Bloomberg Businessweek
The Startups of Nazareth
By Drake Bennett November 26, 2014
Photograph by Guy Martin for Bloomberg Businessweek
In the northern Israel city of Nazareth, around the corner from the Basilica of the
Annunciation and its crowds of Christian pilgrims, is a centuries-old building,
formerly a roadside inn. The stables off the courtyard where pack animals once
bedded down are empty, and the rooms above, where traveling merchants used
to sleep, are offices. When the windows are open, the amplified voice of the imam
at a nearby mosque cuts through at prayer time. On a Friday morning in October,
Jamil Mazzawi, the founder of Optima Design Automation, sits in one of the
cheaply furnished, fluorescent-lit workspaces, explaining what his startup does.
He gives the 15-second pitch he has perfected for investors: “The chip companies
are spending billions of dollars to protect their chips from ‘soft errors.’ These are
errors caused by particles coming from space, mostly from the sun, which disrupt
the operation of electronic chips. We at Optima are providing a solution for chip
companies to solve this problem at very low cost,” he says, then asks: “How many
seconds?”
A few hundred yards from the spot where Catholics believe the angel Gabriel
appeared to tell Mary of her divine pregnancy, Mazzawi worries about a different
kind of heavenly visitor: the protons and alpha particles bombarding us from
distant stars. The relentless shrinking of computer chips has created circuits tiny
enough that the impact of a projectile a millionth of a nanometer across can cause
a temporary malfunction.
Photograph by Guy Martin for Bloomberg BusinessweekCompetitors at a 36-hour “Makeathon” hacking competition in
Nazareth
If the computer containing that chip is running a stock exchange, or your car,
even a momentary error can have dire consequences. Optima’s software lets
chipmakers calculate exactly where they need to build redundancy into their
designs to make their chips less vulnerable. The product is in beta now, and
Mazzawi hopes to one day sell it to chip giants such
as Broadcom (BRCM), Intel (INTC), and Qualcomm(QCOM).
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Mazzawi, 44, is an experienced engineer with top Israeli and international tech
companies on his résumé, and a graduate of the Technion, Israel’s preeminent
technology university. In a nation that in the past decade has gone startup crazy,
that makes him a natural candidate for entrepreneurship. Mazzawi is also an
Arab, though, and that makes everything harder. He grew up in a working-class
neighborhood in Nazareth, a mostly Arab city culturally remote from Israel’s
social and financial capitals. Having battled his way into the Technion from a
largely vocational high school, he struggled to keep up with his better-prepared
classmates. When he graduated and first sent out applications for jobs he felt well
qualified for, he didn’t hear back from a single employer—a story common among
Arab engineers. Since starting his company, he’s found it difficult to find advice
and funding. “If I was Jewish,” he says, “I would have two or three uncles or
friends who have money and who are willing to invest and risk money in order to
maybe make money. In Arab society, this culture doesn’t exist of ‘Let’s invest in
high tech to make money.’ ” He’s still learning to negotiate the dynamics of
conversations with venture capital funds. “They’ll ask certain questions, and to
get answers you need to talk to people. With my limited network, it’s harder to
get this information,” he says. “That’s what I’m missing.”
A 2009 bestseller dubbed Israel Start-Up Nation, and the name has stuck. A
country founded by socialists, Israel boasts the second-largest collection of
fledgling tech companies in the world, after Silicon Valley. Israeli programmers
and engineers—and the security software, biomedical devices, and agricultural
technologies they create—enjoy a reputation for ambition and technological
ingenuity. Check Point Software Technologies (CHKP), based in Tel Aviv, has
over the past two decades grown into one of the world’s top network security
companies, valued at $14.5 billion. Medinol is a leading producer of heart stents.
Last year the mobile navigation startup Waze was bought by Google (GOOG) for
just under $1 billion, and IBM (IBM) reportedly paid about as much for the
security software company Trusteer.
Israel’s tech sector has grown despite intense conflict. This summer, 4,500
Hamas rockets were launched at Israel, the Israeli Defense Forces invaded the
Gaza Strip, and more than 2,000 Palestinians and 70 Israelis were killed. During
this bloody time, the pace of investment in Israeli startups actually increased over
the same period the year before, according to the research company IVC-Online.
In July, the Jerusalem-based company Mobileye (MBLY), which makes driver
assistance software to help prevent car accidents, raised $890 million in its initial
public offering, a record for an Israeli company.
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By Drake Bennett November 26, 2014
Photograph by Guy Martin for Bloomberg BusinessweekIsrael boasts the second-largest collection of tech startups in the
world, but only 2 percent of Israeli technology workers are Arab
A fifth of the population, however, Israel’s 1.7 million Arabs, are only marginal
participants in Start-Up Nation. Only 2 percent of Israeli technology workers are
Arab. “The major social challenge of the success of high tech in Israel is that it’s
just created bigger gaps,” says Yossi Vardi, an investor and central figure in
Israel’s tech sector. And today relations between Israel’s Arabs and Jews are as
tense as they’ve been in years—in recent weeks young Arab men from East
Jerusalem have carried out a series of lethal terrorist attacks in the holy city, and
right-wing Jewish activists have called on companies employing Israeli Arabs to
fire them. The mayor of the southern Israeli city of Ashkelon has barred Arab
workers from construction projects at local preschools, citing security concerns.
Yet at the same time, an increasing number of Israel’s Arabs are finding work in
the country’s burgeoning tech economy, feeding its appetite for programming
talent. Arabs are represented at Israel’s top universities in numbers
commensurate with their percentage of the population. The number of Arab
engineers at the large Israeli branches of multinational tech companies such
as Cisco (CSCO), Google, Intel, andMicrosoft (MSFT) is climbing. In cities such
as Nazareth in the largely Arab Galilee, a small startup ecosystem has started to
flower, nurtured by a couple of Arab-focused venture capital funds and
incubators—one of the latter, the Nazareth Business Incubator Center, houses
Optima. The potential for a boom is there, in a highly educated generation of
Arab scientists and engineers, and the fact that, after a lag, hundreds of millions
of Arabic speakers are making their way onto the Internet, looking for things to
read, watch, click, share, and buy.
Ask Israeli Arabs in high tech why there aren’t more of them, and you get several
answers. The most frequent is cultural: A young Israeli Arab who shows promise
in school is expected to become a doctor or, perhaps, a lawyer. “Arabs can’t join
high-tech companies because of their parents,” says Ahmad Soboh, a 24-year-old
software engineer and Muslim Arab participating in an October Makeathon, a 36hour programming and building competition at Nazareth’s St. Gabriel Hotel.
Soboh’s team will win first place, creating a glove for the deaf that,
communicating with a smartphone, could translate a phrase in sign language into
text and spoken words. “My parents wanted me to study medicine; they thought
that way I’d be able to find work,” he says, as a teammate behind him tests the
connections on a circuit board.
During a bloody period this summer, the pace of investment in Israeli startups
actually increased
This narrow vision of professional success isn’t uniquely Arab—it’s the same path
minority and immigrant parents push their children onto in the U.S. and other
wealthy nations. Medicine is safe. High tech is unpredictable. And starting your
own company, whoever you are, is a little crazy.
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Imad Telhami is an Israeli Arab success story, though his background is not in
technology. He is the former chief operating officer of Israeli textile company
Delta Galil, a leading global manufacturer of underwear. After leaving Delta he
started a call center company in northern Israel that employs mostly Israeli
Arabs, then began investing in startups. He lives in Isfiya, a village high on Mt.
Carmel that has been home to his family for 240 years.
Sitting in his sunny living room in the late afternoon, with an overflowing bowl of
fruit on the table and a Parliament cigarette in his hand, Telhami talks about the
“five fears” that handicap Israeli Arab entrepreneurs. There’s fear of failure, he
says, which is greater among Arabs than Jews. There’s fear of the government
and whether it will hinder Arab-owned businesses. There’s fear of banks and the
sense that they won’t lend money to Arabs. There’s “fear of being the first,” since
there have yet to be any major Arab tech success stories. And there’s fear of being
on one’s own, without peers or mentors.
These anxieties aren’t unfounded. Something in the culture and history of
Zionism, or of Israel, may make Jews more comfortable with risk than Arabs, but
it’s also true that Israel’s Arabs are poorer and therefore less able to absorb a
setback. And while Israeli Arabs are full citizens in the eyes of Israeli law and
enjoy rights that the citizens of most Arab countries lack, they also have endured
private and public discrimination in hiring and housing. Israeli Arab children go
to schools that are different from and usually inferior to those of their Jewish
peers—with the exception of Christian schools. The 10 percent of Israel’s Arabs
who are Christian actually perform better academically than any other Israeli
demographic and are comparatively prevalent among the country’s Arab software
engineers and entrepreneurs.
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By Drake Bennett November 26, 2014
Photograph by Guy Martin for Bloomberg BusinessweekNazareth is known as the “Arab capital of Israel”
Then there’s the simple fact of geography: Most Israeli Arabs, Muslim and
Christian, live in the north and the interior, not in greater Tel Aviv, where the
global tech companies, startups, and investors are concentrated.
The single biggest disadvantage is that Israeli Arabs do not serve in Israel’s
compulsory military service, which has proved a powerful machine for matching
up young, entrepreneurial Israelis. A disproportionate number of the nation’s
startups have come out of elite intelligence units, which select young men and
women for their smarts and technological skills, train them extensively, then
release them into the workforce in their mid-20s. Israeli Arabs are exempt from
the draft, and most don’t volunteer, feeling that doing so would effectively be
taking up arms against their brethren in the occupied territories and neighboring
countries.
Institutions, both public and private, are trying to change the odds for Arab
entrepreneurs. Telhami, the former textile executive, along with founders of two
of Israel’s biggest venture capital funds—Chemi Peres of Pitango Venture Capital
and Erel Margalit of Jerusalem Venture Partners—recently created an Arab
startup incubator called Takwin Labs in Haifa, the northern coast city that’s
home to the Technion.
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Al Bawader, a $55 million fund founded in 2010, is run by a Jewish partner,
Jimmy Levy, and an Arab one, a Christian named Ehab Farah. The fund’s name
means “early signs” or “buds” in Arabic. Forty percent of Al Bawader’s money
comes from the Israeli government, the rest from banks and wealthy individuals.
The fund invests in companies majority-owned by Arabs, and most of its portfolio
focuses on the Arabic-language Internet. There are 360 million Arabic speakers
in the Middle East and North Africa and 100 million elsewhere, and they are
getting online at a rapid rate: By some counts, Arabic is the fastest-growing
language on the Internet. However, there’s a relative scarcity of content.
According to Farah, while there’s one English-language website for every three
English speakers, in Arabic that ratio is 1 to 250.
Peres, the son of former Israeli President Shimon Peres, is chairman of Al
Bawader. He declines to name any of the five Arab Internet companies in which
the fund has invested. “It only puts the company in jeopardy,” he says. “There’s
enough hatred in the Middle East that one doesn’t need to help these negative
forces.” This is one of the paradoxes of Israeli Arab tech. Being based in Israel has
undoubted advantages: the VC funds, the programming talent, the
entrepreneurial tradition. Yet an association with Israel is a terrible thing in the
minds of many of the Arab consumers these companies are trying to reach.
“It only puts the company in jeopardy. There’s enough hatred in the Middle East”
There are also smaller efforts. New Generation Technology is hidden among the
maze of auto repair shops at the edge of Nazareth and within sight of a gleaming
new shopping mall. Like Takwin, NGT is an incubator, providing startups with
office and lab space, money and guidance. It funds mostly Arab startups and
focuses on biotech companies. One is Metallo Therapy, founded by an Arab
Muslim physicist named Amal Ayoub. Showing visitors around the small lab she
shares with the other NGT startups, she explains her technology: specially coated
gold nanoparticles that improve the accuracy of CT scans for cancer and will
eventually, she hopes, sharpen the targeting of chemotherapy and radiation
treatment. She’s had trouble raising funds, but she’s optimistic that some
American investors she’s been speaking with will come through.
These efforts have yet to produce success stories on the scale of Waze or Check
Point. Even if they do, nobody pretends it will do much to solve the country’s
political problems. In contrast to Silicon Valley, where politics is often talked
about as a quaint human activity soon to be rendered superfluous by mobile
technology and seamless social networking, politics in Israel and the Palestinian
territories is urgent and inescapable. Everyone’s still waiting for Israel or
Palestine’s first big “Arab exit”—a major IPO or a billion-dollar acquisition. (So
far, the biggest Arab exit in the region was Yahoo!’s (YHOO) 2009 purchase of
Maktoob, a Web portal founded in Jordan, for $164 million.) It’s a measure of the
technological optimism and political pessimism of the place that so many believe
they’ll see that before they see lasting peace.
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By Drake Bennett November 26, 2014
Photograph by Guy Martin for Bloomberg BusinessweekThe number of Arab engineers at the Israeli branches of multinational
tech companies such as Cisco, Google, Intel, and Microsoft is climbing
The late October Makeathon in Nazareth was hosted by a nonprofit called Tsofen
that tries to bring technology companies to Israel’s majority Arab cities. The
participants at the hotel, a former nunnery, were mostly in their 20s and mostly
Arab, and conversations jumped from Arabic to Hebrew to English. A contingent
from the West Bank had been scheduled to come, but two days earlier a young
Arab East Jerusalemite had driven his car into a crowd of Jews at a train station
in the city and killed two, and Israel clamped down on travel from the West Bank.
Mazzawi stopped by the event on Friday night, then Saturday, to see friends,
network a little, and scout for programming talent. At the Saturday evening
ceremony he sat in the audience and watched the presentations: There was a
smart flowerpot that could wheel itself into the light and send mobile alerts when
it needed water, a social network to help young female Arab students find
roommates (lack of willing landlords in cities such as Tel Aviv is a common
complaint among young Arab tech workers), and a slipper with an alarm clock
that retreats from its owner to help him all the way out of bed in the morning.
One of the judges was Reem Younis, co-founder of a company called Alpha
Omega Engineering. Younis is Arab and grew up Greek Orthodox. She met her
husband, Imad, an Arab Catholic, at the Technion, where she studied civil
engineering and he studied electrical engineering. They had trouble finding work
after graduation. For electrical engineers it was particularly tough—most of the
jobs were at defense-related companies, which were closed to Arabs.
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Then the Persian Gulf War broke out. “Everything was going crazy and all of
these rockets were falling in Haifa and Tel Aviv, and Arabs and Jews were at each
other’s throats,” Reem says. For reasons she can’t exactly explain, it felt like the
time to take a huge risk. They quit their jobs, moved back to Nazareth, and sold
one of their cars, a Volkswagen Jetta. Their parents were furious, but Imad’s
father eventually gave them four gold coins from the stash he’d been given at his
own wedding. That, and the money from the car, was their capital for Alpha
Omega, which they founded in 1993 to make equipment for neuroscience
research.
The Younises’ big break came in 2000, when Medtronic (MDT), the medical
device giant, introduced a form of therapy for Parkinson’s disease that involved
planting electrodes in the brain. The electrodes had to be directed to just the right
spot, and the couple realized that a product they already made could do that.
They cobbled together a prototype, flew to the U.S., and drove across the country,
hitting all the top brain centers.
By the end of the year they had their first clients, and in 2003 the Younises
moved to Atlanta for two years to be closer to the American hospitals that were
their primary market. It wasn’t a foregone conclusion that they would move back.
But the idea of basing their company in Nazareth was important. “I decided we
were doing it the hard way,” Reem says with a laugh. “We were going through the
little door, not the wide door.”
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The door, in Nazareth, is now wider, thanks in part to the Younises. Today the
company takes up one floor of a hulking new office building on an otherwise bare
hilltop outside Nazareth. It employs 60 people, and as in the city itself, most are
Arab. The company’s “GPS systems for neurosurgeons” are in 500 research labs
and hospitals around the world. And, as Reem points out with pride, several
former employees have left and started three companies of their own.
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