Start-up Nation

Most of the U.S. tech companies BIRD pursued had limited R&D budgets. Because they were midsized to large publicly traded companies, they were skittish about dipping into the quarterly revenues to pay for costly research.

Mlavsky recalls, “We came to [U.S. companies] and said, ‘There is this place called Israel, which you may or may not have heard of. We can put you in touch with smart, creative, and well-trained engineers there. You don’t have to pay to hire them, relocate them, and you don’t have to worry about what happens after the project is over. We will not only introduce you to such a group—we’ll give you half the money for your part of the project and half the money the Israelis will need for their part.”

To date, BIRD has invested over $250 million in 780 projects, which has resulted in $8 billion in direct and indirect sales.⁷

The impact of the BIRD program far surpassed mere revenues: it helped teach burgeoning Israeli tech companies how to do business in the United States. The companies worked closely with their American partners. Many rented office space in the United States and sent employees overseas, where they could learn about the market and their customers.

In the absence of equity financing, BIRD provided a shortcut to American markets. Even when the venture failed, there was tremendous learning about how to create products designed for markets, as opposed to simply developing technologies.

By 1992, nearly 60 percent of the Israeli companies that went public on the New York Stock Exchange and 75 percent of those listed on the NASDAQ had been supported by BIRD.⁸ American venture capitalists and investors were beginning to take notice. And yet 74 percent of high-tech exports out of Israel were generated by just 4 percent of high-tech companies.⁹ The benefits were not being widely dispersed. If new tech companies couldn’t get BIRD or government grants, they had to master the art of “bootstrapping”: using personal resources, connections, or any other means to cobble together funds.

Jon Medved tried bootstrapping when he went door-to-door to sell his father’s optical transceivers in 1982. At the time, the company consisted of just ten people working out of an actual garage, building optical transmitters and receivers. Medved admitted that he had not taken a single math or physics class in college and knew nothing about the nuances of the business that his father had put together. He also didn’t know Hebrew.

“I would speak before groups of Israeli engineers who knew nothing about fiber,” Medved recalls, “and give them a lecture about fiber optics. If they ever asked a tough technical question, I’d hide behind their Hebrew—‘I can’t understand you, sorry!’ ”¹⁰ Medved did write a business plan for the company, and he developed revenue projections on the first spreadsheet software available on his suitcase-sized computer; but, like Orna Berry, he found fund-raising to be impossible.

Chief scientist Erlich became fixated on ways to overcome the funding challenges facing entrepreneurs. But there was some opposition: “Don’t waste your time and money on new, small companies. They’re a losing proposition,” detractors told him.¹¹ Instead, government economists called for increased funding and partnerships between Israel and the big multinational companies, which at this point were employing thousands of Israelis.

There was also another challenge bearing down on Israel at the time: how to deal with the nearly one million Soviet Jewish immigrants beginning to flood the country. The government believed that to absorb these immigrants, the Israeli economy would have to create half a million new jobs. With one out of every three Soviet immigrants a scientist, engineer, or technician, Israel’s high-tech sector seemed to be the best solution. But existing R&D centers alone would never be able to handle that many new employees.

In 1991, the government created technology incubators—twenty-four of them. These incubators gave most Russian scientists the resources and financing they needed in the early stage of R&D for their innovations. The goal was not only to develop the technology but to determine whether or not that product could be commercialized and sold. The government funded hundreds of companies through payments of up to $300,000. This got many of the new Russian immigrants working at their craft, but those doling out the money had little, if any, experience with start-up ventures. The government financiers were unable to give these entrepreneurs the support and management they needed to turn these R&D successes into commercially viable products.