Why Israel Is Letting Its Tech Startups Go

The Silicon Wadi, as Israel's tech sector is known, has a penchant for creating innovative new companies. But rather than grow to maturity, they're often sold off early to larger, foreign firms.

Man uses technology presented at CyberTech conference in Silicon Wadi
Man uses technology presented at CyberTech conference in Silicon Wadi
Nathalie Hamou

TEL AVIV — "Who will be the next Waze?" Israeli newspapers asked in 2013 as soon as the startup, founded just five years earlier in a Tel Aviv suburb, was sold to Google for $1 billion. "Who will be the next Mobileye?" they asked four years later, when the vehicular anti-collision software, developed in Jerusalem starting in 1999, was sold for $15 billion to Intel, another U.S. giant.

Announced some years apart, these two "mega-deals' were relayed by the media and public officials in this nation of 8 million people as cause for national celebration, and as further proof that in Israel, there's nothing taboo about selling startups to foreign companies.

Quite the contrary. In the Silicon Wadi, as the country's high-tech sector is known, startups practically beg from the outset to be absorbed by industry leaders. Adept in the so-called "culture of the exit," Israeli tech startups are simply designed this way. As a result, in 2017, for example, approximately $6 billion worth of startups were sold — not counting Mobileye, which is listed on the Nasdaq. During that same period, Israeli firms saw their value increase by roughly $5 billion, more than twice as much as their French counterparts.

The goal isn't to create an enterprise that will last, but rather something that will go up in value very quickly.

Why the discrepancy? For Jérémie Kletzkine, the Franco-Israeli vice-president of business development at Start-Up Nation Central, a business that helps large international groups find local tech solutions, the explanation is simple. "In Israel, a company worthy of the startup name tries first and foremost to increase its value. That, and not job creation, is its chief goal," he says.*

A second reason Israeli companies are so often and easily absorbed by foreign companies is that even before the purchase, they "don't belong to Israel," says Kletzkine, 41, who began several of his own companies, one of which PrimeSense was sold to Apple. They are financed by Israeli venture capitalists, he explains. But the money itself mostly comes from abroad.

The kind of business model that high-tech Israeli companies follow is typical of the venture capital world. These startups were designed from the beginning to be sold. They're set up in the domestic market, but with a global niche in mind. The goal isn't to create an enterprise that will last, but rather something that will go up in value very quickly.

Another thing that sets Israeli and French tech companies apart is the emphasis in Israel on innovation and risk taking. In France, large investment groups try to minimize risk among startups. But doing so dampens innovation. Such was the case of the Aldebaran school, a French robotics specialist who sold in 2012 to the Japanese company SoftBank, much to the chagrin of French officials.

Startup conference in Tel Aviv, Israel's Silicon Vadi — Photo: Athos Capriotti/Instagram

Other factors that set Israel apart are its full-employment economy and relatively high level of R&D spending: 4.5% of GDP compared to 2.23% in France. Approximately 85% of that money, furthermore, comes from private sources. And even when ambitious projects fizzle out, they have a tendency to spawn a cluster of new startups.

Still, things are far from perfect in the Silicon Wadi. There's the brain-drain phenomenon, for one thing. And with the high-paying web giants now opening international R&D centers in Israel, local startups are losing even more talented engineers. Analysts also agree that the Israeli economy cannot rely on startups alone. Other sectors also need to thrive to keep the job market healthy.

Even so, Israel's dynamic tech industry is worthy of praise, especially for the fluid links that exist between the research and business sectors, and the role the Israeli army's technological units play as catalysts for innovation. And while some might fault Israeli entrepreneurs for being too eager to sell their startups, those voices are few and far between, especially in wake of the recent move by Mobileye, which waited 18 years to sell, and did so just as the driverless car industry is taking off. A sign, perhaps, that the sector is maturing.

*Correction: In an earlier version, due to a translation error, Jérémie Kletzkine was misquoted about the priority of company value over job creation.

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Air Next: How A Crypto Scam Collapsed On A Single Spelling Mistake

It is today a proven fraud, nailed by the French stock market watchdog: Air Next resorted to a full range of dubious practices to raise money for a blockchain-powered e-commerce app. But the simplest of errors exposed the scam and limited the damage to investors. A cautionary tale for the crypto economy.

Sky is the crypto limit

Laurence Boisseau

PARIS — Air Next promised to use blockchain technology to revolutionize passenger transport. Should we have read something into its name? In fact, the company was talking a lot of hot air from the start. Air Next turned out to be a scam, with a fake website, false identities, fake criminal records, counterfeited bank certificates, aggressive marketing … real crooks. Thirty-five employees recruited over the summer ranked among its victims, not to mention the few investors who put money in the business.

Maud (not her real name) had always dreamed of working in a start-up. In July, she spotted an ad on Linkedin and was interviewed by videoconference — hardly unusual in the era of COVID and teleworking. She was hired very quickly and signed a permanent work contract. She resigned from her old job, happy to get started on a new adventure.

Others like Maud fell for the bait. At least ten senior managers, coming from major airlines, airports, large French and American corporations, a former police officer … all firmly believed in this project. Some quit their jobs to join; some French expats even made their way back to France.

Share capital of one billion 

The story began last February, when Air Next registered with the Paris Commercial Court. The new company stated it was developing an application that would allow the purchase of airline tickets by using cryptocurrency, at unbeatable prices and with an automatic guarantee in case of cancellation or delay, via a "smart contract" system (a computer protocol that facilitates, verifies and oversees the handling of a contract).

The firm declared a share capital of one billion euros, with offices under construction at 50, Avenue des Champs Elysées, and a president, Philippe Vincent ... which was probably a usurped identity.

Last summer, Air Next started recruiting. The company also wanted to raise money to have the assets on hand to allow passenger compensation. It organized a fundraiser using an ICO, or "Initial Coin Offering", via the issuance of digital tokens, transacted in cryptocurrencies through the blockchain.

While nothing obliged him to do so, the company owner went as far as setting up a file with the AMF, France's stock market regulator which oversees this type of transaction. Seeking the market regulator stamp is optional, but when issued, it gives guarantees to those buying tokens.

screenshot of the typo that revealed the Air Next scam

The infamous typo that brought the Air Next scam down

compta online

Raising Initial Coin Offering 

Then, on Sept. 30, the AMF issued an alert, by way of a press release, on the risks of fraud associated with the ICO, as it suspected some documents to be forgeries. A few hours before that, Air Next had just brought forward by several days the date of its tokens pre-sale.

For employees of the new company, it was a brutal wake-up call. They quickly understood that they had been duped, that they'd bet on the proverbial house of cards. On the investor side, the CEO didn't get beyond an initial fundraising of 150,000 euros. He was hoping to raise millions, but despite his failure, he didn't lose confidence. Challenged by one of his employees on Telegram, he admitted that "many documents provided were false", that "an error cost the life of this project."

What was the "error" he was referring to? A typo in the name of the would-be bank backing the startup. A very small one, at the bottom of the page of the false bank certificate, where the name "Edmond de Rothschild" is misspelled "Edemond".

Finding culprits 

Before the AMF's public alert, websites specializing in crypto-assets had already noted certain inconsistencies. The company had declared a share capital of 1 billion euros, which is an enormous amount. Air Next's CEO also boasted about having discovered bitcoin at a time when only a few geeks knew about cryptocurrency.

Employees and investors filed a complaint. Failing to find the general manager, Julien Leclerc — which might also be a fake name — they started looking for other culprits. They believe that if the Paris Commercial Court hadn't registered the company, no one would have been defrauded.

Beyond the handful of victims, this case is a plea for the implementation of more secure procedures, in an increasingly digital world, particularly following the pandemic. The much touted ICO market is itself a victim, and may find it hard to recover.

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