Israel is the world's second-largest destination for hi-tech venture capital, after Silicon Valley. Often called the "Start-up Nation," part of Israel's economic strategy has always been to sell start-ups to foreign companies. According to a recent Jerusalem Post article, over 95 percent of Israeli start-ups sell to foreign businesses. Traditionally, these acquisitions have required the start-up to move most of its operations overseas, often while keeping a small R&D center in Israel. This creates a complex dynamic: a large number of talented Israeli science and engineering professionals move abroad for economic opportunities, and many never come back. Fourteen percent of Israelis with doctorates in science and engineering have left Israel for at least three years, compared with 3.8 percent of those with degrees in the humanities and social sciences, and 17.7 percent of Israelis with a PhD in engineering choose overseas employment.
But Waze, an Israeli traffic navigation application that was bought by Google for approximately $1 billion last month, bucks the trend by staying put: One of its key demands was that its Israeli employees remain in Israel. Google agreed to this requirement while other interested buyers, including Facebook, did not. Waze's exit was the fourth-largest buyout in Google's history.
It was also the largest buyout ever for an Israeli consumer firm, far outdoing Face.com's sell to Facebook for $60 million last year. Waze's success opens a new frontier for Israeli start-ups, which have traditionally focused on encapsulated software solutions, to online consumer engagement . Because these jobs are web-based, this precedent may also eventually shift Israeli start-up jobs from abroad to back home.
Venture capitalist David Stark immigrated from Wall Street to Israel to join the Jerusalem-based v.c. firm OurCrowd, which funds early-stage Israeli start-ups.
Stark, a Wharton business school graduate wearing a kippa, or religious skullcap, says that he is seeing fewer Israeli companies move abroad because many current start-ups are more internet-based. "More and more business is being done on the web. Successful companies like Waze that are more consumer-facing have an online or mobile presence that you can build from anywhere. Now fewer [Israelis] feel pressure to move abroad." Of the 21 companies in OurCrowd's portfolio, only 30 percent have staff located overseas, specifically in the U.S.
He claims that a lot of Israeli entrepreneurs prefer staying in Israel, but at some point, they feel the need to live abroad for a period of time in order to broaden their networks: "I'll be sitting at a meeting, and [entrepreneurs] will show all the startups they have been in, and they usually will have spent some time abroad."
But when it comes time to start their next business, he says, many will opt to return to Israel.
"They say, 'I want to do it here.' Maybe it's easier for them. They've been abroad, they've built the networks and can leverage the networks. Their preference is to be closer to home, close to family."
One common criticism of the Israeli start-up scene is that few Israeli companies grow into mature businesses. This creates a pattern of "serial entrepreneurship," in which founders look for a big buyout rather than developing a long-term company.
The first official statement from Waze after the buyout, however, seemed to assure customers that its leadership team will not change anytime soon. "Nothing practical will change here at Waze. We will maintain our community, brand, service and organization -- the community hierarchy, responsibilities and processes will remain the same," the company said. They further specified that, "Our employees, managers, founders... are all committed to our vision for many years to come."
Uri Levine, one of Waze's co-founders, explains this line of thought in a recent speech at the Technion - Israel Institute of Technology in Haifa. He gives the example of the Israeli entrepreneurs that formed the start-up HumanClick (now part of LivePerson), who remained at their company even seven years after the buyout. Levine says, "I asked one of the partners a simple question, 'Why?' He said, 'It was the funnest workplace we ever had.' And with that understanding, we decided that we were going to found Waze."