Globalization and Technology-Intensive Businesses: The View from Israel

When Arad Naveh had an idea for a software company in 1996, he encountered problems unlike those faced by most other entrepreneurs in Silicon Valley.

“I was working in the Valley, but I knew I wanted to establish the company in my home country, Israel,” he says. “It would be easier for me to hire people in Israel because they would be loyal. They would have a connection to me based on more than just business. But business-wise, you had to have a presence in the United States. That is the big market. That is where you become global.”

Naveh was one of the speakers at the Wharton-Israel Global Alumni Conference on “The Globalization of Technology-Intensive Businesses” held earlier this week (March 11-13) in Tel Aviv.

Other speakers included Shimon Peres, Israel’s newly-appointed foreign minister; Sir Paul Judge, chairman of Oxbridge Capital Ltd.; Shlomo Kalish, founder and CEO of the Jerusalem Global Group, a banking and venture capital company; Gideon Tolkowsky, a founder of Veritas Venture Partners, an Israeli venture capital firm, and Eli Mintz, president and founder of Compugen, Inc., a genomics research company.

While several participants offered examples of specific business experiences, Peres spoke more generally about how he sees global, scientific and high-tech companies as the basis for economic security and, thus, social peace.

“For the first time in human annals, we are at a time where you don’t have to fight for community, for the future, for your economy, for land,” he said. “Science does not have borders. Innovations do not go through customs. No longer are we only connected by land and sea that we have to defend, but by the waves of ether. They are limitless. They are inviting. There are no obstacles. We are connected no matter where we are, no matter what the color of our skin.”

What that means, according to other conference participants, is that every company will have to think globally in order to survive. And that, in itself, presents a set of cultural, as well as business, problems.

Naveh, for example, said he had served in the Israeli Army, where he received much of his technological training, and then headed to Silicon Valley where the tech revolution was in full swing. “When I got to the point of starting the company, my first question was, ‘Where?’”

His company, Class Data, which provided services to large IP networks, was founded with headquarters both in Israel and the United States. It was the only solution, Naveh said, for start-ups from small countries. “In the United States, you can afford to think locally. It is a huge market. Same with Europe and maybe Japan. But in Israel, you are forced to think globally immediately. That can be a benefit in some ways and a pain in others.”

Many Israeli start-ups entrepreneurs have not been as wise as Naveh, said Jerusalem Global Group’s Kalish. “There are very smart engineers in Israel who are ambitious and capable and feel they can do everything better than anyone else. Back in 1994, when we started our firm, we saw a lot of companies with 10 engineers who thought they could sell their product in 20 different countries. That was a recipe for failure.”

The weakness of start-ups in Israel, Kalish said, is that the country lacks a history of management teams that have global experience. “You don’t become a global leader just by having the technology, which isn’t a problem here, but by having a good management team, which is not always [present] in Israel.” he said. The result is that many Israeli start-ups through the 1990s were either bought by U.S. or European companies or failed in the public marketplace.

Another potential roadblock for Israeli entrepreneurs, pointed out Compugen’s Mintz, is that funding for start-ups may be severely limited in the near future. That in turn could prevent Israeli companies from flourishing quickly. “Start-ups will now have to get started with small budgets and a lot of hope,” he said.

Naveh, in fact, sold his firm, Class Data, to Cisco after 18 months and now works in Benchmark Capital’s Tel Aviv office. “We were always having conflicts,” he said. “Israelis don’t like to take orders from people across an ocean. With two offices like that, you are always faced with these questions: How do you make everyone aware of both cultures? How are you sure trust is there? In the end, it was best to have Cisco buy [us]. As an Israeli company, you have to make this decision early on or you may lose markets. You have to think globally.”

According to Sir Paul Judge, whose firm, Oxbridge Capital Ltd., helps young firms deal with cultural differences in the countries where they hope to do business, “first movers have to work hard to establish their names in virgin communities. Culture plays a big part in accepting new technologies. You must understand the culture in every country you want to do business in. If you work in the United States, it is important, say, to be able to discuss baseball scores with your partners. But it is not enough just to know the language, you must know the taboos, too.”

He cited two mis-steps by American companies. General Motors tried to sell its Nova in South America, but sales stalled because, as it turns out, “Nova” in Spanish is loosely translated as “Doesn’t go.” In some countries, Pepsi lost market share with its “New Generation” campaign because people associated that phrase with the death of the old generation, which stirred negative thoughts.

Naveh added that in countries where your company does business, it is important to have employees locate there and know the culture, “not just fly in and out. Invest in video conferencing. Invest in travel. [Spend money on] telecommunications. This is important for Israeli firms. If your product manager has to be in Silicon Valley, tough luck. As a firm in a small country, you have to understand things like that.”

Veritas Venture’s Tolkowsky echoed the point. Israeli start-ups, he said, have become more conscious of cultural and business challenges when dealing globally, mainly because they could not exist doing business only in Israel. He also pointed out that Israeli entrepreneurs start out with some essential attributes for success already in place.

“There is social mobility here,” he said. “Israelis can move swiftly from one social stratum to another with no societal barriers. Further, failure is not a disaster here. As in the U.S., it is considered a learning experience to fail in business. In Europe, you fail and you may be done for life. There is a good educational system in Israel and people are ambitious.”

Nor is Tolkowsky worried about the lack of management history in Israel. “When we as VCs look for a good person in whom to invest, we look for leadership qualities, for charisma, for willingness to listen, for total devotion to excellence, to integrity. Experience may well be sixth or seventh down the list.”

What he is most bothered by in Israeli entrepreneurs, though, is their feeling that they must have an exit strategy for their companies right at the beginning. He doesn’t think Israeli companies should be thinking of selling out to an American company before they even get started. “An exit strategy should not be a part of a start-up at all,” he said. “Don’t come to me and talk of exit strategies. As a VC, I want to see someone who wants to build a company. Exit strategies take care of themselves, but much later on.”

Naveh is more worried about a different kind of exit, the kind that may be more vital to whether Israel becomes a hearty high-tech economy or just another unimportant small market in the global business world. “Israelis are great engineers and have the ability to be great managers,” he said. “But what is happening is that when Israelis do well in the United States or in Europe, we don’t see them coming back here. We need to encourage Israeli firms to go global, but to stay in Israel and keep the best people here. Only then will we fulfill our promise to be a high-tech center for the world.”

For his part, Peres said he isn’t worried about these sorts of national concerns. He believes that globalization itself, fueled by scientific and technological breakthroughs, is important in both economic and cultural contexts. “The high-tech modern economy is not a technological matter alone,” he said. “You cannot have free technological research in a society that doesn’t know what freedom is. Young scientists will not settle in lands where corruption and war infect society.

“But the globalization of these technological businesses will see to that. There will be less war,” he predicted. “Two billion people now have cell phones. It connects them with other societies all over the world.

“I believe that high-technology business will change the face of humanity,” Peres added. “The future is not a repetition. It is merely a new challenge.”

 

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