Another side of the start-up nation

After years of stagnation and neglect, the green shoots of Arab hi-tech entrepreneurship are starting to spring up in Nazareth, the country’s largest Arab city.

By JOANNA PARASZCZUK
Nazereth 521 (photo credit: Makbula Nassar )
Nazereth 521
(photo credit: Makbula Nassar )
Behind the door of a modest office building in Upper Nazareth’s industrial estate, a sort of miracle is taking place – the kind that cures diseases. But this is no religious miracle; it’s a technological one.
From its modest offices, Israeli-Arab biotech company Alpha Omega Engineering has developed a technology that helps alleviate the symptoms of neurological and movement disorders, including Parkinson’s disease.
Alpha Omega is the brainchild of two Nazareth natives, husband-and-wife team Imad and Reem Younis. Quiet-spoken and modest, Imad Younis graduated from the Technion in 1983 with a degree in electronic engineering. After spending the better part of a decade working in a biomedical company, in 1992 Younis decided the time was right to establish his own hi-tech start-up.
The Alpha Omega technology works by allowing neurosurgeons to precisely map a patient’s brain with microelectrodes. Later, permanent electrodes are fitted, alleviating the disease symptoms so the patient can lead a normal life.
“There are only about four or five companies in the world developing this kind of technology,” says Younis, who believes there is considerable global market potential for Alpha Omega’s product.
Currently, 200 research labs in 70 universities around the world, including several leading Israeli institutions, use Alpha Omega’s technology.
As members of Nazareth’s new community of Arab hi-tech and biotech entrepreneurs, Imad and Reem Younis are helping enact a far-reaching transformation of Israeli Arab society.
But it’s a very slow process.
One of only a handful of successful Arab startups, Alpha Omega is a big fish in a very small pond of Arab hi-tech. The company’s operations are run by a team of just 27 people – 20 in Nazareth and a sales and marketing team in the US and Germany.
“Alpha Omega accounts for nearly 70 percent of hi-tech exports from Arab companies,” says Younis.
Why are Arab-Israeli hi-tech start-up successes so few on the ground? “It’s hard to create a successful start-up. Most new businesses fail. So for a critical mass of successful hitech companies, you first need a lot of start-ups,” says Younis. “And unfortunately, so far, there aren’t many Arab entrepreneurs out there.”
According to Younis, many different factors contribute to the lack of entrepreneurship within the Israeli-Arab community.
One of the root causes is that, compared with their Jewish counterparts, Israeli Arabs are exposed far less to entrepreneurial culture.
“It starts at an early age. A kid going to school in Tel Aviv, for example, will see entrepreneurship all around him. Maybe his mom has a law firm, maybe his dad is a hi-tech worker. It’s right there, in his culture,” Younis explains. “But that really doesn’t happen in Nazareth.”
In Shfaram, an Arab town in the Nazareth metro area, signs of the growing Arab middle class are literally written on the wall, in the form of Arabic billboard advertisements for VIP banking services, luxury hotels and coffee shops with English names. It is here that another significant milestone in the development of Arab entrepreneurial culture has been reached – Malakom, Israel’s only Arabic-language business magazine, was first published in Shfaram in 2007.
Malakom’s founder and editor, Nabil Armaly, admits that the lack of entrepreneurial and business culture in Israel’s Arab sector has created a hurdle: the biggest difficulty the publishers faced was how to write about business in Arabic.
Modern economic and business terms either didn’t exist or people just didn’t know them.
“It’s also very hard to convince successful Arab entrepreneurs to be interviewed,” Armaly adds.
“They think it’s boasting. Modesty is a big part of Arab culture.”
LACK OF infrastructure is another major factor hampering the development of Arab entrepreneurship culture: just 4.5 percent of land in Arab towns is used for industry.
To help improve this, a new industrial park, Tziporit, is being built in Nazareth.
The park is financed by billionaire Israeli entrepreneur and industrialist Stef Wertheimer, who has dubbed industry “the weapon of peace,” and economic development and achievement “the surest prescriptions for producing security and stability.”
Wertheimer has already financed five industrial parks around Israel, which account for around 10% of the country’s exports.
It’s no coincidence that Wertheimer chose Nazareth as the site for his latest park. With 65,000 residents, it is Israel’s largest Arab city, and the Nazareth metro area is home to the country’s largest population of Arab residents.
Directing the Nazareth project is Shawki Khatib, former mayor of Yafia, a neighboring Arab village.
Khatib is optimistic that the park, set to open next summer, will provide a much-needed boost to local industry.
“The park is the first of its type and quality in an Arab town, and it is based on a very successful model – Wertheimer’s Tefen Park [in Western Galilee],” says Khatib.
“It will bring together Arab and Jewish entrepreneurs and businesses and attract international companies to Nazareth.”
Also significant, says Khatib, is that the park has been designated a National Priority Area A, a status conferring a range of economic incentives for companies choosing to relocate or establish themselves there.
“This is the first time the government has given this status to an Arab city,” Khatib notes.
Upper Nazareth, the Jewish development town built in the 1950s next to the Arab city of Nazareth, was designated a Priority Area A during Binyamin Netanyahu’s first term as premier in the 1990s.
While Upper Nazareth has two dedicated industrial zones, including one for hi-tech, Nazareth itself has only a small industrial area.
Alpha Omega CEO Imad Younis is one of several local Arab entrepreneurs who have expressed an interest in relocating to the Nazareth park.
“The park is definitely a good thing,” says Younis.
“Creating infrastructure is a positive step. But if the government really wants to develop Arab entrepreneurship, there are other issues that also need to be addressed in parallel.”
Younis notes that another stumbling block for Arab hi-tech is the relatively small number of Arab Israelis with hi-tech work experience.
Currently, only a few hundred Arab engineers are employed in Israeli hi-tech companies, compared to over 80,000 of their Jewish counterparts.
In a detailed report published last month, the Industry, Trade and Labor Ministry revealed that four out of every five Arab science and engineering graduates do not work in their professions.
Arab graduates polled for the study blamed discrimination by Jewish businesses, security issues and insufficient levels of Hebrew and English as the three biggest reasons hampering their employment.
Smadar Nehab, executive director at Tsofen, a Nazareth-based nonprofit that prepares Arab science and technology graduates for careers in Israeli hi-tech, lists additional reasons why these graduates struggle to find professional work in their fields of study.
“There is a significant divide between Arab and Jewish Israelis,” she says. “One issue is access to jobs – many hi-tech companies are in the center of Israel in cities where Arabs don’t live.”
Lack of relevant experience and poor access to networking compared to their Jewish counterparts are other barriers.
“One of the prerequisites of hi-tech employment is work experience,” says Nehab. “Jewish Israelis often get experience in the army, during their studies or in youth movements. Arabs don’t have these opportunities. Israel is a closed society, so it’s harder for Arabs to network.”
Nehab also points to cultural differences, including recruiters’ lack of knowledge about the educational background of Arab candidates, as a factor.
“When someone from an Arab city like Umm el- Fahm sends his resumé to an Israeli hi-tech company, a recruiter can’t tell whether the school that candidate went to is good or not,” she explains.
In many ways, these problems are similar to those faced by new immigrants, notes Nehab. To help Arab graduates bridge this divide, Tsofen runs courses that give them crucial experience in key technologies.
Tsofen also works in partnership with hi-tech companies, connecting them with suitable Arab candidates, and even helping them set up branches in Nazareth.
WHILE TSOFEN helps qualified Arabs find work in hi-tech, Nazareth’s pool of science and engineering graduates has begun to attract the attention of companies looking for cost-effective local alternatives to outsourcing abroad.
In 2008, Jimmy Levy – the former vice president of Comverse’s Mobile Internet Division – established Galil Software, a Nazareth-based software house.
Galil Software’s employees are almost all local Arab graduates.
“It’s simple – in the local area there are around 2,000 unemployed or underemployed Arab graduates from the Technion and other top universities,” says Inas Said, Galil Software’s CEO.
“It’s totally abnormal to look for outsourcing in India when you have that kind of resource at home in Israel. And, after all, we are Israelis. We know how to think outside the box, to take responsibility.”
Galil Software currently employs 135 local engineers, 90% of whom are Arab Israelis and the rest Jewish. In the three years since it opened for business, the company has won 11 accounts with leading Israeli companies, including Amdocs, Ceragon and GE Healthcare.
Said notes that Galil Software’s successes have helped catalyze a sea change in attitudes, not just among companies seeking to outsource but among Nazareth’s technology graduates too.
“If before Israeli hi-tech meant Ramat Hahayal, Ra’anana and Herzliya Pituah, now we’ve brought it home to Nazareth,” says Said with pride.
Nazareth’s growing hi-tech industry is even encouraging more young Arabs to study exact sciences and engineering, he adds.
“The number of students choosing engineering has grown in just three years, because now they have a respectable place to work, right here in Nazareth,” Said says.
“Previously, graduates wound up working for family businesses or becoming teachers.” The government has also made it a priority to improve Arab participation in hi-tech.
Last month, President Shimon Peres launched Project Maantech, a joint government and private sector initiative to increase the number of qualified Arabs working in hi-tech companies.
Twenty leading Israeli and international hi-tech corporations, including Microsoft, Cisco, Check Point, Amdocs and IBM, are taking part in Maantech (maan means together in Arabic), which has a budget of $50 million – $20m. from the government and the remainder from private sources.
Suitably qualified Arab Israelis can register for the project on a dedicated website. Recruitment company Manpower then provides assistance with resumé polishing, English classes, and placements in companies.
But Arab entrepreneurs like Galil Software’s Said and Alpha Omega’s Younis say that while increasing the number of Arab engineers working in hitech is a hugely positive step, it’s just the beginning of the journey.
“We want to progress to the next step – and that’s developing our own products and technologies,” says Said. “For that to happen, we need to inculcate an entrepreneurial spirit here.”
Younis adds that for that entrepreneurial spirit to develop, Arab Israelis need to gain experience in key positions in the hi-tech industry – not just as engineers.
“The few Arab hi-tech workers are developers, not product managers or marketing managers,” he says.
“So they don’t get the right experience to really understand the hi-tech market. Without that, it’s hard for Arabs to learn how to create a start-up that addresses a specific market need.”
ANOTHER MAJOR hurdle Arab entrepreneurs face is obtaining critical venture capital funding for start-ups. To help address this issue, last year the government partnered with the private sector to launch Al-Bawader, a new private equity fund created specifically for the Arab and minority sector.
Al-Bawader is a subsidiary of Pitango Venture Capital, an investment firm established by Peres’s son, Chemi. The fund has a total of NIS 177 million, of which NIS 80m. was provided by the government, and NIS 97m. raised privately by Pitango.
The role of Al-Bawader (“early signs” in Arabic) is to stimulate Arab entrepreneurship by providing access to venture capital funding – something that was extremely difficult for many Arab start-ups to obtain before now.
A third of Al-Bawader’s investment capital is earmarked for the Arab hi-tech sector.
The two co-founders and general managing partners of Al-Bawader are Galil Software founder Jimmy Levy and Habib Hazzan, a former management consultant with McKinsey and co-chair of Kav Mashve (Employers’ Coalition for Equality for Arab University Graduates in Israel).
“This is the only investment fund in Israel that focuses on the Arab sector,” said Hazzan at a recent press conference in Nazareth.
“Until now, Israeli Arab entrepreneurs have had to fund their start-ups using their own money.”
Hazzan noted that Al-Bawader, which is focused primarily on export-oriented companies, will help boost the number of successful Arab start-ups and stimulate the hi-tech sector.
“What is needed is a critical mass of successful Arab entrepreneurs,” he added.
According to information provided by Al- Bawader, the fund will invest in both revenue-generating companies with an existing product, and early-stage companies that can provide compelling business proposition.
Reactions to Al-Bawader from within the nascent Arab hi-tech industry are mostly positive.
“Al-Bawader is a very, very good thing,” emphasizes Alpha Omega CEO Younis, who admits that his company has struggled to find investors apart from the Office of the Chief Scientist.
“There is a definite lack of investment funding in the Arab sector. Many Arab businesspeople have to fund their companies themselves, because is very difficult to find investors. But without investment, we can’t take the risks we need to expand, so we’re stuck. We can’t grow.”
Some entrepreneurs, however, say they are concerned about Al-Bawader’s role, and whether it will fund early-stage Arab hi-tech start-ups.
Among them is Dr. Amal Ayoub, CEO and founder of Metallo Therapy, a biotech start-up.
In 2009, Ayoub received NIS 2.2m. from Nazareth-based technology incubator New Generation Technology to found his company, which is currently perfecting a cancer treatment therapy that uses gold nano-particles to destroy tumor cells. Ayoub hopes to go to clinical trials this year.
“To get a working proof of concept, we need investment capital,” she says.
“It’s hard for Arab Israelis to get investment capital, especially for hi-tech companies which require a lot of funding. So we applied to Al-Bawader a few months ago, but we were refused on the grounds that our company is still too small. We were very surprised, because Al-Bawader was supposedly established to fund small companies.”
Ayoub adds that Trans Bio Diesel, an Arab startup producing green energy solutions, also applied to Al-Bawader, but was turned down because the company was too large.
“So really it’s not clear what sort of companies Al- Bawader will fund, or even whether they have actually funded any company at all, even though the fund was established two years ago,” says Ayoub.
“It’s not clear what their plan is. Right now there is no communication with them. But Al-Bawader ought to be held to account because the money in their investment fund is government money.”
At press time, representatives of Al-Bawader had failed to respond to inquiries by Metro regarding what type and stage of company the fund intends to invest in, and when.
Despite these setbacks, Ayoub remains optimistic about the future of Arab hi-tech.
“The Arab hi-tech sector has considerable potential,” she concludes.
Like Ayoub, Alpha Omega’s Younis is also positive about the Arab hi-tech sector, though he admits there is a long road ahead.
“Developing Arab hi-tech is not going to happen overnight,” he says. “There needs to be a mixture of short-term planning and long-term initiatives.
We need better education, more exposure to entrepreneurial culture, more hi-tech greenhouses.
“If I were running the government, I would try to do all these things in parallel. But I would also go to companies like mine and try to help us grow. If Alpha Omega grows, we will also spin off more new entrepreneurs and more start-ups.
“I already had three of my staff leave to start their own companies. That’s not good for me, but that’s OK, because it’s good for Nazareth.”
And like many of his counterparts in the Nazareth hi-tech community, Younis believes that in the final analysis, what is really needed is a concerted effort to give Arab Israelis the tools they need to succeed as entrepreneurs.
“People here are determined. Even though my company isn’t really all that successful yet, young people look at Alpha Omega and say, ‘Wow, I want to be like Imad,’” he laughs.
“And they will be! Because they’ll see that it’s not just the Jews who can be entrepreneurs. They’ll see that we can make it too.”