warfare units. They were on a mission so sensitive that their superior officers had been deliberately left out ofthe loop-no need for them to know, and they wouldn't have been happy had they known. Many had been enticed here by one of the oldest tricks in the spy handbook: an invitation from a ar- pretty young woman working * for the ,r*. i.r other side. Some of the operatives were tsfl .:4 r.:i.9 armed, M-r6s hanging loosely from I* L,. their shoulders. All were hunting for :, what has become one ofthe most cov- eted objectives in Israeli intelligence circles today: startup funding. IJaffaire Dugit was, in fact, a recruit- ing party thrown by a group of 's big-gun high-tech companies. The at- "-"-t:.*,f : tendees were targeted because they are i'.-, ilii among the brains behind the Israel De- fense Forces, or IDF. They belong to units that dream up the state-of-the-art intelligence and communications tech- nologies that give the IDF its tactical edge. These technological innovations power Israel's far-ranging high-tech boom. In Israel, yesterday's soldier is tomorrow's entrepreneur, and the event's sponsors, established Israeli tech outfits that include Comverse Technolog;4 RoseNet, and,Yazam, are trying to get an early line on ideas to fund or geniuses to hire. "X7e want to make a first contact with young entre- The Internet suddenly gives Israeli spy technology huge preneurs who are in the midst of form-

ing some technological idea into a busi- powerhouses emerge. In Israel, the mil- code names suitable for a spv novel: 8- ness," says Rona Freund-Amitzur, one itary, much to its own discomfort, in- zo o, 8t53, Mamram, Talpiot, Mamdas. of the event's organizers. Their tactics creasinglyplays that role. Since the cre- In the incubator of the IDF, those units, for establishing those connections ation of Israel in t948, the military has as Israelis winkingly call them, have aren't subtle: To lure the mostly young compensated for its lack ofresources invented or improved technoiogies male crowd to this event, the sponsors and manpower with brainpower. Par- used in everlthing from digital switch- surreptitiously stationed a group of zo- ticularly in the past 20 years, the IDF ing to wireless telephon;r (For more, year-old women outside four different has invested billions ofdollars in devel- see Cheat Sheet, page 257.) With the military bases; the women handed out oping technological warfare. The result spread ofthe Internet, the kind of fliers to the soldiers as they entered and is a number of secret, semisecret, and technological wizardry once used to left their compounds. open-secret divisions devoted to com- guide missiles, beam secure commu- The United States has MII Stan- ing up with cutting-edge technologies nications, and break codes suddenly ford, and a handful of other academic designed to help Israel knowwhat its presents enormous commercial oppor- hothouses that nurture the talent and enemies are doing-and to kill them tunities. "By sheer luck," says Profes- research from which many high-tech when the need arises. The units have sor Shimon Schocken, dean of the

136 www.ecompany.com NOVEMBER 2OOO school ofcomputer science at the In- da. In the mid-r98os, the Israeli govern- immigrants-many of terdisciplinary Cenrer Herzliya, a pri- ment's socialist economic policies had them scientists-in vate Israeli university, "Israel aheady helped produce inflation of4io percenr, the r99os also provid- had the solutions to so many of the and the nation's major export was or- ed a tremendous infu- problems of the Internet." anges.Today inflationis in the single dig sion of talent. This is a Even a short list of hot tech compa- its and 7o percent oflsrael's $35.8 billion country that saw an nies that have recently spun out of Is- in exports comes from the high-tech opportunity in its arid rael's military-technological complex is sector. Thanks mainly to the kick from climate - 6o percent long. "I came out of one of those units," the tech industry Israel's economy stag- ofits land is desert- says Amiram Levinberg, president and nant for years, grew 5 percent during the and invented drip irri- co-founder of Gilat Satellite Networks, last sixmonthsof ry99. gation. There's a cloak- which last year made more than half of But even as the tech boom energizes and-dagger instinct the interactive VSAIs (small satellite the national economy-and, for many here that has been earth stations used in communications citizens, puffs up national pride-it has honed by years ofun- networks) sold in the world. raised issues that rear at the very fabric ceasing military alert. Several of the founders of Israel's of Israel's identity It turns out that in In 1966,Israel smuggled a Russian best-known tech success, the Internet sulprisingways, Israel is ill-equipped for MiG-zr out of Iraq; rhe secrets learned security firm Check Point Software an Internet boom. The challenge facing about the plane were crucial to Israel's Technologies, are former members of Israel is captured in two questions that defense ro months later during the Six 8-zoo who specialized in developing flashed insistently in the smoky sweaty Day War. (More recently according to firewalls between classified military glow that recent night at the bar ofthe Israeli and international press reports, computer networks. Today the seven- Dugit: Can the boom last? And if it Israel acquired a urine sample from ail- year-old company has a market cap of does, can the military-symbol of Is- ing Syrian president Hafez Assad by $23.4 billion and commands j2 percent raeli pride, steadfast guardian ofnation- clandestinely doctoring a toilet that of the worldwide market for commer- al survival-handle it? was set aside for his exclusive use at the cial firewall sofrware. Gideon Hollan- funeral ofJordan's King Hussein in der, CEO of wireless sofrware maker IsnaBr IS A srARTUp NATIoN. you February 1999. The toilet's pipes were is a veteran Jacad,a, of those units, couldnt design a more fertile ground for rerouted to lead to a specimen jar; Is- where he worked on artificial intelli- entrepreneurship. From the beginning, raeli agents Iatet analyzed the sample gence systems. Founders ofnew start- Israelis have confronted daunting chal- for clues about the Syrian leader's ups iVeb (software for deliveringWeb lenges-enemies on all sides, a harsh health and concluded that he was living

c0mmelcial potential. "By sheu luck," say$ Interdisciplinary Centu Heruliya's "lstael $himon $chocken, already had solutions to many of the problems dt ttre lntetnet." ads), CTIz (Web telephony), Audio- landscape, embargoes, war-with perse- on borrowed time. Assad died l6 Codes (voice-compression technology), verance and innovation. Theylike to call months later.) and hundreds of others are former se- themselves natural-born entrepreneurs. But it is military intelligence, more cret warriors. "It's in our genes to try and do the im- than any other single factor, that ac- AII this technological ferment has cat- possible here," says AvivT2idon, a for- counts for Israel's tech prowess. In fact, apulted Israel into the front ranks of mer fighter pilot and co-founder of BVR the demands made by the elite intelli- global tech powers - and transformed Technologies, a high-tech holding com- gence units seem as if they're meant to an economy that just a decade ago was a pany with interest in broadband and be basic training for startup entrepre- disaster. There a.re now more startups in wireless technologies. "We're ahsays try- neurs. Soldiers work in small, highly Israel than there are anywhere outside ing to crack the code." motivated teams, with brutal hours and SiliconValley Israel, a country of 6 mil- Israel has a highly educated popula- little sleep. The pressure to innovate is people, lion ranks third in the world in tion, with more engineers per capita crushing-national survival is at stake. the number of Nasdaq-listed compa- (r35 per \ ro,ooo) than any other nation. They must sell their ideas to their com- nies, behindthe United States and Cana- The influx of nearly r million Russian manding officers, or swiftly dream up

NOVEMBER 2OOO www.ecompany.com 137 gram known aslhlpiot, ser up in the aftermath of the bloodyYom Kippur War in October ry7. Is- rael eventually prevailed, but in 18 days offighting, Egypt and Svria inflicted heavy casualties on the much-vaunted Israeli fbrces. The idea behindTalpiot, savs -N'lajor Yariv Danziger, "was for a unit to gather geniuses in the armv to invent new tech- nologies and u.eapons." The pro- gram was officialh. started in r979 with an initial class of z5 "geniuses." Danziger, 34, has headed the program ibr the past

r\1 0 \-ears.

Think ofTalpior as somerhing like the old East German Olvmpic athletics program minus the doping. By the time young men and women are in- ducted into the army at age r8, the IDF has in hand all of their individual psychological and ac- ademic records. The IDF is no- tified of students with top grades, particularly in physics and math. Each September, 3,ooo Talpiot candidates submit

"Business is like tt'ar, only without the Geneva Convention."

something else. "The armywas the best eran, revered here as one of Israel's to a brain-busting batten' of intellecrual business school," says Aryeh Finegold, a high-tech pioneers, says: "The army and scientific tests. They undergo hean' g-year-old former paratrooper and one teaches technology in a very intensive psychological profiling, and tests on of the designers of a naval antimissile way It invests a lot of responsibility in leadership skills and their abiliry to work

system. He recently founded his third zz-year-old kids. They might get a proj- with others. By March, only 35 are left. company, Orsus, an e-commerce soft- ect worth tens of millions of dollars to "The tests are so difficult, most people ware maker. As an engineer for Intel in work on-the kind of experience other complete only zo percent to 40 percenr the United States in the r98os, Finegold people get ro years later." of each exam," says Assaf llonsa, a z9 - was a principal architect of the 286 and Most menandwomen serve in the mil- year-old Talpiot graduate. "Some of the 386 chips. One ofhis previous starrups, itary in Israel, which gives the armed questions are not solvable. They are not Mercury Interactive, an e-commerce services a continuous look at the nation's meant to be solved. It's to differentiate monitoring software company, has a top young talent. But the IDF has creat- between the very good and the extraor- market cap of about $u.z billion. "Busi- ed special systems to identi$' the coun- dinarily good." Danziger says he's not ness is like war, onlywithout the Gene- try's best and brightest, and to steer them sure even a known brain like Bill Gates va Convention," says Finegold. Yossi into the most demanding areas of tech- could cut it. "I think he could pass rhe Vardi, a former air force and Ministry of nological warfare and intelligence work. intellectual part, but I don't know his Defense research and development vet- The elite ofthe elite pass through a pro- human capabilities," the major says. "Is t

138 www.ecompany.com NovEMBER 2ooo he pleasant to work with? Can he make edge science. They also go through tems. But Thlpiot's role in the current other people do what he wants without eight months of basic training. After tech boom is no secret. Assaf Monsa financial authority?" (There's also the graduation, they spend five years in the and another Thlpiot graduate, Yair question of whether Gates would want unit of their choice; almost all pick one Mann, along with two other alumni of to spend at least nine years in the mili- ofthe elite technical units. "These are elite tech units, three years ago found- tary as Talpiot graduates must. That's six the soldiers that all of the units want," ed RichFX, which has developed years more than the minimum require- says Danziger. streaming video technology that Monsa ment for many other Israeli soldiers.) Since tlpiot's inception, only a few says uses between one-twentieth and Thlpiot soldiers spend the first three hundred people have made it through one-hundredth of the bandr,r'idth gob- years and four months of their service the program. Their military handiwork bled up by competing svstems. (It's housed in special barracks at Hebrew is classified, although it is known to used by Neiman Marcus to sell S5oo- University inJerusalem, where thev have touched everything from algo- plus shoes over the Internet.) Marius undertake intensive studv in cutting- rithm compression to antimissile sys- Nacht, another tlpiot grad, is a co-

ajor General Eitan Ben Eliyahu had bombing mission that destroyed the lraqi nuclear re- spent 38 years in the lsraeli Air actor outside Baghdad in 1981. He rose through the Force, flying 2500 sorties, downing air force! command ranks until he was named its top several enemy planes and eventually officer in 1996. rising to commander of the lAF, Fac- It was just the kind of resume EastWest Venture- ing retirement, he could see only one way out. Group was looking for when it wanted to establish an He became a venture capitalist, office in lsrael. The $250 million fund is headed by ln lsrael, nearly every top venture fund is man- Merv Adelson, the former chairman of Lorimar Pic- aged by former fighter pilots like Ben Eliyahu. tures and a former director of Time Warner (which That, flyboys say, is no accident. "lt's not life and owns eCompany fiorry). Adelson had met Ben Eliyahu death, but the core of everything is very much the 20 years earlier through a common friend. ln April, as same strategy" needed to chase MiGs, says Ben Ben Eliyahu neared retirement, Adelson approached Eliyahu,56. There's the need for instant reaction, him about joining EastWest. "l decided this is my last unerring instinct, unflappable cool. There's also chance to see the world from a differ- the thrill of the chase. Shlomo Kalish flew A-4 Skyhawks in the air ent angle," Ben Eliyahu says. force, Six years ago, he founded Jerusalem Global Ventures, now a Ben Eliyahu is just getting off the $200 million fund, Last year, he set up another seed fund, Yazam, At ground as a VC. He hasnt sealed any --a Concord Ventures, both managing partner Matty Karp and general deals yet. Will he have the right stuff? partner Yair Safrai are former air force pilots. Yair Shamir, chairman of He seems like a strong prospect. For venture fund Catalyst, is a former fighter jock. So are Chemi Peres one thing, while he was in the air force, and Aaron Mankovski, managing directors of Polaris Venture Capital. fr he managed to complete a bachelor's Few had careers as storied as Ben Eliyahu's, however. He says he degree in economics and business was weaned on stories of \ /Wllflying aces and other pilots, and knew management at Bar-llan University; from an early age that he wanted to fly. (His father emigrated from he also graduated from Harvards Ad- lran to what was then Palestine in 1918. He traveled mostly on foot and vanced Management Program. At on horseback; it took nearly a year and a half, and two of his sisters various times in the air force, he was died on the way.) "1 dreamed about it ever since I can remember," Ben responsible for weapons procure-

Eliyahu says. During the Six Day War, he was part of the mission that ment, budgets, research and develop- F knocked out 300 Egyptian planes in a single day. He commanded an F-4 ment, and tactics. He knows what cutting-edge technologies are under o sguadron in the Yom Kippur War, and flew on the commando raid that development in the military and he knows who is working on them. "He freed hostages held in Entebbe, Uganda, ln 1979, he engaged in the first is a leader who plotted and young out battles, that's what companies o dogfight ever between an F-15 and a MiG-21 over Lebanon. "There were do," says Paul Nadel, EastWest's managing partner.'And there is no one four MiGs," Ben Eliyahu recalls. "We shot them all down." He flew on the he does not know." - STACY PERMAN

14O www.ecompany,com NovEMBER 2ooo All Roads l,ead to Yossi

founder of Check Point. Eli Mintz, CEO f sraelis rarely miss an opportunity to remind visitors just what a small country and president ofCompugen, a gene se- lsrael is' "Everybody yossi I is connected to everybody," says Vardi, rsraeri en- quencing technology firm, and yuval trepreneur and big-time private ,,Everybody I investor. knows everybody.,, ls_ Shalom, co-founder and CTO of l7ise- r raelis have forged a number of close-knit networks from time spent in youth band, a maker ofwireless phone technolo- ,,This movements, high school, the army, the university, and the government. is gies, also wenr through Thlpiot. ,,The a country," says Vardi, "with two degrees of separation.', We at eCompony Now phrase'It can't be done'is not forTalpiot,,, decided to connect the dots, starting with Vardi himself, the high-tech impresario says Ehud Ram, a recently retired high- who is said to be Steve Case's eyes and ears in lsrael. ranking intelligence officer who worked with some Thlpiot grads over the years. (Ram's own background is in geophysics and remote sensing data. During a meet- ing three years ago, Ram informed Steve Ballmer, then 's second in com- mand, that he should consider relocating RichFX/Neiman the company's Redmond campus Marcus or risk ::r r : racker of RichFX, - ',: beingwiped out by a nearbylong-dormant :- ra" lvlarcus lses to :: '.':-! c 3 ahniks online but still dangerous volcano. No word yet from Ballmer, now Microsoft's CEO.) The demands of Mamram, another elite division, aren't as withering as Talpiot's- 0prah Nl\4 is a reported ;:. c' :: :' the Mamram washout rate is only per- 5o the 0xygen [rledia co-it:r:: cent. Mamram, the Hebrew acronym for and daytime d ';a. .. Central Unit for Data Processing, is the IDF's main computer corps, and trains all Steve Case AOL pooh-bah bought military sofr\4'are programmers and net- revenueless ICQ for $400M in 1998, announced work systems architects. Its a deal headquarters, with Oxygen Media that tucked discreetly on a busy street in the 5ame yeaT. commercial Ramat Gan neighborhood of , looks something like an out-of- Gerald lcvin date college campus. Project teams work -l me Warner chairman a in basementlevel offices. There are cubi- signs cur checks, soon he m:i c; lllr Case "Boss." -.. cles and drab cabinetry bought in bulk Meir Amit Legendary lVossad chiel later went '. the Russian fighter out from Office Depot. "Doesn't it look like a clvllian as chairman of Koot a client '. of lraq in 1966. of sraei Chemical; now hes chair : Silicon Valley office?" asks Lieutenant man of the board at Spacecom Ltd. : Nmrod Na'amani, the z4-year-old matag- er of a software system (can't sav which one-classified). Sort of, except for the army green uniforms. "We have no casual Ex-Tlme Warner board mem- Friday," quips Lieutenant Colonel Avi ber and former head of Lorimar he gave the wor Kochva, d Dal/as Now one of Mamram's top officers. he runs $2501\,4 EastWest Yoel Gal And no foosball table, although Na'amani VentureGroup says Mamram offers its workers some- thing better than foosball: "Guard duty,' He's kidding. We think. Major General (Ret.) Eitan Ben Eliyahu Mamram candidates go through a six- EastWest VC chlef runs Adelson s

Tel Avlv-based fund The former i month trial of up to r5-hour-a-day course srae Air Force commander has four MiG kills under his belt work before they're admitted to the pro- Barbara Walters gram. Those who make the grade must Ihe former Mrs. Adelson now has her own mini TV-ta k empire. serve six years, minimum. Still, it is one of Bill Gates i\l:crosoir inked a deal with Gi at for consumer two-way satellite broadbands worttr about Not y 142 www,ecompany.com NovEMBER 2o0o $50M. usual referred to as the Gil Shwed l"Ir of the United States. [' Bill Clinton (D) '. Lame-duck 42nd U.S. president, i (R) trying gamely to broker egacy : James Carville Mary Matalin George Bush deai to achieve peace in the : Clinton spinmeister and Baraks Wlfe of Carvl e. mother oi two, Matalin helped spin his BB lViddle East strategic ad\'ls€r ln 99 e ectlon and formet G0P spinmeister presldential campaign right lnto now TV political prndit. the Whlte House. But four years ater the maqic was gone as Clinton srcceeded him.

Arafat Sylvester Stallone Endrring Pales:iriar eac€r. trylng ([abor) Jesus Ehud Barak apocaypltc Rambo lll (Baraks Ftned to tarrer cul a geace peace Hebrew U. alma mater) Trying to hammer out a southwest of Mount of Olives ai a!reef€^: :l' lnOtl whO you who. overLooks the l\,4ount of 0 lves ,'Ou agreement with know Bet Guvrin Natlonal Park. " where he prophesied the ard esiaD ls. e Parestinian state, lsrael's most decorated so d!er and apocalyptic co{irre, ct:re 9j \oDe Peace Prlze Hebrew U. grad, the embatt ed PM in '99 fal of lerusalem srcceeded Bibi fQ .7

Benjamin "Bibi" Netanyahu ([ikud) dE- During Rabin administratlon Bibl was press :nder Richard Dreyluss yitzhaki;bin(rabor) opposltion eaderj at time, "..- lii-ij},,''f1',llrii?,il,il;ilii. Played Netanyahus bro anc Charles Bronson prirne lcrnatan Natlonal icon, the slain lsraeli i former PM bides hlslime on ihe lecture natlonal hero Yonatan I .: :. s commander ministermtntslet wettwent fromtrurl waniorwd[Lut toro pedLc]peacenik, r(, Lu-co- '... .ir.r L; :n;

lsrael's lnternet Guru "* 1ffif,.1:..."... )ntmon reres ...... business and politics, traDoil subsrdv. bul t a chlO factort Ln Kiriat J;r Vardi's career has traversed ir '95. A-le' RaDin a.sassinal;or tl^eii,:tilJ,, '. i Arveh Finegoldtineoold After he invested $75,000 in a little something Aryeh Gilshwed oN,1 ' # i oecane t-c with his friends, called .0-g're LaDor Party'on son Arik was hatching Sits on Tel Aviv U.'s new '. " A former r'esecordrrne).04yr0,oseetecti.n. i ,.f lCQ, a high-tech legend was born. tech management school i "'.- Ll ,: ;ir;,.;, : Blbi sixmonthslater.Aco-recipientof the i 1.^ '"".;,;;;,; "- ol lsrael Chemicals. The Technion grad '. chairman board; a.k.a. the Bill Gates ; ;..' .|f new High-Tech is on the board of Tel Aviv U.'s of lsrael, he coJounded ; "".-', *f, ""*;;ili Management School, Under Rabin, Vardi was an i:',:,?:fi:liffi#1il:Jil:fil::,j i Check Point Software after : negotiator with Jordan and was economic allegedly servlng rn elite : Palestinians involved in economic talks with the inte ligence unlt 8-200 Under Peres, he participated in peace ialks with Syria. lsaac Stern A member cf the Peres Center for Pe3ce board tfe 80-1;ear old violir legend is a frequent co aborator tvith DanieJ Barenboim.

Amiram Levinberg Another alleged 8-200 alumnus, he co{ounded Chemi Peres Gllat Satellite Networks. Daniel Barenboim Son of Shimon; ex-fiqhter now calls ihe Vardi world- if'-'..\ pilot and VC with Polar s, Zohar Zisapel pian'st ano coTolcto') 'ano:s ..'- which lsts VCON and With Vardi, a board (part I Radcom of RAD) in lts member of Te Avlv U s portfolio. new tech management Itamar Rabinovich il1i" schoo the lormer {q ntelliqence qutu is a co- launching the High-Tech chairman ol [4anagement Schoo the Fr founder and ../ president Te Aviv U is the RAD Data cf Cornmunlcatioits the former sraeli ambassador to lhe lnited ; Staies and former chlef Yair Shamh w th Syria Yitzhak Shamh (likud) negotiator Son of Yitzhak; ex{lghter Part of coaliiion government pi ot, CEO of VCON and Emily Watson wlth Peres senior in '84, the Catalyst Fund VC cellulold version of du Pre !n two-time former lsraeLi Prime Hi la ry and Jacki e ear red \N alson minisier ls also a NOVEMBER 2OOO www,ecom pa ny. com 143 Mossad vet. world.The unit has also attained a cial units in inle'lligence, most deal with mythical status among venture sophisticated telecommunications," capitalists for the entrepreneurial says Marom. "People who come from wizards who are veterans of the them alreadycome from an atmosphere unit. Gil Shwed, one of Check where they are developing solutions in Point's founders, allegedly served short periods of time with limited in 8-zoo, thoughhewon't confirm money and manpower."Just what a that himself "I had the idea in the starfup needs, in other words. army th,ree years before I started CTIz embodies much of what's going Check Point," Shwed says. "I on in Israeli tech today-and how it is knew I had agood idea. Ifyou can sending an electric zap of excitement do it in the military environment, through Israeli society CTIzt technolo- you have the tools to do it in other gy uses the Internet to enable wireless environments." communications - by phone, laptop, Those coming out of the elite PaIm Pilot, whatever-from almost any- units carry away much more than where. The company's most recent just top-flight technical knowl- round of financingvalued it at $165 mil- edge and trial-by-fire experience lion; CTIz recently shot down rumors in project design. Many grads of that it was about to be bought by a for- the most coveted postings in the mili- the units say the connections they forge eign companv-for Sr billion. tary With torrid demand for program- inthe militaryare just as important;they Visions of that kind ofbonanza mers in the civi-lian economy Mamram provide instant recruiting networks out stoke Israeli's startup frenzv But the grads-known as "jobniks" among sol- in the starnrp world. The bonds of trust event that really stirred the Israeli diers from other units-can command and loyalty can run deep. Fouryears ago, entrepreneurial spirit was the u-ild a starting salary three times that of the Erez Marom, a former officer in an intel- success of a little company called average Israeli. "Mamram is a brand ligence R&D unit, had an idea for a-Web Mirabilis. InAugust 1996, YossiVardi- name," says Kochva. "You can see ads telephony technology. But he and his a 57-year-old private investor and en- looking forgraduates. I get calls from partner needed a crack programmer. trepreneurwho has been a fixture in Is- companies wanting to know who wants Marom knew just where to turn. He raeli high tech for decades-provided to be discharged. I dont call them back called Yoram Naim, who had served seed money for Mirabilis, which con- or I would be on the phone all day" with Marom in his technology R&D sisted of his son Arik, then 26, and Then there is 8-zoo, an electronic unit. Naim was working for a military three of Arik's buddies. The Mirabilis warfare unit founded in the eady r96os contractor and had just completed a six- crew created a real-time instant-mes- (as that manybelieve has left abigger mark month, highly classified proiect. "Dont saging system, and called it ICQ in

Mammm training isn't so tough; the washout rate is only 50 percent.

on the boom than any of Israel's other ask too many questions," Marom told "I seek you'). In November rqq6, ICQ elite operations. Its name comes from Naim. 'Just resign." Naim wasn't sur- began offering its messaging service for its founding members: 8 AshkenaziJews prised by the cryptic approach. "\X/hen free over the Internet. After eight and zoo Iraqi immigrants who were spe- wewere in the army" Naimrecalls, "Erez -onihr, it had r million users.'S?ithin cialists in wireless communications and had said to me, 'Someday I will call you, r8 months, America Online bought had worked for Iraqi Railways. Their and I dont care where you'll be.' It had Mirabilis, which had no revenues, for skills became the cornerstone of the been sevenyears." $4oo million in cash and stock. At the electronic intelligence gathering, en- It was all very secret agent-ish. Naim time, it was the biggest foreign acquisi cryption, and other activities known to did quit, and began working for what tion of an Israeli company ever. The be among the unit's specialties. It's ille- would eventuallybecome CTIz. Marom deal made Vardi, his son, and their gal for past and present members to talk recruited several other veterans of his partners national figures, celebrated about 8-zoo, although it has become old unit (including his brother Alon) the way only rock stars and war heroes something of an open secret in the tech and other elite operations. "In the spe- had been in Israel before. It also made

144 www.ecompany.com NovEMBER2ooo them rich. And it led to a new Israeli business phrase, the "Mirabilis effect": the notion that anybodywith a cool In- ternet idea and the drive to make it happen might have a shot at sudden fame and instant wealth. "ICQ galva- nized the country" says the elderVardi. "There was a shockwave of Pride." Mirabilis was just the beginning. The record it set was swiftly eclipsed. The new standard for the biggest foreign purchase ofan Israeli company is Lu- cent Technologies's acquisition of Chromatis Networks, a maker of fiber- optic systems, for S4.5 billion in May Is- raeli tech executives estimate that more than z,ooo startups have sprouted here in the past couple ofyears. A recent re- port on CNET, much cited here, found

IC0's loundets are national pilde." celebrities. "lC0 galvanized the country. There ttlas a shock lllilve 0f

year and is still flow- that of the ro most popular programs dreessen, pumped $zoo million into Is- Israeli tech each ing, but its growth rate is slowing, and downloaded from the Web, three were rael Seed Partners, a VC firm in worry that the tax invented in Israel: ICQ, DownloadAc- Jerusalem. Everyone, it seems, wants many tech executives will ultimately scare off some celerator (which speeds up file down- in on the action. "I'm getting calls structure investors. Immigration poli- loading), and iMesh (which speeds up from every parent with a genius," says foreign cies-and resistance from Israel's more file searches) . Herzliya, a town just ZeevHoltzman, chairman and CEO of and economic-nationalist north ofTelAviv that has become home Giza Venture Capital. Vardi says he conservative factions-have long thwarted indus- to CTIz and dozens ofother startups, fields about 7o e-mails and countless try's efforts to address a shortage ofen- has been dubbed (Arabic calls daily from wannabe entrePre- by temporarily bringing in for- for dry riverbed). Israeli commentators neurs. "I was having my eyes checked gineers This summer, members of one giddily proclaim the discovery of Inter- the other day," he recalls. "The techni- eigners. a of Israel's main tech trade groups of- net Israel's "virtual oil field," the long- cian says, 'Mr. Vardi, do You have government $rz5 mil- dreamed-of counterweight to the minute? I have an idea."' fered to pay the lion to bring ro,ooo foreign engineers petro-dollars of some of itsArab rivals. to Israel for two years. The government American high-tech giants like Cisco, So wHAt's Nor ro LIKE ABour rHE of a hasn't yet acted on the proposal. "The Intel, and Motorola-drawn in no small Israeli tech boom? In the minds has to understand that we part by the wealth of technical talent growing number of Israelis, it turns government are competingwith everyone else," says coming out of intelligence units-have out, quite a lot. rooted in Ami Erel, CEO of Elron, a high-tech set up research facilities in Israel. Ven- Israel's culture and politics, a holding company. He saYs turnover ture capitalists have followed suit: In socialism, are in manyways bad fit for among his engineers is z5 percent, de- r99r, there was one VC fund in Israel; the freewheeling dYnamism of the offerings of stock oPtions, re- today there are approximately r3o. In boom. In Israel, capital gains are taxed spite cruiting bonuses, and cars. April, agroup ofAmerican investors, in- at to percent, more than twice the u.s. More critical is a shortage of manage- cluding Yahoo'sJerryYang, eBay's Pierre level. Foreign capital accounts for ment expertise. That reflects, in part, Omidyar, and Loudcloud's Marc An- about a third of the money invested in

146 www,ecompany.com NovEMBER 2ooo the speed at which Israel is churning out keeping R&D in Israel but moving sales had been a potent symbol of national entrepreneurial ideas and the relative and marketing to the United States. pride and excellence. But now some of youth of its high-tech industry There CTIz's Marom set up a sales and cus- its best minds, the highly specialized hasn't been time for a strong manage- tomer support operation in Burlington, technical elite, are reiecting militaryca- mentgeneration to come ofage. But the Mass.,last fall; he sees his homeland as a reers to chase startup gloryJust how result is that Israel doesrt't have enough tech way station, far from the heart of much of a challenge the security appa- experienced managers to nurture the the action. "Israel is onl,v a place to ratus faces u'as driven home inJuly, flood of fledgling tech companies. Ita- sleep," says Nlarom. "It's good to dream when a ne\l'spaper ad appeared in Is- mar Rabinovich, president of Tel Aviv of building a gteat worldwide company raeli's major dailies. "'We offer you a fu- University says Israel is a nation ofserial in Israel, but the realiry is that most of ture arrd a horizon ofservice in a field in entrepreneurs -he likens them toJim the monev and power sits in the U.S." which you u'i-ll be able to contribute to Clark, the American founder of Silicon That may be, but seeing so many of what is dearest to all ofus," the ad read. Graphics, Netscape, and other compa- its best tech minds and ideas either It featured heavv blue doors embla- nies-who are good at dreaming up light out for foreign shores or get zoned with the state insignia of the companies, but less good at developing bought by foreign companies is deeply menorah, opening over this caption: them into long-term enterprises. 'Jim troubling to many Israelis. Zionism's "The Nlossad is OpeningUp." Even the Clark is like an Israeli," he says. "This emphasis on community over the indi- Mossad, the storied spy agency, has countryhas too manyJim Clarks and too vidual is losing ground. National icons launched a mass-media recruiting cam- few traditional American executives.'We like the kibbutznik have pretty much paign, its first ever, to try to plug per- have thousands of startups, but only 5o been replaced by the startupnik. sonnel holes the agency attributes in or 6o medium-size companies." To ad- And it's not just the brain drain. large part to the difficulty of competing 'S7hile dress the problem, the universin'is many Israelis find inspiration in vith the tech industry

As boom fever gilps the country, some lsmelis lament that national icons like the telf-sauificing kibbutznik have been roplaced by the self-interested startupnik.

launching a high-tech management the tales of sudden personal fortunes It's not an eas\- sell. The lure of big school next October. created by startup entrepreneurs, oth- monev is on soldiers' minds. "It's very These problems fuel what many Is- ers find them simply crass. "High tech hard not to think about it." savs Ronny raelis fear will become a permanent is both idolized and envied," saysVardi. Dukat, a zz-vear-old second lieutenant high-tech diaspora. About 9o percent "It raised the total economic level of in rMamram rvho is projec t manager of a of Israeli startups are incorporated not the country, but it also increased the nerwork design team. ".NIv friends are in Israel but in the United States. That's gap" between haves and have-nots. In- going out there and starting compa- in part because the United States is such deed, economists say only about nies." Especially troubling, sav Israeli a huge market, but it's also because the roo,ooo Israelis have benefited direct- officers, is the number of soldiers country has a less troublesome tax ly from the boom; other sectors of the working on startups on their own time regime and deep ranks of managerial economy are still stagnant, and unem- or secretly moonlighting at tech firms. and marketing expertise from which Is- ployment is still 9 percent despite all Under some circumstances, that's ille- raeli companies can draw: Some of Is- the tech action. Others worry about gal in Israel. "If I find out about it, I will rael's largest and most successful tech what the glorification of instant wealth punish them," says Lieutenant Colonel companies call the United States home: is doing to the national character. "Ten Aviad Ben-Izhak of the IDF's Signal Comverse, a voice messaging company years ago, an engineer asked, ''What Corps. "'Without even thinking about with a market cap of $r4.9 billion, is project can I work on now?' " laments it, I would put them in jail." based in-Woodbury N.Y; Mercury In- ZviMarom, CEO of BATM, a maker of That prospect is not enough to dis- teractive is based in Sunnywale, Calif. digital network switches. "Today, he suade some would-be entrepreneurs. Re- More common these days is what's asks how many options can he have." cently, a young air force lieutenant, in known as the fast exit, whereby startups The dilemmas posedbythe boomhit uniform, was spotted making the rounds

either sell out to a foreign multinational home hardest in Israel's securiry forces. of the startup offices in Herzliya. David entirely or split themselves in two, Long before starrup fever, the military Rubin, CEO of Tech Capital, recalls

148 www.ecompany.com NOVEMBER 2oo0 seeing himwandering the rrth-floor hall- pushing to increase offers ofa paid uni- way of his offrce building. "I asked him if versity education and to raise salaries. he needed help," he says. "He said he was There are even rumors that some of an electrical engineer with one year left the elite units are contemplating giv- of service in the air force. He offered to ing soldiers cars if they'll stay on after

work part-time for a year until the end of their minimum tours. his service and then he would be available Back at the bar of the Dugit, all that frrll-time. He was going office to office, ffi seems like pretty pallid stuff Some of offering his services." Rubin says he de- the 3oo soldiers who have come to com- clined the lieutenantl offer, but told him U mune with the high-tech recruiters have to try the sixth floor. arrived straight from their bases, many It's the loss of high-ranking intelli- still in uniform. There are splashes of air gence veterans, seemingly military lif- force blue and knots ofarmygreen. Free ers whose rich experience is hard to re- beer is flowing, and the food is on the place, that makes military leaders most house too. A DJ is spinningAmerican uneasy Two years ago, Buky Carmeli, tunes. Tech companv execs are handing

38, left his post as a high-ranking intel- out baseball caps, fann-v packs, and in- ligence officer after t7 yearc of service. formation packets. Over the din, Adi He had led agroup divisionworking on Spiegel, a marketing manager for the Is- software, hardware, information and raeli office of PricewaterhouseCoopers, data security, and wireless systems. one of the bash's sponsors, explains the years n. was asked by his idea behind the evening. "There is a Eight "ff commanders to develop a system that fight over minds right now," he says. would improve audio systems. "I the likelihood of all-out war with its "'$?'e're fighting for startups, and the thought,'N7hy not take the PC and neighbors has receded, some Israelis be- armyis fighting to keep people in." take a SoundBlaster and create a file lieve the emergence of a high-tech in- It may be the one war that the fabled and send it through like e-mail?' " dustry that may drag the country deep- Israeli armed forces can't win. Yoni, a Carmeli recalls. He received a certifi- er into the global economy is a good zo-year-old engineer in one ofthose cate of honor from the IDF. About six thing-even if it drains talent from se- units, talks about his future. "Me and months later, Carmeli read a newspa- curity institutions. The prospect oflast- my friends have so many ideas about per article about an Israeli company ing peace adds to the challenge faced by websites and services," he says. He calledVocalTec and its new technology the military; it's harder to appeal to stands in front of a booth set up by for sendingvoice messages over the In- young tech hotshots by arguing that the Yazam, a seed fund. He says some of ternet. "They made a lot of moneY," nation may be swept into the sea if they the things he and his intelligence bud- Carmeli says, "and I had a certificate of don't forgo their startup dreams and dies have dreamed up "couldworkvery honor from the army" He went home stick with their units. Former Mossad well on the open market. But the army that night and told his wife he was chiefShabtai Shavit recently told Israel won't offer me the same amount of leaving the army so he could start a Radio that the agency must make itself money for my knowledge. People are company Then he told his command- "compatible to a new era of negotia- looking to invest inguys like me and my ing officer. "He laughed and said,'You tions, ofpeace efforts and coexistence friends from the elite units." will be running this unit someday. with our enemies, and maybe even ulti- Then Yoni utters words that would Money isn't everlthing,"' Carmeli re- mately an era of genuine peace." make his commanders shudder. "The calls. Carmeli left anlway He is now The Israeli military, of course, re- army tries to keep us, but ..." FIe pauses. CEO ofSpearhead, an Internet data mains a fearsome force, formidable in He says he's out of the military the day security company A few months after its region. Still, "the army knows it has he has done the minimumhitch. + his discharge, his commanding officer a problem," says Lieutenant Colonel left to loin a startup too. Ben-Ishak of the Signal Corps, which To learn morer go to www.ecompany.com deals with the IDF's telecom and wire- and type lsnel in the search box to find the Ar,q.rInp oF RAGGED BUT PERSISTENT less systems. "The army needs these Web File. a collection of links and addition- peace talks and an increasing sense that soldiers." And the army is trying: It is al information on this story.

15O www.ecompany.com NovEMBER 2ooo