Coop's Corner

Nir Barkat, the founder of the BRM Group and later a prominent tech investor, is on his way to becoming Jerusalem's next mayor, according to Israeli exit polls.

Barkat, 49, now a multimillionaire, was said to have an eight-point lead over his ultra-Orthodox rival, Meir Porush, according to Israel's Channel 1. Russian billionaire Arcadi Gaydamak is said to trail both in a distant third place.

This was Barkat's second try at becoming mayor of Jerusalem. He received 43 percent of the vote in 2003.

BRM was one of the first entities worldwide to develop antivirus software. Barkat later became an investor in Checkpoint Software, where he served as chairman for its first four years.

Later on, Barkat became a founding partner of BRM Capital, which concentrated on making investments in Israeli high-tech companies.

His brother, Eli Barkat, was the former CEO of BackWeb and is now a managing partner at BRM Capital.

KIBBUTZ YIRON, Israel--"Znnnnnnnnng!"

The mechanical whine overhead forced every picker in the apple orchard to crane their heads toward its source. I didn't know it at the time, but we were watching Israel's high-tech future play out a couple of thousand feet above us.

A reconnaissance drone not much larger than your garden variety model airplane, a television camera strapped to its underside, was creeping through the sky to photograph military installations in Lebanon.

That was 26 years ago.

The "mazlat," as it was known in Hebrew, was a joint project between a government-run aeronautics branch and an Israeli electronics firm called Tadiran. This unmanned aerial vehicle later played a role in helping Israel neutralize Soviet antiaircraft and radar systems deployed by Syria in Lebanon's Bekka Valley during the 1982 war between the two nations.

But when they seek explanations for Israel's contemporary success in the technology field, chroniclers of the story often underplay the military's part in helping to lay the groundwork for the nation's high tech ecosystem. Instead, journalists more often focus on the network of personal connections that Israel entrepreneurs initially forge in the military. As if certain special individual qualities honed in the army prepared them for business success later on.

It's a cute story, one that public relations reps love to play up. But it misses a lot of context.

To be sure, graduates of the army's elite technology units do acquire valuable experience in optics and communications. And they do make valuable connections that can come in handy afterward in civilian life. But the "army brats-turned-entrepreneur" angle is more of a romantic cliche than a useful depiction of how it all went down.

The fact that companies in Israel are built by former soldiers isn't remarkable. High school age Israelis get drafted at 18 and enter university or business after being discharged. By definition, then, you're going to find a lot of ex-military in the Israeli business world.

"I don't think it is much different than any university alumnus when it comes to the same bond," said Isaac Levanon, a former fighter pilot who is now CEO of 3DVU, a Tel Aviv-based provider of 3D photography navigation. "Obviously, the intensity of serving and sometime fighting together is more then the average sorority events. One knows his friends better through these greater challenges than (because of) a beer party or preparation for a test."

When I was a kibbutz volunteer in the early 1980s, Israel's high-tech industry was negligible. A lot of history has taken place since then. High-tech services now comprise about half of the country's total industrial exports. What's more, the country boasts the highest number of publicly traded companies on the Nasdaq outside of the U.S. and Canada. Some, like Teva Pharmaceutical Industries, are in the health or scientific fields but the list is tech-heavy, featuring the likes of Check Point Software and Aladdin Knowledge Systems. Israel's ratio of engineers to population is noteworthy: there are about 135 engineers per 10,000 employees. The comparable ratio in the U.S. is 80 per 10,000 employees.

The list of tech advances developed in Israel runs the gamut from digital signal processing to antivirus technologies, encryption, and data security. More people likely are familiar with ICQ, the predecessor to AOL's Instant Messenger, or M-Systems, which developed USB-flash drives as well as the design for Intel's Pentium processor.

Looking back on that history, former Defense Minister Moshe Arens said recently that projects like the unmanned aerial vehicle underscored the symbiotic relationship that he said nurtured Israel's military and its high technology sector over the following decades.

"That was a starting point," he said.

(For more on more modern applications of the technology, here's a recent 60 Minutes piece on the United States "Predator." Although the Predator was developed by a joint U.S. Army-Navy program, there also is an Israeli connection. Following the 1982 Lebanon war, which demonstrated the UAV's surveillance and reconnaissance capabilities, the U.S. began to purchase Israeli unmanned systems, such as the Pioneer, as the American military started to develop its own capabilities.)

The nexus between the military and the country's subsequent high-tech growth obviously consists of many strands. But when it comes to understanding the roots of Israel's subsequent high-tech prowess, Arens said it is "impossible" to see Israeli high tech without also considering the special role played by the military.

He should know. Through the decades, Arens played a close role helping to develop the Israeli army's high-tech skills as both an academic and a politician closely identified with defense issues.

For the many private sector technologists in Israel who later went on to fame and fortune, the development of the mazlat and other defense projects was a boon in that it fed demand for a talent pool that they could later tap. The Israeli political-military establishment was keen to build up a qualitative edge in weaponry to compensate for Israel's tiny population and small size and to adequately equip itself in the face of conflict with its Arab neighbors.

A few examples:

In the 1950s, RAFAEL, the Hebrew acronym for the Armament Development Authority, was part of the Israeli army. It built the country's first computer, nicknamed "Itzik" in 1956. RAFAEL also sponsored degree study for employees, both in Israel and abroad at overseas universities. It subsequently helped create the army's computer unit and developed the country's first sea-to-sea radar guided rocket

Regional conflicts prodded the army to accelerate the expansion of its technological prowess. In 1961, for instance, Israel's military mobilized a major engineering effort after learning about Egyptian attempts to build medium-range missiles. That scramble ultimately led to the creation of Israel's Arrow ballistic missile interceptor.

Another turning point came after the 1967 war, when France declared an arms embargo. France had been Israel's major military supplier, and Israel was left cut off from its major aircraft provider.

"At the time," Arens recalled, "there was considerable doubt about Israel's engineering and scientific community." He noted that there were questions at the time whether Israel would come up with the product that could compare with the U.S. and Soviet aircraft industries. "It took some time before the government's ministers, the army generals, and the general public believed that that capability was here. But we did it."

The country poured millions of dollars into military development and launched its own aircraft industry. That again had a spillover effect as technologies and processes mastered in the defense labs would later trickle into the civilian sector.

"The idea was to build and design everything that we needed to defend ourselves," said Yair Shamir, the chairman of Israel AerospaceIndustries, (IAI), which has since developed a range of UAVs. (Some that can travel as far as Iran.) The company also developed Israel's first spy satellite; eight of them currently circle the globe.

On a recent visit to IAI, I had an opportunity to tour the plant. Unfortunately, security restrictions bar outsiders from bringing cameras onto the facility's premises.

"When we began our activities--especially after Israel's withdrawal from the Sinai--the emphasis was on our need to recover strategic depth," said Shamir.

Reflecting on the growth in the country's IT industry, Shamir agreed that the cross-fertilization between Israel's high tech and defense industries had worked out beyond even the boldest expectations.

"This has been a way for people to contribute their technical talents. And whatever skills they pick up, they can then apply later in civilian life," he said. "For our country, where we don't have billions to spend, high tech has helped provide the differentiation between the armed forces of Israel and our neighbors."

Earlier this month I was in Israel moderating a panel on the myths and realities of alternative energy. The good news to report is that technologists are making steady headway in so-called green alternatives like solar and wind. The bad news is that governments aren't yet providing enough investment support for their ideas.

So it's been more than slightly amusing to watch the media circus around the discovery by the United States Geological Survey that the Arctic may hold around one fifth of the planet's future oil and natural gas reserves. Since that Wednesday announcement, every talking head worth his or her salt has been paraded (in some cases multiple times) on Fox, MSNBC and CNN.

But beyond the predictable polemics, is it such a grand idea? Alternative energy technologies represent the future, and drilling in the Arctic constitutes yet another (temporary) diversion. Others have pointed out that we're talking about only three years' worth of oil (at current consumption rates), though the natural gas reserves in the region are gauged to be three times as large. Texas oilman-turned-wind power enthusiast T. Boone Pickens, hardly a garden variety Berkeley leftist, is hitting the stumps making the case that "this is one emergency we can't drill our way out of."

All of which left me wondering what it's going to take to force public opinion to dispense with the fiction that cheap oil is only one or two big drilling projects away. With Ford and General Motors now anxious to get rid of truck and large-vehicle divisions as fast as they can, clearly, change is in the air.

My former CNET colleague, Michael Kanellos, now working for GreenTech Media, offers a fascinating what-might-have-been had the Arabs followed through with an oil embargo if the United States recognized Israel in 1948. Kanellos argues that a strict embargo would have forced the U.S. auto industry to move to 4-cylinder cars and fostered a more conservation-conscious approach.

For one thing, U.S. auto companies likely wouldn't be the bumbling boneheads of the industrial world. General Motors, Ford and Chrysler would have had to retool quickly. But turning on a dime was something they learned to do thanks to the wartime experience, when the federal government ordered these automakers to start building planes. Germany and Japan were still in shambles at the time so U.S. automakers could have eked out an early, sustainable lead.

In turn, that might have meant softening, or even avoiding, the blight that hit Detroit in the 1970s. And the focus on efficiency could have bled into the steel industry. Who knows? The U.S. could have become an early leader in solar manufacturing with all the intellectual capital focused on efficiency and energy.

History worked out differently. The Arabs didn't impose an oil embargo until 1973. The resulting gasoline shortage forced a shift in consumer preferences for smaller, more efficient vehicles. Temporarily, that is. Then Detroit went back to its business as usual. We know the rest of the story.

I finally made it to the big time and got to fill in for the vacationing Dan Farber on the EIC Squared podcast. Check out my conversation with ZDNet Editor-in-Chief Larry Dignan as we riff on the circumstances surrounding Apple's legal tiff with Mac clone maker Psystar, as well as Intel's surprisingly strong quarterly earnings. Also, I recently got back from a visit to Israel's high-tech community. Take a listen.

(Editor's note, 10:25 p.m. PDT: The original headline on this blog was altered to remove the word "subatomic" because its usage may not have been appropriate.)

TEL AVIV, Israel--One of Intel's legendary chip developers says that the computer industry may no longer be able to infinitely shrink microprocessor die size.

And if anyone should know, it's Marcian E. "Ted" Hoff.

The designer behind the 4004 chip, Intel's first microprocessor, Hoff says that a technical end of the road may soon be within sight.

"We are approaching atomic dimensions," Hoff said, adding that "5 or 10 nanometers is as small as we can get. And I haven't seen much to change my mind."

Intel's most advanced chips are at 45 nanometers, while 32-nanometer technology should be out sometime next year. But Hoff, Intel's 12th employee, whose technology breakthrough helped create the microcomputer industry, cautioned that before long, "progress may slow or stop someday."

This shouldn't come as a complete surprise. Hoff and other Intel officials have warned for years that they would eventually run up against a technical wall they might not be able to hurdle.

He said that development is getting much harder and that Intel is going to have to do some novel things to maintain the same technical momentum. Talking about previous generations of Intel microprocessors, Hoff said that "each one has been a variation of the previous one. So, essentially, we're running our computers on glorified 8088s."

Of course, Intel has been wringing its hands about Moore's Law for quite some time, and still the company manages to pull through.

TEL AVIV, Israel--For one of the most important venture capitalists in Israel, the nation's recent burst of entrepreneurial success isn't going to be good enough to guarantee a productive future.

Chemi Peres, founder of the Pitango Venture Capital partnership, doesn't mince words when he talks about a high-tech landscape that he had a big part in shaping. The way he sees it, Israel's start-up culture will likely take one of two directions.

"Some people think we are only meant to innovate, and that once we build something, the best strategy going forward is to sell that company," he said. "The other school of thought is that you have to focus on building significant companies. Otherwise, it will endanger the idea of Israel as a state of science and technology."

For much of the last decade, Israeli high-tech companies have excelled in innovations but then sold technologies to larger multinationals that took those products to customers. Although Israel has prospered by adopting a more technology-oriented focus, Peres believes the build-and-sell model won't suffice in a fast-changing global market where competition is likely to come from anywhere on the globe.

"We're living in a world which doesn't have a original market," he said, "so we have to think on a global basis from Day 1."

I spoke in more detail about the local high-tech scene with Peres, who was on hand for an investment summit here sponsored by Silicom Ventures.

Right now, what's the hottest tech sector for VC investment in Israel?
Peres: Some are the more traditional ones, like software or semiconductors. But we see lots of activities and a great interest in life sciences.

What about clean tech?
Peres: Yes, there is more interest in clean technologies, though right now, the subsector within it that's emerging quickly is energy. The big issue of energy is very visible in the world, and we're starting to see some interesting companies out there.

Are the themes that VCs are looking at in Israel these days much different from a year ago or is a continuation?
Peres: I would say that it is a continuation from previous years. The Internet continues to attract a lot of interest, along with life sciences and energy--though energy is the No. 1, new growing area.

Can energy and clean tech turn into areas where Israeli tech start-ups hold a qualitative edge over the rest of the world, even the U.S.?
Peres: I think that potentially those are new sectors where Israel can stand in the forefront of technology. The issue is whether our market can become aware of changes in the world at the same time that others are. This is one of the critical factors related to the long-term perspective of the Israeli technology sector. We need to be aware of changes--if not ahead of everybody--then definitely no later than anybody else. Because we are far away from markets, the result is that sometimes we start things with a delay, which is not so good.

In the past, the criticism was that Israeli start-ups do a great job coming up with new technology ideas. But when it comes to marketing, they don't do quite so good a job. Do you think that's still true?
Peres: Clearly, you'll find deficiencies that result from the fact that we come from different cultures. We speak different languages. And our scale of measurement is adjusted to different levels. Israel is a very small country, while the U.S. is a very big country. You behave, think, react, and initiate differently when you live in a small country because you are used to things that catch up very quickly. Everybody is in the same time zone. Things look simpler. But I think that over time...Israelis may catch up still.

In the early '90s there was a big influx of immigrants from Soviet Union and so you had quite a massive supply of relatively inexpensive engineering talent to pick from. That was a once-in-a-generation event. And your universities can only turn out so many computing engineers each year. Since everything comes down to supply and demand, has all that affected cost-per-employee at your average Israeli tech company?
Peres: When you absorb over 1 million immigrants, there is a period of time you can enjoy that cost reduction. But it doesn't last as the immigrants get absorbed. Meanwhile, our currency has become stronger compared with the dollar. So while the dollar is weakening, what happens is that many Israeli companies are generating substantial portions of their revenues in dollars and euros. Because our expenses are in Israeli shekels, we suffer from the devaluation of those foreign currencies and therefore, our cost structure has become less advantageous when you compare it to the Silicon Valley.

The cost of an engineer in Israel has become higher than the cost of the engineer in the U.S. for the first time in history. We usually were more efficient or less costly than Silicon Valley and now we are in line--or in some cases--may be even more expensive, because of the shekel's strength.

I think your high-tech sector employs around 8 percent of the civilian workforce. If there is a shortage of engineers and technical people, what are the implications for Israel's high-tech prowess?
Peres: The most important thing is not the amount of people that you can recruit; it's the number of people that can innovate, that can invent and can develop. The rest can be complemented by different sources.

When a prospective Israeli tech entrepreneur comes knocking on your door and asks you for funding, what qualities are you looking for?
Peres: We like to see entrepreneurs who can carry the company from A to Z. People who can address problems, people who can build management teams, lead, and have a great vision.

What about biotech? Israel has a track record in coming up with new technology, but I don't hear anywhere the same amount of news concerning biotech start-ups in Israel. Why is that?
Peres: It takes time for companies to mature in life sciences. For instance, one of our portfolio companies, TransPharma, just announced a deal with Eli Lilly, which is a significant deal. This is a company that it took a long time to build. I think that you'll hear more interesting news about start-up biotech companies in Israel, but it's just that the maturity time horizon is longer than in the IT and the communication sectors. Still, you see the level of excitement.

A few weeks ago, we had the Israeli Biotech and Israeli Lab Sciences Industry conference, and 7,000 people registered for the conference--1,000 of them came from abroad. And remember that we're a small country and people were nonetheless very interested in what's going on here.

Is there much VC investment from Israel going into the Palestinian territories?
Peres: No, not yet; we have one interesting example, which is Ghost. It's visible because of the fact that the R&D center is in Ramallah.

But, you know, the deal flow is close to zero for us at least. We don't see opportunities to invest. And clearly, the situation is not in favor of doing business. But we have an interest to explore ways to cooperate, and actually there is a conference at the end of the first week of July, which is organized by the Israeli Chamber of Commerce, the Israeli-America Chamber of Commerce with PITA, which is the Palestinian IT Association.

Part of the discussions will be around how do we better operate on the IT side.

We'll have some business people talking about ventures. I think Ghost is going to present theirs and Yadin Kaufmann is putting a fund on the Israeli Palestinian front. So, you know, it is something that should be, should have happened before, a long time ago.

I think it's something that we look forward to see, and I think that once that will (be) a success story, I think that there will be an explosion of opportunities as opposed to explosion of other things. You need to ignite the market, initiate the imagination. And the way to do it is really to find something that will be successful.

TEL AVIV, Israel--He's the richest man in Israel. And at 82, Stef Wertheimer is far from calling it quits. Two years after selling 80 percent of his Iscar Metalworking to Warren Buffett for $4 billion, Wertheimer has an idea on how to bring peace to a region scarred by decades of strife.

His idea: jobs.

More than two decades ago, Wertheimer built Tefen, an industrial park in an undeveloped and low-income region of the Galilee, offering employment both to Arabs and Jews. It worked out so well that he subsequently built three more industrial parks in Israel, as well as one in Turkey. The parks serve as incubators for manufacturing and export companies, which over the years, have spawned about 250 companies--one third of them in the high-technology field, according to Wertheimer.

At one point, Wertheimer was even ready to finance the construction of similar industrial parks in Jordan and the Gaza Strip. But those plans were sidelined indefinitely by the outbreak of the second intifada and the chill in Arab-Israeli relations.

Still, the way Wertheimer sees the future, it's only a matter of time before economics and self-interest ultimately trump ideological and religious differences, paving the way toward a final resolution between Israel and the Arabs. After receiving an award Sunday for his entrepreneurial work at an investment summit sponsored by Silicom Ventures, Wertheimer spoke with me in more detail about his ideas.

When you talk about start-ups and new technologies in Israel, one area that's receiving a lot of attention, obviously, is clean technology. I believe that you built a windmill at Tefen.
Wertheimer: I did. You have a good memory. Yes, I built the windmill 30 years ago in Tefen and I think it was the right thing to build at that time and I don't think that we did much with the solar or with windmills. Not much was done. I think we were too busy. Every few years they have a war.

You've been pushing this concept of building industrial parks. The basic idea is that economic prosperity will lead to coexistence between Arab and Jew and that will help end the conflict. But terrorism's not always related to unemployment. Isn't it also about things, which have no connection to unemployment, like anger or ideology?
Wertheimer: The GDP of states in our area which have no oil is $2,000 per man. In Europe and Israel, it is $20,000; that's a 10 to 1 difference. This difference of income will always create problems in the area. Whether there are religious aspects or not--it's not important. The economic difference is too big. It can only be overcome by helping young people to have the right type of jobs where they can be satisfied. In the Galilee, where I live and which has 10 percent to 20 percent of Israel's population, we have very little friction because most of the people have jobs now. So in a way, we overcome the problem in a positive way because Arabs in our area, which are half the people in the area, have been trained and find good jobs. It doesn't solve everything, but that's the way to do it.

Have you had conversations with political leaders in Jordan or Egypt about expanding industrial parks to the other side of the border? You once had been plans to build an industrial park in Aqaba and Gaza. Do they still share your point of view?
Wertheimer: They share the point of view, but I don't think that any Israelis can do it. It must be done either by Europe or by America.

A few years ago, you testified before the U.S. Congress where you made the case for a new Marshall Plan. Maybe the timing wasn't good as it came just before the war in Iraq. Are you still optimistic about building industrial parks in other countries of the Middle East?
Wertheimer: I've built a park in Turkey, and it's been very successful. The Turkish government now would like to have more parks. I think this is the solution. It happens slowly, although, unfortunately, not so far with the Palestinians. But it happened with Turkey, which is nearby and also a Muslim country.

You've been a major proponent of investing in big joint regional projects to build political ties between the nations in the region. But in the Middle East, you're talking about nations with varying degrees of wealth. Some have oil, others don't.
Wertheimer: With the areas which have no oil, the idea is to create industry and jobs. The oil areas have a big problem digesting the oil. There's too much money and the people don't know what to do with it. I'm finding all the time that we have more industries and more success stories which are not involved with oil.

So which comes first? The political breakthrough or the economic revolution? Specifically what will it take for the private sector, let's say in Palestinian territories and Israel's other neighbors to join the ranks of high-tech based 21st century economies like Israel's?
Wertheimer: To go to vocational school, to have universities. I'm not speaking only about high-tech, but about anything you can sell, which brings in money and gives more pride to the people who make it.

Do you have a particular favorite in clean technology?
Wertheimer: Yes, I have. I would like today to see solar energy, which could change the southern of part of the Negev from Israel. It also would help Arab countries (that) have no oil. It's a better approach to better energy or--at least a cheaper approach.

TEL AVIV, Israel--Watching the news from Israel over the last several years, it sometimes seems that the political culture in the country is broken. Yet at the same time, the economic and entrepreneurial trends seem stronger than ever. I've never been able to explain that contradiction. Now that I'm back in Israel, a country where I worked several years in the 1980s, that contradiction is more striking than ever.

As always, the "matzav" or the security situation, dominates discussions here. Just prior to my arrival, the Israeli cabinet OK'd a controversial prisoner swap with Hezbollah in return for two abducted Israeli soldiers believed to be dead.

Maybe it's the Israeli knack for compartmentalization, but the entrepreneurs and venture capitalists I've been meeting on this trip take the security question more in stride than do the outsiders. They continue to wax optimistic about prospects for the country's high-tech industry, particularly in the area of clean technology. And even though most would agree with Eric Benhamou's apercu that Israel is a 60-year-old start-up, one that's often overlooked strategic aims in favor of the tactical, the "return on investment" is enviable. In 1950, Israel had average annual gross domestic product of $3,500. Last year, it was $22,500.

As with previous years, the Internet continues to attract a lot of interest, but venture capitalist Chemi Peres told me that now life sciences and, especially, energy are the new, new growing areas.

"I think that potentially those are new sectors where Israel can stand in the forefront of technology," Peres said. "The issue is whether our market can become aware of changes in the world at the same time that others are. This is one of the critical factors related to the long-term perspective of the Israeli technology sector. We need to be aware of changes--if not ahead of everybody--then definitely no later than anybody else. Because we are far away from markets, the result is that sometimes we start things with a delay, which is not so good."

I'll have more over the next couple of days, including a one-on-one with Israel's richest man, Stef Wertheimer, now in his eighth decade, who remains undeterred by regional unrest and insists there is time to enlist business in the cause of peace in the Middle East.