Israel's Silicon Valley

Beit Shemesh - "Israel's ten thousand miles from Silicon Valley; but it takes a nanosecond to get there," says Jon Medved, one of Israel's leading high-tech venture capitalists and CEO of a new startup calledVringo, which allows users to share video ringtones on their cell phones.

Israel is a small country with seven million people, unfriendly neighbors, and relatively high taxes. So why does it have the second-largest concentration of startups per capita after Silicon Valley? Jon says the two places are more similar than one would think.

He knows from life experience. He was born in San Diego, raised in Los Angeles, and went to UC Berkeley for college. That's where he first got interested in Israel, arguing Israel's case against campus colleagues during the 1973 Arab-Israeli War.

Not long after graduating, Jon's father offered him the chance to go to Israel to help open the Israeli market for his father’s optical technology company. He went, and found the entrepreneurial spirit of Israel to be much like that of burgeoning California.

In both locales, he found tightly-knit geographical communities, informal work atmospheres, a pioneering, risk-taking ethos, and a large number of immigrants. He says these elements are key to entrepreneurial success, and have only grown more pronounced in both places over the past two decades.

Wearing a button-down Hawaiian shirt and slurping Nescafe, he now sits in Vringo's headquarters inBeit Shemesh, a small town just one mile from where the Bible's David is said to have conquered the giant Goliath.

Despite its ties to the past, this place is helping define the world's technological future, Jon says. Israeli venture capitalists support over 400 startups per year, more than any European nation. After America, Israel has more stocks traded on NASDAQ than any other country. High tech makes up 50% of the country's exports, worth about US$15 billion per year. Israeli startups provided crucial technology to develop the flash drive, the call center, and instant messaging software.

This doesn't surprise Jon. Silicon Valley and Israel are very similar, he says.

"Silicon Valley pioneered the open office," he says, which makes it easier to know your colleagues and to meet the real "movers and shakers" in a company. Israel's tech sector companies caught on to the benefits of that informal work atmosphere, which gives young people with ideas that chance to meet old people with money. That culture also resists entrenched hierarchies, encouraging youth to challenge superiors and raise new ideas. Add that to a larger popular culture that glorifies successful risk-takers in business, and a pioneering attitude, and you have a recipe for successful innovation.

But in both locations, Jon says the most important ingredient is the immigrants. "Being an immigrant is like being the CEO of your own mini-start-up," he says. "You're taking huge risk to improve your life." Moreover, immigrants bring Diaspora connections from their homelands that help new companies establish transnational partnerships and open up markets.

In Jon's industry, many of the most valuable immigrants are American managers, whom he recruits to lead his companies. He says they know America's specialties best: eCommerce (buying and selling goods online), entertainment content (like movies and music TV), and social networking (like MySpace).

They're all driving towards the goal of taking what America does well and positioning themselves to do it even better. With a tiny domestic market but a prime location between Asia and Europe, Israeli entrepreneurs are constantly drumming up international business - and to survive, they must do some much earlier in their development than American companies would have to. In Jon's view, that's a core strength. He also thinks Israeli companies have easier access to Asian markets, which don't view small Israeli startups as competitors like they do with some American corporate giants.

And Americans have big money. "America invented venture capitalism," he says glowingly. 60% of Jon's venture capital funds come from U.S.-based investors. "They are driven by profit, not politics," he says. That's good news for companies in Israel, where politics sometimes seems to take over; despite the Second Intifada that began in late 2000 when Palestinian suicide bombers terrified the country, and the 2006 Israeli War in Lebanon, which was roundly criticized for its excesses, Israel sustained a 5% growth rate. And Israel has doubled its relative share of the world venture capital market since 2000. Judging from the number of Israeli tech companies listed on NASDAQ, more than a few startups here have done their American venture capitalists proud.