Saving the start-up nation

Israel’s capital-strapped tech companies find homes in technology nurseries.

By DAVID ROSENBERG / THE MEDIA LINE
February 16, 2012 23:41
TechLoft

TechLoft 390. (photo credit: Medial Line)

 
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A score or more of people are hard at work on a balmy winter afternoon at TechLoft’s big open-area office in the center of Tel Aviv. Most of them are quietly glued to their computer screens. A few are meeting in a conference room whose Plexiglas walls are covered by flowcharts and jottings. Others are quietly consulting with one another. Off in one corner is a mini-kitchen and coffee machine and just outside is a big wooden deck used to host networking events.

It could be the offices of any of hundreds of hi-tech start-ups in the city and its environments, but in fact the TechLoft’s space is the shared home to a dozen or more start-ups -- or more accurately, seed-stage companies or even pre-seed companies: businesses that haven’t yet reached start-up status. Some of them aren’t companies at all – just teams of people working to formulate an idea.

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''We’re trying to fill the gap for early stage companies who need that $100,000 and $500,000 that their friends and family can’t provide on one hand; while venture capital funds won’t provide on the other. There's a gap, which we have set out to fill,” Gilad Tuffias, one of TechLoft’s two co-founders, told The Media Line.

The facility represents a new generation of investors coming to fill a dangerous gap that has developed in Israel’s high technology, namely a way for budding entrepreneurs to take the germ of an idea and begin turning it into a product and a company.

While Israel has earned a global reputation as the “Start-Up Nation,” the fact remains that it is tougher than ever for nascent companies to get off the ground. Venture capital (VC) funds, the traditional source of finance for new companies, invested more than $2.1 billion in technology start-ups last year, but just 5% of that went into seed stage companies, according to Israel Venture Research.

“Even when VCs were thriving, very, very few were investing in start-ups. Many said they did but only a few really did,” says one fund manager, who spoke on condition of anonymity. “I’m an active chairman of a start up and we’re beating our brains out finding money for the company –  and we have a product.”

Seed companies are by their very nature small and many fail, but they are critical to the hi-tech industry in Israel. Few Israeli tech companies stay independent and grow for the long term. Instead, they tend to put themselves and their technology up for sale after a few years, usually to be bought out by a big foreign company. That means the industry needs a steady supply of fresh companies embarking on the path of conceiving an innovative new idea and developing it into a workable product for the industry to remain vibrant and grow.

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TechLoft’s strategy is to help these new entrepreneurs by giving them workspace; access to lawyers, accountants and others to help them get their new business in order; and a forum for meeting investors and other entrepreneurs at the same stage in the tech lifestyle. An important component of the TechLoft’s concept is for the entrepreneurs to exchange ideas and advice among themselves. It charges a nominal rent of 1,000 shekels ($263) a month per person for the space.

TechLoft opened its doors last autumn and is already at work to double its capacity to 70 people with a new open-office one floor above its current location. Tuffias and his partner Tal Marian are now raising money for a micro-fund, one that will invest sums of about $100,000 in the most promising TechLoft’s tenants.

TechLoft isn’t the only one creating an innovative new environment for seed stage companies.

Google is planning to dedicate a floor at its new research and development center in Tel Aviv to an incubator for as many as 20 pre-seed enterprises. When it opens this August, the center will have places for up to 80 budding entrepreneurs who will be hosted for several months, during which time they will have access to desk space, Internet, meeting rooms as well as technology and advice from Google employees.

“The Israeli developer community is hugely innovative,” Yossi Matias, the head of Google’s Israel R&D center, told The Media Line in an e-mail. “This incubator project was initiated with a desire to encourage entrepreneurship and to provide support at exactly the stage when developers are most often in need of it.”

Google will not invest in the incubator companies, but it does aim to “strengthen” its connections with the developer community, explains Paul Solomon, Google’s spokesman in Israel.

Even the Tel Aviv municipality has gotten into the act as its tries to turn itself into start-up city. In the Migdal Shalom Tower, not far from where the city was founded just over a century ago, part of an underused library branch has been turned into a facility for early-stage entrepreneurs. Twenty-eight people who get approved by a screening committee have access to “hot” desks, a conference room, a panoramic view of the Mediterranean Sea and a standing invitation to events and meet-ups.

The library facility is a part of a wider initiative to turn central Tel Aviv into a nursery, not only for Israel’s hi-tech industry but for all of Europe, by encouraging foreign tech entrepreneurs to set up shop in the city.

“What Tel Aviv is doing here is developing an eco-system that feeds Israel’s hi-tech industry,” says Avner Warner, economic development director for the Tel Aviv Global City initiative. “Tel Aviv concentrates 2,000 of the 4,000 start-ups in Israel. We want to promote that and open up to the international market. We want to be the technology center of Europe.”

These technology nurseries are different from the technology incubators of the last generations, which performed a similar role of proving, space, advice and capital.  But when telecoms and hardware were at the core of the hi-tech boom, the time and cost of starting up a new company was high. That is still the case for a lot of areas of high technology.

But, nowadays, when Internet and mobile technologies are the hot new growth area, going from idea to viable company can be a matter of as little as 12 to 18 months. Entrepreneurs start off by working on their kitchen table at home or at a café. The entire company’s intellectual property and operations are uploaded to the Internet cloud. Social media can take care of the marketing at little cost. Start to finish, the budding business might need no more than a few-hundred thousand dollars of investment capital.

''Without a doubt, the innovations in technology have brought us to a new level and given opportunities to people without too many means to get something up and running,” says Tuffias, of TechLoft. “If you have a talented team of developers and just one investor who believes in you, with the globalized economy and having the Internet reach every point on the globe, if it’s a good product and people like it, word of mouth can bring it to millions of people within a matter of even minutes.”

“You don’t have to spend millions and millions of dollars on marketing and traveling overseas,” he says. “You do all of that from your home or from the beach – or from TechLoft.”

Nurseries aren’t the only ways early-stage enterprises can get off the ground. Angel investors – wealthy individuals who alone or in groups back new companies providing the first hundreds of thousands or millions in investment – have come into their own in the past two years in Israel.

The cause for that was a Knesset (parliament) law, popularly known as the Angels Law, which gives them an attractive tax break. Private investors who put anywhere between 25,000 ($6,600) and 10 million shekels ($2.65 million) in hi-tech start-ups have the right to record the amount as a capital loss at the time they make the investment. That can be used to offset other capital gains. 

The law has brought new angel investors into the market at a time when the quality of angels has risen. That is important because young, often inexperienced hi-tech entrepreneurs need advice as much they need capital.

“Angels have come back into play and angels have changed in quality here,” Ed Mlavsky, founding partner of the VC Gemini Israel Funds, told The Media Line. “In America angels were people who really understood what they were investing in. Here, they were diamond merchants and didn’t really understand what they were investing in. But now we have a generation of people who made money in hi-tech.”

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