How Israel turned itself into a high-tech hub

When a grey-haired grandmother clutching a smartphone mounted the stage at Montreal's Start-up Festival this summer, young Israeli entrepreneur Guy Rosen knew he had pocketed a very special award.

His company, Tel Aviv-based Onavo, offers an application that shrinks mobile phone data to help users save money - and appeals to any age. That made Onavo the winner of the Grandmother's Award for best start-up, judged by tech-agnostic ladies in the later stages of life.

Standing in his office in Tel Aviv, Mr Rosen recalls the moment: "They went on stage and said: 'We love Onavo and we understand what it does... it is such an easy app to understand' - we just save money, that's it, period, they loved us."

Guy Rosen is one of Israel's many young, enthusiastic entrepreneurs who, fresh out of the army, decided to set up a tech firm.

Tiny Israel, a country embroiled in conflicts for decades, has managed to transform itself from a stretch of farmland into a high-tech wonder.

Formula for success

Israel currently has almost 4,000 active technology start-ups - more than any other outside the United States, according to Israel Venture Capital Research Centre.

In 2010 alone the flow of venture capital amounted to $884m (£558m).

The result: high-tech exports from Israel are valued at about $18.4bn a year, making up more than 45% of Israel's exports, according to the Central Bureau of Statistics.

Israel is a world leader in terms of research and development spending as a percentage of the economy; it's top in both the number of start-ups and engineers as a proportion of the population; and it's first in per capita venture capital investment.

Not bad for a country of some eight million people - fewer than, say, Moscow or New York.

Serial entrepreneur Yossi Vardi says there is a whole blend of factors responsible for turning Israel into a start-up miracle. He himself has invested in more than 80 Israeli high-tech firms - among them the first web messaging service ICQ. He sold many of them to technology giants such as AOL, Microsoft, Yahoo and Cisco.

"If you look at how this country was created, it was really a start-up on the large scale," says Mr Vardi, who has been dubbed the godfather of Israel's high-tech industry.

"A bunch of crazy people came here, to a piece of desert, trying to pursue a dream of 2,000 years."

Over just a few decades, Israeli start-ups have developed groundbreaking technologies in areas such as computing, clean technology and life sciences, to name a few.

"Look at... agriculture, at the defence industry, at the universities here," says Mr Vardi.

"The high-tech is a popular story right now, the internet gave it a lot of visibility, but the story of the culture and the spirit is part and parcel from the kinds of the cultural genes of [the Israeli] people."

Government's role

But there is more to this start-up scene than certain aspects of Israeli culture - the lack of hierarchy, a constant drive for individualism, regular risk taking. The government played a key role in the rapid rise of this start-up nation.

"The government jump-started the industry," explains Koby Simona from Israel Venture Capital Research Centre.

One was the creation of the Yozma programme in 1993, a so-called fund of funds set up to invest in local venture capital funds that would channel money into new technology firms.

Soon numerous start-ups dotted Israel's industry landscape, and venture capital funds mushroomed all over the country - a blooming industry that quickly attracted foreign investors.

Israel's defence forces are also boosting entrepreneurship.

Military service is compulsory, but besides regular military units, the army also has designated hi-tech units, where computer-savvy conscripts are constantly prompted to come up with innovative ideas in disciplines such as computer security, cryptography, communications and electronic warfare.

"The military enables young people in certain units to get technological skills, to run large technological projects at a very young age, where they need to improvise in order to get fast solutions," says Prof Niron Hashai from the Jerusalem School of Business Administration at Hebrew University.

Once back in the real world, many military alumni use the newly acquired experience to launch their own technology start-ups.

And then, of course, there is Jewish immigration - a key driver of the country's economy since its foundation.

The biggest and the most important wave of immigration came from Russia, says Prof Hashai.

"Many were very smart people with technological background," he says.

"Maybe they were not so much entrepreneurs, but when these guys meet Israeli-born guys, many interesting things happen."

Lost decade

The first start-up boom of the 1990s lasted just a few years though. When the global dot.com bubble burst in 2000, the fortunes of Israeli venture capital started to decline.

Today, industry insiders speak of a lost decade.

Still, venture capital continued to flow into the country, and now investors are reaping the rewards.

During the past two or three years, all around Tel Aviv a new generation of start-ups has begun to emerge, ready to prove that Israel's high-tech industry is back in business.

Take Takadu, a company founded in 2008 that offers smart water infrastructure monitoring, remotely detecting leaking pipes in real-time all around the world. One of Takadu's customers is Britain's Thames Water. When a water pipe in London bursts, chances are that it will first be spotted by a computer in Tel Aviv.

Another example is Boxee. The five Israeli founders decided from the get-go to headquarter the company in Delaware in the United States, but locate the company's research and development office in Tel Aviv.

Boxee tries to provide the missing link between content on television and the internet. Once you connect Boxee's small shiny black cube to your TV, it will also link wirelessly to your home network. With a remote control, you can then browse and watch all online content on the big screen - not just your movies, YouTube videos or web TV, but also videos uploaded by your friends to Facebook, Twitter and other social networks.

Shortly after its launch in 2008, Boxee's little box could be found in more than two million homes across the US, Canada and the European Union, says Tom Sella, one of the firm's co-founders.

Then there is Waze - a firm that has developed a free app that turns your smartphone into a web community-based GPS device.

It will guide you through a city's road labyrinth, but combines the map with updates from other users - or "wazers" - from traffic jams to construction works to accidents.

Silicon Boulevard

The bright Middle Eastern sun may be setting slowly, painting Tel Aviv's roofs in warm shades of red, but one part of the city will continue to buzz for many hours.

This is Rothschild Boulevard - also known as the Silicon Boulevard, home to the offices of many hot start-ups such as Face.com and Soluto.

Some of them do not mind following in the footsteps of ICQ, 5Min, LabPixies and others, who have been scooped up by international tech giants.

Take the Gifts Project, for instance, set up by a handful of young enthusiastic employees sharing a tiny office with a balcony that looks out to Rothschild Boulevard and sports a huge logo of a pink pig. They've just been bought by the world's biggest online store eBay.

Others want to strike out on their own. One of them is Soluto, a firm that aims to make computers more user-friendly and crowdsources technical support that helps computer users anywhere in the world, for free.

Whatever their strategy, it seems that they are here to make an impact.

"These entrepreneurs are thinking big, they're using the latest web technologies, they are trying to build global businesses - they're not satisfied by building something small, they're really trying to create something huge," says Saul Klein, a Tel Aviv-based investor working for British venture capital fund Index Ventures.

"I think the new Israeli technology scene is almost rebelling against the last 10 years, where Israel for many years has underdelivered.

"This is Rothschild Boulevard - and I believe this is the place to watch."