The Startups of Nazareth

The Startups of Nazareth

By Drake Bennett

Photograph by Guy Martin for Bloomberg Businessweek

In the northern Israel city of Nazareth, around the corner from the Basilica of the Annunciation and its crowds of Christian pilgrims, is a centuries-old building, formerly a roadside inn. The stables off the courtyard where pack animals once bedded down are empty, and the rooms above, where traveling merchants used to sleep, are offices. When the windows are open, the amplified voice of the imam at a nearby mosque cuts through at prayer time. On a Friday morning in October, Jamil Mazzawi, the founder of Optima Design Automation, sits in one of the cheaply furnished, fluorescent-lit workspaces, explaining what his startup does. He gives the 15-second pitch he has perfected for investors: The chip companies are spending billions of dollars to protect their chips from soft errors. These are errors caused by particles coming from space, mostly from the sun, which disrupt the operation of electronic chips. We at Optima are providing a solution for chip companies to solve this problem at very low cost, he says, then asks: How many seconds?

A few hundred yards from the spot where Catholics believe the angel Gabriel appeared to tell Mary of her divine pregnancy, Mazzawi worries about a different kind of heavenly visitor: the protons and alpha particles bombarding us from distant stars. The relentless shrinking of computer chips has created circuits tiny enough that the impact of a projectile a millionth of a nanometer across can cause a temporary malfunction.

Photograph by Guy Martin for Bloomberg BusinessweekCompetitors at a 36-hour Makeathon hacking competition in NazarethIf the computer containing that chip is running a stock exchange, or your car, even a momentary error can have dire consequences. Optimas software lets chipmakers calculate exactly where they need to build redundancy into their designs to make their chips less vulnerable. The product is in beta now, and Mazzawi hopes to one day sell it to chip giants such as Broadcom (BRCM), Intel (INTC), and Qualcomm (QCOM).

Mazzawi, 44, is an experienced engineer with top Israeli and international tech companies on his rsum, and a graduate of the Technion, Israels preeminent technology university. In a nation that in the past decade has gone startup crazy, that makes him a natural candidate for entrepreneurship. Mazzawi is also an Arab, though, and that makes everything harder. He grew up in a working-class neighborhood in Nazareth, a mostly Arab city culturally remote from Israels social and financial capitals. Having battled his way into the Technion from a largely vocational high school, he struggled to keep up with his better-prepared classmates. When he graduated and first sent out applications for jobs he felt well qualified for, he didnt hear back from a single employera story common among Arab engineers. Since starting his company, hes found it difficult to find advice and funding. If I was Jewish, he says, I would have two or three uncles or friends who have money and who are willing to invest and risk money in order to maybe make money. In Arab society, this culture doesnt exist of Lets invest in high tech to make money. Hes still learning to negotiate the dynamics of conversations with venture capital funds. Theyll ask certain questions, and to get answers you need to talk to people. With my limited network, its harder to get this information, he says. Thats what Im missing.

A 2009 bestseller dubbed Israel Start-Up Nation, and the name has stuck. A country founded by socialists, Israel boasts the second-largest collection of fledgling tech companies in the world, after Silicon Valley. Israeli programmers and engineersand the security software, biomedical devices, and agricultural technologies they createenjoy a reputation for ambition and technological ingenuity. Check Point Software Technologies (CHKP), based in Tel Aviv, has over the past two decades grown into one of the worlds top network security companies, valued at $14.5 billion. Medinol is a leading producer of heart stents. Last year the mobile navigation startup Waze was bought by Google (GOOG) for just under $1 billion, and IBM (IBM) reportedly paid about as much for the security software company Trusteer.

Israels tech sector has grown despite intense conflict. This summer, 4,500 Hamas rockets were launched at Israel, the Israeli Defense Forces invaded the Gaza Strip, and more than 2,000 Palestinians and 70 Israelis were killed. During this bloody time, the pace of investment in Israeli startups actually increased over the same period the year before, according to the research company IVC-Online. In July, the Jerusalem-based company Mobileye (MBLY), which makes driver assistance software to help prevent car accidents, raised $890 million in its initial public offering, a record for an Israeli company.

A fifth of the population, however, Israels 1.7 million Arabs, are only marginal participants in Start-Up Nation. Only 2 percent of Israeli technology workers are Arab. The major social challenge of the success of high tech in Israel is that its just created bigger gaps, says Yossi Vardi, an investor and central figure in Israels tech sector. And today relations between Israels Arabs and Jews are as tense as theyve been in yearsin recent weeks young Arab men from East Jerusalem have carried out a series of lethal terrorist attacks in the holy city, and right-wing Jewish activists have called on companies employing Israeli Arabs to fire them. The mayor of the southern Israeli city of Ashkelon has barred Arab workers from construction projects at local preschools, citing security concerns.

Yet at the same time, an increasing number of Israels Arabs are finding work in the countrys burgeoning tech economy, feeding its appetite for programming talent. Arabs are represented at Israels top universities in numbers commensurate with their percentage of the population. The number of Arab engineers at the large Israeli branches of multinational tech companies such as Cisco (CSCO), Google, Intel, and Microsoft (MSFT) is climbing. In cities such as Nazareth in the largely Arab Galilee, a small startup ecosystem has started to flower, nurtured by a couple of Arab-focused venture capital funds and incubatorsone of the latter, the Nazareth Business Incubator Center, houses Optima. The potential for a boom is there, in a highly educated generation of Arab scientists and engineers, and the fact that, after a lag, hundreds of millions of Arabic speakers are making their way onto the Internet, looking for things to read, watch, click, share, and buy.Ask Israeli Arabs in high tech why there arent more of them, and you get several answers. The most frequent is cultural: A young Israeli Arab who shows promise in school is expected to become a doctor or, perhaps, a lawyer. Arabs cant join high-tech companies because of their parents, says Ahmad Soboh, a 24-year-old software engineer and Muslim Arab participating in an October Makeathon, a 36-hour programming and building competition at Nazareths St. Gabriel Hotel. Sobohs team will win first place, creating a glove for the deaf that, communicating with a smartphone, could translate a phrase in sign language into text and spoken words. My parents wanted me to study medicine; they thought that way Id be able to find work, he says, as a teammate behind him tests the connections on a circuit board.

During a bloody period this summer, the pace of investment in Israeli startups actually increased

This narrow vision of professional success isnt uniquely Arabits the same path minority and immigrant parents push their children onto in the U.S. and other wealthy nations. Medicine is safe. High tech is unpredictable. And starting your own company, whoever you are, is a little crazy.

Imad Telhami is an Israeli Arab success story, though his background is not in technology. He is the former chief operating officer of Israeli textile company Delta Galil, a leading global manufacturer of underwear. After leaving Delta he started a call center company in northern Israel that employs mostly Israeli Arabs, then began investing in startups. He lives in Isfiya, a village high on Mt. Carmel that has been home to his family for 240 years.

Sitting in his sunny living room in the late afternoon, with an overflowing bowl of fruit on the table and a Parliament cigarette in his hand, Telhami talks about the five fears that handicap Israeli Arab entrepreneurs. Theres fear of failure, he says, which is greater among Arabs than Jews. Theres fear of the government and whether it will hinder Arab-owned businesses. Theres fear of banks and the sense that they wont lend money to Arabs. Theres fear of being the first, since there have yet to be any major Arab tech success stories. And theres fear of being on ones own, without peers or mentors.

These anxieties arent unfounded. Something in the culture and history of Zionism, or of Israel, may make Jews more comfortable with risk than Arabs, but its also true that Israels Arabs are poorer and therefore less able to absorb a setback. And while Israeli Arabs are full citizens in the eyes of Israeli law and enjoy rights that the citizens of most Arab countries lack, they also have endured private and public discrimination in hiring and housing. Israeli Arab children go to schools that are different from and usually inferior to those of their Jewish peerswith the exception of Christian schools. The 10 percent of Israels Arabs who are Christian actually perform better academically than any other Israeli demographic and are comparatively prevalent among the countrys Arab software engineers and entrepreneurs.

Then theres the simple fact of geography: Most Israeli Arabs, Muslim and Christian, live in the north and the interior, not in greater Tel Aviv, where the global tech companies, startups, and investors are concentrated.

The single biggest disadvantage is that Israeli Arabs do not serve in Israels compulsory military service, which has proved a powerful machine for matching up young, entrepreneurial Israelis. A disproportionate number of the nations startups have come out of elite intelligence units, which select young men and women for their smarts and technological skills, train them extensively, then release them into the workforce in their mid-20s. Israeli Arabs are exempt from the draft, and most dont volunteer, feeling that doing so would effectively be taking up arms against their brethren in the occupied territories and neighboring countries.

Institutions, both public and private, are trying to change the odds for Arab entrepreneurs. Telhami, the former textile executive, along with founders of two of Israels biggest venture capital fundsChemi Peres of Pitango Venture Capital and Erel Margalit of Jerusalem Venture Partnersrecently created an Arab startup incubator called Takwin Labs in Haifa, the northern coast city thats home to the Technion.

Al Bawader, a $55 million fund founded in 2010, is run by a Jewish partner, Jimmy Levy, and an Arab one, a Christian named Ehab Farah. The funds name means early signs or buds in Arabic. Forty percent of Al Bawaders money comes from the Israeli government, the rest from banks and wealthy individuals. The fund invests in companies majority-owned by Arabs, and most of its portfolio focuses on the Arabic-language Internet. There are 360 million Arabic speakers in the Middle East and North Africa and 100 million elsewhere, and they are getting online at a rapid rate: By some counts, Arabic is the fastest-growing language on the Internet. However, theres a relative scarcity of content. According to Farah, while theres one English-language website for every three English speakers, in Arabic that ratio is 1 to 250.

Peres, the son of former Israeli President Shimon Peres, is chairman of Al Bawader. He declines to name any of the five Arab Internet companies in which the fund has invested. It only puts the company in jeopardy, he says. Theres enough hatred in the Middle East that one doesnt need to help these negative forces. This is one of the paradoxes of Israeli Arab tech. Being based in Israel has undoubted advantages: the VC funds, the programming talent, the entrepreneurial tradition. Yet an association with Israel is a terrible thing in the minds of many of the Arab consumers these companies are trying to reach.

It only puts the company in jeopardy. Theres enough hatred in the Middle East

There are also smaller efforts. New Generation Technology is hidden among the maze of auto repair shops at the edge of Nazareth and within sight of a gleaming new shopping mall. Like Takwin, NGT is an incubator, providing startups with office and lab space, money and guidance. It funds mostly Arab startups and focuses on biotech companies. One is Metallo Therapy, founded by an Arab Muslim physicist named Amal Ayoub. Showing visitors around the small lab she shares with the other NGT startups, she explains her technology: specially coated gold nanoparticles that improve the accuracy of CT scans for cancer and will eventually, she hopes, sharpen the targeting of chemotherapy and radiation treatment. Shes had trouble raising funds, but shes optimistic that some American investors shes been speaking with will come through.These efforts have yet to produce success stories on the scale of Waze or Check Point. Even if they do, nobody pretends it will do much to solve the countrys political problems. In contrast to Silicon Valley, where politics is often talked about as a quaint human activity soon to be rendered superfluous by mobile technology and seamless social networking, politics in Israel and the Palestinian territories is urgent and inescapable. Everyones still waiting for Israel or Palestines first big Arab exita major IPO or a billion-dollar acquisition. (So far, the biggest Arab exit in the region was Yahoo!s (YHOO) 2009 purchase of Maktoob, a Web portal founded in Jordan, for $164 million.) Its a measure of the technological optimism and political pessimism of the place that so many believe theyll see that before they see lasting peace.

The late October Makeathon in Nazareth was hosted by a nonprofit called Tsofen that tries to bring technology companies to Israels majority Arab cities. The participants at the hotel, a former nunnery, were mostly in their 20s and mostly Arab, and conversations jumped from Arabic to Hebrew to English. A contingent from the West Bank had been scheduled to come, but two days earlier a young Arab East Jerusalemite had driven his car into a crowd of Jews at a train station in the city and killed two, and Israel clamped down on travel from the West Bank.

Mazzawi stopped by the event on Friday night, then Saturday, to see friends, network a little, and scout for programming talent. At the Saturday evening ceremony he sat in the audience and watched the presentations: There was a smart flowerpot that could wheel itself into the light and send mobile alerts when it needed water, a social network to help young female Arab students find roommates (lack of willing landlords in cities such as Tel Aviv is a common complaint among young Arab tech workers), and a slipper with an alarm clock that retreats from its owner to help him all the way out of bed in the morning.

One of the judges was Reem Younis, co-founder of a company called Alpha Omega Engineering. Younis is Arab and grew up Greek Orthodox. She met her husband, Imad, an Arab Catholic, at the Technion, where she studied civil engineering and he studied electrical engineering. They had trouble finding work after graduation. For electrical engineers it was particularly toughmost of the jobs were at defense-related companies, which were closed to Arabs.

Then the Persian Gulf War broke out. Everything was going crazy and all of these rockets were falling in Haifa and Tel Aviv, and Arabs and Jews were at each others throats, Reem says. For reasons she cant exactly explain, it felt like the time to take a huge risk. They quit their jobs, moved back to Nazareth, and sold one of their cars, a Volkswagen Jetta. Their parents were furious, but Imads father eventually gave them four gold coins from the stash hed been given at his own wedding. That, and the money from the car, was their capital for Alpha Omega, which they founded in 1993 to make equipment for neuroscience research.

The Younises big break came in 2000, when Medtronic (MDT), the medical device giant, introduced a form of therapy for Parkinsons disease that involved planting electrodes in the brain. The electrodes had to be directed to just the right spot, and the couple realized that a product they already made could do that. They cobbled together a prototype, flew to the U.S., and drove across the country, hitting all the top brain centers.

By the end of the year they had their first clients, and in 2003 the Younises moved to Atlanta for two years to be closer to the American hospitals that were their primary market. It wasnt a foregone conclusion that they would move back. But the idea of basing their company in Nazareth was important. I decided we were doing it the hard way, Reem says with a laugh. We were going through the little door, not the wide door.

The door, in Nazareth, is now wider, thanks in part to the Younises. Today the company takes up one floor of a hulking new office building on an otherwise bare hilltop outside Nazareth. It employs 60 people, and as in the city itself, most are Arab. The companys GPS systems for neurosurgeons are in 500 research labs and hospitals around the world. And, as Reem points out with pride, several former employees have left and started three companies of their own.