can’t expect every other company to be huge,” says Slobodkin. “These are companies reaching a billion-dollar valuation and they weren’t around 10 years ago.”

Eyal Gura, a serial entrepreneur with three companies under his belt, notes that as the industry matures and the entrepreneurs themselves move on to their second, third or fourth company, the urgency to cash out quickly diminishes. Gura himself is planning a new start-up in the health care information technology field, and says that this time he is in it for the long run. “The fact that I picked this specific field instead of a mobile app shows that my horizon has changed and that I can afford to think of bigger opportunities and take more risks,” Gura states. “You need regulatory approvals from the [U.S. Food and Drug Administration], and there are privacy issues and technology risks.” Nevertheless, Gura is confident that he can steer his business through those challenges and that he can find the capital and the managers to back him.

In any event, the competition for Israeli start-ups has grown as Europe, China and India have developed start-up clusters of their own. The old days when Israeli start-ups could pioneer a new category without fear of local competition are over, Gura says. “It’s a very big zero sum game. With online properties, there is a winner-take-all market dynamic. So if you look at browsers, e-commerce and payment systems, and email inboxes, usually the first two or three players are the ones who win — the rest close down or are taken over because they don’t create enough returns for investors,” Gura notes. “The so-called advantage we have in Israel is diminishing fast.”

Additional Reading:

The Israeli Innovation Enhancing Your iPhone

Tel Aviv: The Next Medical Device Cluster

Israeli Tech Companies Raise $1.92 Billion in 2012

The post Creating Global Giants from a Culture of Israeli Start-Ups appeared first on Israel Knowledge@Wharton.

Since the news of Izhar Gafni’s cardboard bicycle made international headlines in late 2012, the Israel-based inventor has spent more time fielding phone calls from journalists and hosting television camera crews than on adding the finishing touches to his unique design.

What got people talking is not only the idea that creating a bicycle from the wood pulp material used usually to make storage boxes has challenged what most deemed impossible, but also the fact that such a gadget, which is slated to retail for $20, could essentially change the world by affording millions of people worldwide the opportunity to own a bicycle. The bicycle also incorporates other recyclables — plastic bottles, wood and old tires — for the wheels, pedals and brake mechanisms.

Gafni, an automation expert and head of I.G. Cardboard Technologies, and his business partner, Nimrod Elmish from ERB, an incubation company for startups, have also developed an ecologically friendly business model built on rebates for green products, incentives for commercial advertising and non-profit funding for the manufacturing process.

Israel Knowledge@Wharton interviewed Gafni and Elmish recently about their venture. An edited transcript of the conversation appears below.

Israel Knowledge@Wharton: How did news about your invention spread around the world?

Izhar Gafni: I don’t know how this has happened, but we have been quite shocked by all the attention. It has taken me by surprise actually. I was so busy focusing on making a short movie to promote the bike and explain how it was created, that I just kept thinking: “When I finish this, I will be able to move on to do something else.” But it has not happened like that at all!

In early September, we published two short articles in Hebrew; one was on a blog for bikes, and the other was on an Israeli website featuring new gadgets. A few days later, I started getting emails from all over the world and then suddenly I got a call from the news agency Reuters, whose reporter came out and did a story. After that, everything else happened so fast! We have not had a minute to even think about how to set up time for proper marketing or public relations, or to work on how to move the product to the next stage, which is to develop a prototype so it can be reproduced easily.

Israel Knowledge@Wharton: Where did the idea for a bicycle made from cardboard come from? How did you know it would even be possible?

Gafni: Well, I am a bicycle enthusiast and about four years ago, I went to the cycling store to buy some parts for my bike. At the store, we were talking about various things, and then someone started telling me that he had heard about a canoe built out of cardboard. It was the canoe that was at the back of my mind when it suddenly struck me: Why not make a bicycle out of cardboard? I started to speak to some well-known engineers and they all said it was impossible to make a bicycle out of cardboard.

I was feeling frustrated, and at home, my wife noticed that I was looking disturbed. I told her about the cardboard canoe and the engineers who said it is impossible to build a bicycle in the same way, and about my desire to do it anyway. My wife said to me, “In that case, you better try it, because if you don’t you will drive yourself crazy and drive me crazy.” So I did; I was determined.

The other aspect that drove me to develop a bicycle from cardboard was that I love nature. I see it as a way of going back to my roots. I grew up on a Kibbutz (an Israeli agricultural community) and, after working in hi-tech and business for several years, I wanted to get back to nature. I thought about what I could do to harness my love of nature and my interest in traveling. It was about the same time that I had paid a visit to the bicycle store near my house.

Israel Knowledge@Wharton: Why do you think people have become so interested in a bicycle made from cardboard?

Gafni: Despite the fact that people are into new technology, innovation and gadgets that [make our lives easier], I think there is a real need and a craving for things like this that are simple and easy to use. On one side of our world there is technology, but on the other side, people like simplicity and things that make their lives easier. I think it is like a wristwatch. Today, people do not really need to wear a watch because they have clocks on their TVs, on their computers, even on their phones, so why do they need a watch? Yet they still want one because it’s simple, looks good and is useful.

Another point is that the bicycle is going to retail very cheaply, which will make it attractive and affordable to a lot of people. People who have bikes are always worried that they might get stolen or lost or broken. With a bike costing not more than $20, even if it disappears or breaks they can afford to buy another one cheaply.

Israel Knowledge@Wharton: How did you go about developing the product and strengthening the cardboard?

Gafni: Before I started working on this project, I had very little knowledge of how to work with cardboard, except for using it to make packages. I spent a long time playing with the material and folding it in different ways like you do with origami. It became very simple; just a few folds and it was double the strength of how the cardboard usually is. Then I added a mixture of glue to get it to the point where we could make the bicycle parts. On the surface — and the element that makes the bicycle a little bit heavier (it weighs 20 pounds in all) — is paint and varnish, the type used on cars. This also protects the bicycle from outdoor elements like sun and rain. We have tested the bicycle in all different elements and it did not break apart.

Israel Knowledge@Wharton: What was the turning point in your development of the bicycle?

Gafni: A few months ago after finishing the first prototype, I — who weighs 250 pounds — and a friend of mine, who weighs a similar amount, both took turns riding the bike. It was an exciting moment and felt like a real triumph that we could both ride on it and it did not crumble or collapse. I have to add that the glory passed fairly quickly, because we immediately had to go back to work on getting the bike ready.

Israel Knowledge@Wharton: What challenges did you face in developing the bike, and how did you overcome them?

Gafni: Every day was a challenge for me while I was developing the bicycle, basically because it had never been done before. There was no point of reference for me to use to check whether I was heading the right direction. Every part of the bicycle that I developed was also a challenge — from the frame and pedals to the wheels.

There were many days when I felt frustrated with the challenge, but I was never willing to give up. Instead, I tried to adopt elements of tai chi, whereby I would try to feel the material, learn its properties, understand its secrets and then find the right way of working within its limitations.

One of the biggest breakthroughs for me was when we took the bicycle to Tel Aviv to make a short film about it. It was then that I realized we might have actually created something that people like and want. When we were in Tel Aviv, people suddenly surrounded the bicycle and told us, “This is what we want.” For me, that was the first time I saw a real connection between the bike and people. Until that point I was not sure it would work; because I was so engrossed in its development, it was hard for me to imagine the response of real people.

Israel Knowledge@Wharton: What have you learned from the experience of overcoming such a huge challenge?

Gafni: Well, I am very much enjoying the fact that the bicycle is considered a success — not [yet in regards] to the business side, but it is [generating] huge amounts of positive public relations for me personally as an inventor. But the real lesson is that even though it was a big challenge, we managed to get over it.

Israel Knowledge@Wharton: How do you think this creation will affect bicycle production and other products in the future?

Nimrod Elmish: There are 130 million bicycle designs in the world. In fact, there are more models of bicycles than there are cars, but there is only one that is made from cardboard. This will challenge the rising production and manpower costs of making more hi-tech bicycles in the future.

We believe that we have developed something that will be very cheap to produce and much cheaper, than in the past, for the customer purchase. It is also green in every way because we are using recycled materials — tires, plastic bottles and paper. We plan to harness manpower in countries where the bikes are being manufactured. That will be another way to keep costs down.

I think when people realize that in many countries, by using green production methods they can receive a rebate from the government, maybe they will even convince their own governments to adopt such a method — so we are changing ideas, too. Right now, only a few countries have such a system to entice “green” production.

Knowledge@Wharton: Your business model sounds interesting. Could you explain how it works? 

Elmish: I think we are creating a business model for the future. Essentially, the money is going around in a circle, because we are using recyclables to build the bike, so in many places where we plan to open production plants we will get a full rebate on our expenses.

We are also planning to offer companies the chance to advertise or put their logos on the bike, and then they can have a moving advertising space to promote their goods. In addition, big factories might purchase the bikes for their employees, because then it is easier to transport them to work and, in those cases, they can use the bikes to advertise their own products. In the back of my mind, I have the classic image of a man in Africa running holding a bottle of Coca-Cola up high but now, with this bike, he will instead be riding a bicycle with the Coca-Cola logo on it. Everything could completely change.

We also hope to save production costs by keeping factories local, so that we can receive government grants for the manufacturers or we can provide employment to people with disabilities and the elderly so we can get further discounts. The cost to create the bikes will be very low, but obviously retailers will still need to make some sort of profit. However, they should not be sold for more than $20.

Israel Knowledge@Wharton: How did you come up with your business model? 

Elmish: Part of the idea came from a business model often used in the high-tech world, where software is distributed for free because it includes embedded advertising.

Gafni: I got the idea for the business model originally when I was working in the U.S. for a large corporation. One day, I heard that my boss had bought a field of biogas and bio-diesel for $50 million. I did not understand why he thought that was a sound investment, and I was a little surprised — but the chief financial officer of the company explained to me that even though he paid $50 million for the field, he would get a rebate of $100 million because he’d invested in something that was considered environmentally friendly.

Knowledge@Wharton: What are your plans for the future? What else can this cardboard design be used for? 

Gafni: We are already in the process of developing an urban bike for youths, a pushbike for young children, a women’s model and even a wheelchair. As soon as I get some free time, I will start working on the cardboard wheelchair, a project that has been commissioned by a non-profit organization working in Africa. The wheelchair is based on the same principles as the bike. It will weigh less than 20 pounds and use recyclable materials such as tires.

As for production, we have already found a larger working space than the place where I originally created the bike, which is next door to my home on Moshav Ahituv. We hope that the three additional models of the bike and the wheelchair will be ready within the coming months and be available for purchase within a year.

Elmish: We have already begun looking for partners in Africa who can help us determine locations for factories there, and will soon start looking to develop other partnerships all over the world.

Web links

CBS: Israeli inventors create cardboard bicycle

NPR: A Cardboard Bike That Can Change the World (with video)

The post An Israeli Inventor and His Recycled Cycle Are Riding for Change appeared first on Israel Knowledge@Wharton.

The buzz-word “game-changer” suffers from misuse, overuse and abuse. It is applied so liberally to situations in business, politics and even sports that any minor gaffe by a candidate, the launching of an enhanced version of an existing product, an upset in a routine league fixture — anything that can generate a news item — tends to be hailed as a potential “game-changer.”

But major discoveries of natural gas by Israel, a country that imports virtually all of its energy requirements, are viewed by many in the country as a genuine economic game-changer. Given the nation’s strategic location, observers say, the discoveries could spur economic and political powers to consider large-scale infrastructure investments in Israel to facilitate the development of the resources — meaning the game being changed is not just economic but also geo-political.

Indeed, in Israel, the interaction between macroeconomics and geo-politics is almost inevitable. But the scale of the impact of a series of significant-to-major natural gas discoveries made off Israel’s Mediterranean coast in recent years — and the prospect of more to come, probably including oil as well — is likely to prove sufficient to change some of Israel’s most fundamental and seemingly intractable features.

In terms of corporate activity, Israel has become used to hosting R&D facilities of most of the Western world’s leading technology companies — and, in many cases, of production facilities as well. On the other hand, all major — and virtually all mid-sized — energy companies have tended to give the Jewish state a wide berth because doing business there would surely cause them to lose business, existing or potential, among energy-rich Arab and predominantly Muslim countries, from Algeria to Iran and even Indonesia.

From an economic point of view, the Israeli economy’s most consistent feature since the country’s creation in 1948 has been its trade deficit. With no important natural resources to speak of, other than the mineral deposits extracted from the Dead Sea region, Israel has always had to import most or all of its raw materials, foodstuffs and, of course, energy. Thanks to the high-tech revolution of the last generation, the gap between imports and exports of goods has shrunk, while in the services sector the country runs a growing surplus.

The surge in energy prices in recent years has sent the import bill through the roof — and pushed the trade deficit to record levels in the last year. If those oil imports could be replaced by usage of domestically produced natural gas or, alternately, if the bill for imported oil could be offset by revenues from exporting natural gas, the trade deficit would shrink or vanish entirely and the country’s overall balance of payments would move to a massive surplus position, experts note.

In the political sphere, the potential impact could be as great — indeed, it is already visible. Russian President Vladimir Putin made Israel his first port of call after being re-elected to the presidency in June, with the subject of future Israeli natural gas exports to Europe a key item in his discussions with Israeli leaders — and the possibility of Russian energy giant Gazprom playing a major role in their development. Meanwhile, China has offered to build a rail link from Ashdod, on the Mediterranean, to Eilat, Israel’s port on the Red Sea, to allow trade on the China-Europe route — including natural gas from the Mediterranean — to bypass the Suez Canal. Both these developments stem directly from the gas finds and, observers believe, neither was remotely imaginable before them.

Domestically, natural gas offers equally enticing prospects, notably including an energy source that will be not only much cheaper, but also much cleaner and hence conducive to a healthier environment in the country’s crowded center. A slew of energy-based industries could broaden the scope of the economy, as well as spurring growth in existing sectors.

Given such an outlook, it is hardly surprising that many Israelis, especially in government and industry, became euphoric about the country’s commercial and diplomatic prospects after the discovery of the Tamar and Leviathan fields in early 2009 and late 2010 respectively. Tamar has proven reserves of 9 trillion cubic feet (TCF) and the aptly-named Leviathan, with 17 TCF, is one of the largest finds in recent years anywhere in the world. However, in the understandable excitement generated by the finds, the road between identifying the existence of the gas and actually selling it and booking a profit on it — and the host of problems lurking along the way — tended to get overlooked or downplayed, observers say.

Serious Challenges

The euphoria soon dissipated in the face of problems as numerous and as multi-faceted as the potential impact of the bonanza. First, and perhaps foremost, there are huge physical and practical difficulties to be overcome. The very discovery of deep-water deposits — Tamar, for instance, lies under 6,000 feet of water — is itself only possible thanks to very recent technological advances, and the extraction of the gas requires complex and challenging, and hence very expensive, investments.

No less challenging is the need to bring the gas to market, whether domestically or overseas. This could be done by constructing a pipeline, or by turning it into liquefied natural gas (LNG) and shipping it in specially fitted tankers, but either of these options involves huge investments in infrastructure.

These would be daunting problems anywhere in the world — but in the eastern Mediterranean they come overlaid with additional layers of risk. Israel’s fields are adjacent to those of Cyprus, and the two countries are co-operating in developing their assets. But Cyprus is in the throes of a financial crisis, which is itself part of the wider European financial turmoil. Furthermore, Cyprus is divided into rival Turkish-Cypriot and Greek-Cypriot regions, with Turkey unhappy about anything that could make Cyprus as a whole more independent. Meanwhile, Turkish-Israeli relations have been under severe strain in recent years, for reasons unconnected with the energy sector.

These, however, are just the political and diplomatic issues. Lebanon, where the government is dominated by the Shi’ite Hezbollah party, which is closely aligned with Iran and hostile toward Israel, has its own claims to some of the offshore fields, despite Israel and Cyprus having defined their maritime borders to their mutual satisfaction. Hezbollah in Lebanon, as well as the Hamas-ruled Gaza Strip in the south, pose serious security problems for Israel with respect to offshore oil platforms and any potential refining or liquefying installations it may decide to build. An attack on a weapons depot in Sudan October 24 that has been attributed to Israel may have been aimed at preventing weapons with the capability of hitting Israeli energy installations from reaching Hamas, observers note.

Even in the two or three years since the big discoveries, the geo-political situation has become more complicated. In Egypt, the Arab Spring revolution led to the overthrow of the Mubarak government in early 2011 and, soon after, to a series of disruptions in the supply of Egyptian natural gas to Israel and Jordan via a pipeline in the Sinai Desert. The attacks on the pipeline came at a particularly inopportune time for Israel.

The initial small offshore finds, made in 1999, triggered a strategic decision by Israel in 2004 to switch much of its electricity generation to natural gas, with its advantages of being cleaner and cheaper — and potentially plentiful, thanks to supplies from both domestic fields and from Egypt. By 2010, Egypt was providing some 40% of Israeli natural gas requirements, while Israel’s existing fields were being exploited to the full, in expectation that when the Tamar field came on stream — then scheduled for 2012 — they would become redundant.

But the pipeline attacks effectively blocked Egyptian supplies, forcing Israel to buy expensive and polluting heavy oils for its refineries, at great expense and dislocation to the natural gas conversion program. The supply problem became acute in April 2011, experts note, when the Egyptian government formally cancelled the 2007 agreement between Israeli and Egyptian energy companies, albeit on commercial rather than political grounds — leaving Israel with a shortfall that came close to causing system-wide power cuts in the hot summer of 2012.

Was the Egyptian move politically inspired? Most independent analysts do not believe so, pointing instead to growing domestic Egyptian needs versus dwindling supplies from the country’s gas fields, and to a widespread feeling that the Egyptian government and corporate officials involved in the deal with Israel were part of the corrupt apparatus of the Mubarak regime.

Sarah Ma’udi, the Israeli Foreign Ministry’s expert on maritime and humanitarian law, shares this assessment. In an interview with Israel Knowledge@Wharton during a recent visit to campus, she was asked whether the Israeli government regards the discontinuation of natural gas supplies from Egypt as a diplomatic issue and a test of the new Egyptian government’s attitude toward the Egypt-Israel peace treaty and Egypt’s commitment to it. Her reply was: “I think that’s going a bit far…. This is a commercial issue and it’s being handled between commercial actors there. I think to tie it in with the peace treaty is a little bit like mixing apples and oranges.”

Making Progress

Whatever the motives behind the move, it has generated problems for Israel, at least until the gas starts flowing from Tamar — now expected to happen in the second quarter of 2013. But the last couple of years have not been lost from Israel’s point of view, observers say. On the contrary, two critical issues that are entirely in its control have been addressed and largely resolved.

The first is the structure of the taxation and royalties levied on companies engaged in exploring for and extracting oil and gas. The old regime, dating back from a time when there was no energy profits tax, was finally updated after a contentious process in early 2011. Profits of oil and gas companies were increased from 33%, one of the lowest in the world, to a top rate of 50% while royalties on hydrocarbon discoveries remained at their previous level of 12.5%. The tax on energy profits begin only after the developers have reached a payback on their investment of 150%, at which point the tax rate is 20%. It rises to 50% after companies have achieved a return of 230% on their capital spending. All told, the state’s take in tax and royalties is as much as 62.5%.

The second issue that the Israeli government needed to resolve was the domestic argument over whether the country’s new-found natural resource should be exported — and if so, how much and how quickly. The two extremes in this debate were “all” and “nothing”. On the one hand, there were those — led by, by not limited to, the energy companies involved in exploration — who urged that there be no caps on exporting natural gas, since this would maximize revenues and profits not just for the companies involved, but also for the state. Furthermore, it would act as a powerful incentive to other energy companies to join the exploration activities in the eastern Mediterranean. The “nothing” camp, on the other hand, argued that the gas should be seen as a strategic national asset that should be leveraged to end Israel’s dependence on imported oil, as soon as possible and for as long as possible into the future.

With Tamar and then Leviathan offering sufficient reserves for Israel’s projected domestic usage for many decades, an inter-departmental committee chaired by Shaul Tsemach, director-general of the Energy and Water Resources Ministry, determined that the correct strategy was a middle path between these extremes. Its final report, published in September, concluded that 53% of estimated gas reserves could be exported, equal to about 17.7 trillion cubic feet based on current estimates. The biggest, those with reserves of 7 trillion cubic feet and over, which include Tamar and Leviathan fields, are limited to exporting 50% of their output. Fields of 3.5 trillion to 7 trillion cubic feet can export 60%, and those between 880 billion and 3.5 trillion cubic feet 75%. The smallest fields can export their entire output. The committee recommended establishing a mechanism for trading export quotas between the fields, which is aimed at encouraging energy companies to develop smaller fields not now considered commercially viable.

The Tsemach estimates have come under fire from some quarters because they are not based on proven reserves and therefore pose too much risk to ensuring adequate domestic supplies. Those fears have been exacerbated by two dry wells (Sarah and Myra) in September and October in an area that had been regarded as promising.

While energy companies see exports as a means of accelerating their return on investment, the government sees them as a way of flexing diplomatic muscle. Shared energy interests have improved ties with Cyprus and could cement them with Jordan, which is desperate for new sources of energy after Egypt cut off its supply of natural gas last year. “The Israeli government wants to export the gas to neighboring countries as a means of promoting trade and leveraging that co-operation to create a political relationship,” says Nir Zonenberg, head of the research department at Meitav Investment House.

The final element is a sovereign wealth fund that will control a large part of the government’s oil and gas earnings (namely those from so-called windfall profits) and use them for specially designated projects, rather than going into the government’s regular budget. The ministerial legislative committee finalized the terms and structure of the fund in October for approval by the Knesset. The aim of the fund is to ensure that the massive export earnings from natural gas do not bring about the so-called “Dutch disease,” a rise in the value of the country’s currency that hurts the competitiveness of the country’s other export industries. The fund, which is expected to have at least $80 billion under management by 2040, will also help cover costs from unexpected events, such as a war or earthquake, which pose a threat to the economy, experts say. The committee rejected a proposal by the Defense Ministry for the fund to help cover the cost of defending energy installations. The fund’s assets and investments will be managed by a department to be set up within the Bank of Israel. The finance minister will head up the fund’s board that will determine its investment policy and monitor its implementation.

The Next Phase

With government policy mostly in place, the next stage in developing Israel’s vast gas resources is for the oil companies to secure financing for the development of the fields and to find markets. For that purpose, they will need to bring in one or more of the world’s biggest energy companies, a process that has already gotten underway. News reports have said that France’s Total and Russia’s Gazprom are both interested in becoming partners in the Leviathan project, while Australia’s Woodside has publicly announced its interest in taking a 30% stake. Meanwhile, the energy companies will have to decide what markets to direct Israeli exports to, either Europe or Asia. Europe is geographically closer to Israel, but prices in Europe have fallen amid heavy competition. Furthermore, delivering gas by undersea pipeline, as some have proposed, presents serious technological and security challenges, critics note. The second great market — and, according to some, a more promising one — is the burgeoning economies of China and India.

For the more distant Asian market, Israel would have to develop LNG facilities, but an onshore facility is unlikely to be built, says Amir Mor, chief executive officer of the consulting firm Eco Energy. “There are major security and employment benefits to having the project onshore Israel … [including] providing thousands of jobs in construction and thousands more in the operational stage. Nevertheless, the authorization for doing a project like this in Israel is challenging since intensive opposition is anticipated [due] to NIM [not in my backyard] considerations by locals and environment groups.” Therefore, two alternative solutions are being weighed — one to build an offshore facility using newly developed technology and the other to pipe the oil to an LNG plant in Cyprus, a project that the Cypriots are lobbying for. For this, Woodside would be the most promising candidate among the energy multinationals eyeing Israel, experts note.

A third alternative would be to pipe the gas to Egypt, where LNG facilities already exist, but that idea is not currently under discussion due to political obstacles. “The current situation can be used to highlight all the potential absurdities of doing business in the Middle East: Israel has excess gas supplies, but no liquefaction facilities,” says Zonenberg. “Egypt has liquefaction plants, but no gas supply to export. There exists a pipeline between the two countries which could carry Israeli gas to Egypt for liquefaction and export — but the company that owns the pipeline is in bankruptcy proceedings.”

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