Is J'lem the next start-up capital? Nearly 300 venture capitalists say yes

With billions of dollars in foreign investment pouring into Israel investors are clamoring for a piece of the local tech pie.

MAY 5, 2018 17:21

Visiting venture capitalists mingle and network in Jerusalem’s Mahaneh Yehuda market last week, as part of an annual Kauffman Fellows summit showcasing tech in the capital (photo credit: Courtesy) — Visiting venture capitalists mingle and network in Jerusalem’s Mahaneh Yehuda market last week, as part of an annual Kauffman Fellows summit showcasing tech in the capital

(photo credit: Courtesy)

When you hear “Jerusalem,” what comes to mind? Holy? Jesus? City of gold? With the city playing host last week to 270 venture capitalists – the largest delegation of visiting tech investors ever – local entrepreneurs and start-up denizens are putting the capital on the world hi-tech map.

Participating as Kauffman Fellows, a US-based program, the investors held their annual, invite-only summit for the first time in Israel. Four-fifths of the venture capitalists had never been to Israel before, said Jeff Harbach, president and CEO of Kauffman Fellows.

“You’ve got all these fellows who’d never been here saying, ‘Oh, this isn’t at all what I was thinking it was,’” said Harbach.

“There’s so much more hope and hope for the future, great driven people trying to make the world a better place.... It completely changed the narrative in my own mind of what this country is like.”

The visiting fellows in Israel constituted half of the 540 Kauffman fellows in total, who hail from some 42 countries. They spent half the time in Jerusalem and half the time in Tel Aviv.

“We take all these leaders in venture capital or innovation, and they come to a city like Jerusalem,” Harbach added. They’ll then go back to their 42 countries, their own ecosystems, they’ll go back and help them understand… this place is much different than what we see in the news.”

In other words, the summit – which acquaints global venture capitalists with Israeli entrepreneurs – sounds like a ringing endorsement of the Start-Up Nation and its hi-tech ecosystem.

With billions of dollars in foreign investment pouring into Israel – some 16% of all private investment in cybersecurity flowing through the Jewish state – investors are clamoring for a piece of the local tech pie, and that’s where Kauffman fellows enter the picture.

Dozens of investors reported holding follow-up, diligence meetings with Israeli companies, gauging whether to inject equity capital into local start-ups. Given the delicate nature of business negotiations, none of the investors spoken to wanted to be identified with their likely investments on the record.

“Many of the people who were having diligence meetings would not have been there, had it not been for the summit,” Harbach said. “It’s not that they don’t love Israel. They have enough deal flow between the 101 and 280 [Silicon Valley freeways] there on their own, to be flying outside California, let alone [to] Israel.”

Some of the deals that are likely to arise from the visit are in industries such as ag-tech and cybersecurity, along with business- to-business and enterprise software.

Most of the visiting venture capitalists – who hail from blue chip firms in the Silicon Valley, New York and Europe – looked at what distinguishes Israel in terms of its vaunted hi-tech culture, home to some 6,000 active start-ups, the highest per capita in the world, according to Start-Up Nation Central.

Representing firms including Social Capital, Intel Capital, Google Ventures and BlackRock Private Equity Partners, the investors have deep pockets and can afford to invest in the Jerusalem and Tel Aviv tech ecosystems.

Some of the Kauffman fellows and attendees are counted as Forbes Midas list investors, having broken into the rankings of the top 100 venture capitalists.

IN JERUSALEM, the investors dug into what makes the local tech scene tick and what efforts are being made to further integrate Arabs and the ultra-Orthodox.

The heart of that took place in “Shuktech,” where the bustling Mahaneh Yehuda market turned into a nighttime, live music and innovation venue. There, investors hobnobbed with Israeli entrepreneurs, networking and brokering deals.

“Seeing Jerusalem through the eyes of others, it’s fun to see their conceptions of ‘this is an old city,’ but it has such a vibrant ecosystem, such as at Jerusalem Venture Partners,” Harbach said, referring to the burgeoning venture capital firm set up by philanthropist and former MK Erel Margalit.

“We came away going ‘Wow, this may be an old city from a historical perspective, but it’s very much a new city in terms of technology and innovation.’” The investors also met with Jerusalem Mayor Nir Barkat and held fireside chats with leading Israeli entrepreneurs from multibillion-dollar computer vision companies, OrCam and Mobileye.

The capital today is home to some 470 start-ups, according to Start-Up Nation Central’s Ayelet Cohen, who runs tech programming in the capital. That’s up from 200 some five years ago. And with 18 venture capital firm based in the capital, that’s up from seven just half a decade ago.

“Initially, we made a lot of jokes – people thought we were crazy,” Cohen said.

“Start-ups in Jerusalem? Why are you fighting? People didn’t understand us.”

Now, the city is booming – to the extent that public officials in other countries are coming to see the tech ecosystem and how the capital has partnered up with the Hebrew University to set up an entrepreneurship and accelerator center.

The capital has also seen a significant jump in start-ups specializing specifically in AI and computer vision.

That comes on the heels of organizations like Siftech, the nerve center for early-stage start-ups in Jerusalem, and MadeinJLM. And another stamp of endorsement for the ecosystem is how nonprofit accelerator MassChallenge set up shop in the capital.

“A lot of cities are coming to Jerusalem today to learn how we did it, what’s the secret sauce,” Cohen said, referring to the almost 150% growth in the tech ecosystem in half a decade.

“People knew Jerusalem as a tourist city and holy city, and we wanted to frame it differently,” Cohen added, as officials from municipalities in Europe, East Asia and the Americas recently traveled to Jerusalem for a publicly backed tech conference.

SEPARATELY, three current Kauffman fellows from Saudi Arabia could not attend, many citing passport and bureaucratic issues on the Saudi side. It’s a sign that despite burgeoning ties between Israel and Gulf states, public business ties remain out of reach.

“In one of our classes, one of the fellows from Dubai is very close friends with one of the fellows from Israel,” Harbach said, adding that the fellow said: ‘We’re brothers.

We hate that we have some of these political issues that would not allow us to come.’” Some of the fellows also embarked on a one-day trip to areas administered by the Palestinian Authority, including Ramallah and Rawabi, the new Palestinian planned tech city.

There, they met with Saed Nashef, founding partner of venture capital firm Sadara Ventures, to look into making investments in the West Bank.

But in a sign of the politics, the Rawabi trip was scheduled as a separate addition to the official itinerary, with most fellows not making the trip over the Green Line.

That’s partially because the summit was co-hosted by groups with various political constraints, including the Kauffman Foundation, Start-Up Nation Central and the Jerusalem Development Authority.

“Entrepreneurship and technology drive peace and prosperity all over the world, Harbach noted. “We came, we loved our visit, and we will definitely be back.”

Established in 1995, the Kauffman Fellowship is based in California’s Silicon Valley. To join the fellowship, applicants must be recommended by another Kauffman fellow, and pay $80,000 for the twoyear program of leadership development and mentoring.