The rooftop deck atop Nir Zohar’s Israeli startup firm provides a bird’s-eye view of this metro area’s evolution into a high-tech powerhouse.
His website set-up company, Wix, is tucked into a once-derelict port district, now the seaside home to a bevy of emerging tech firms and trendy shops.
To the north, the sun glances off sleek office towers in suburban Herzliya, where thousands of engineers and computer scientists conduct research for U.S.-based multinationals. Chicago-area corporations such as Motorola Solutions, Boeing, Abbott, Baxter, Allscripts and Groupon look to tech hubs throughout Israel as a source of R&D and tech acquisitions.
To the east and south, cleanly curved Bauhaus-style low-rises, business towers and gritty former factories hold a staggering assortment of early stage companies and the incubators, accelerator programs, shared workspaces and venture capitalists that aim to help them launch.
It’s a high-tech landscape that Chicago leaders are studying as the city tries to catch up with America’s pre-eminent digital hubs on both coastlines — Silicon Valley and Boston.
“If you look around you … the choice of location for the office is not random — we were looking for something that would create a really good, positive vibe for the employees,” said Zohar, a reserves naval officer who is president of Wix. The sweeping oceanfront view wows job candidates, he said, adding that “for startups, the first thing that drives you is the ability to reach amazing talent and be attractive for amazing talent.”
Like many Israeli startups, Wix’s first U.S. locations are in San Francisco and New York. Chicago, it seems, is not top of mind for Israeli tech firms looking to open U.S. beachheads.
Despite its assets — first-rate universities and research centers, an educated workforce, a major air hub, a reinvigorated downtown anchored by Millennium Park — Chicago continues to be a flyover zone for most tech investment in the U.S. Building a more muscular tech hub is essential if the city is to remain a viable and growing player in the global economy, observers say.
“Chicago’s got bits of this,” said Bruce Katz, vice president of the Brookings Institution, a leading urban affairs think tank. He cites the young 1871 tech incubator in the Merchandise Mart; recent efforts to bolster research at the Illinois Medical District on the Near West Side; federally supported plans to build a digital lab for manufacturing on Goose Island; and the city’s strong universities. The development of Millennium Park and the revitalization of the Loop have also been important signals about the city’s livability, he said.
But efforts here remain disjointed, said local tech entrepreneur Michael Sachs, recently back from an observational trip to Israel, where he was impressed with the degree to which universities, businesses and government interlace their efforts. “Chicago is trying, but it doesn’t have the same integrated cultural support,” said Sachs, chairman of Sg2 LLC, a health care analytics and consulting firm in Skokie.
Geographic challenges remain too. “Some of your most advanced research universities are in another part of the state,” Katz said. The question, he said, is whether public universities such as the University of Illinois at Urbana-Champaign will consider moving top-flight engineering and graduate schools from the cornfields to vibrant downtown areas that appeal to young innovators.
Other American cities have been aggressive in forging a foundation for startup growth.
New York City recently recognized that it lacked the engineering muscle found in Silicon Valley, which has Stanford University, and Boston, which has the Massachusetts Institute of Technology. So leaders in New York took the gutsy step of conducting an international search for an academic powerhouse, ultimately settling on a joint venture by Cornell University and Israel’s Technion university to build an engineering campus by 2017.
Working around conflict
Even with its cycles of violent conflict, Israel has built a high-tech environment that some experts say is second only to Silicon Valley — one in which government, the military, academia, multinational corporations, venture capitalists and angel investors work in tandem to foster the risky business of launching companies, at least half of which will fail.
This summer’s conflict with Hamas, like past episodes of armed confrontation, does not appear to have soured investors, who tend to see the outbreaks as temporary disruptions.
Jerusalem-based Mobileye, whose technology aims to prevent accidents in driverless cars, raised $890 million in its U.S. initial public offering Aug. 1, which was $250 million more than it anticipated and a record for an Israeli company.
Meanwhile, Takeda Ventures is moving ahead with a joint venture to develop one of Israel’s newest incubators, said Graeme Martin, its president and CEO.
“The current situation in Israel was a considered possibility in our due diligence,” he said in an email. Though some board meetings were moved to London, communications with Israeli counterparts continue as normal, he said.
“Some of the biggest upturns in Israeli high-tech occurred during very serious conflicts in the region,” said Gadi Tirosh, general partner with Jerusalem Venture Partners, one of the country’s largest venture capital firms. Israel’s tech scene performance tends to mirror the sector’s global trends, he said.
The Office of the Chief Scientist in the Economy Ministry acts as the central clearinghouse for public-private high-tech partnerships.
“Every dollar we put into research and development generates another $1.50 in research spending by the private sector that wouldn’t have happened without our dollar,” said Avi Hasson, the chief scientist, citing a 2008 analysis that is being updated.
Under pressure to provide its population with food, clean water, energy, health care and military security since its founding in 1948, Israel has developed a panoply of public-private assistance programs, including 20 government-backed incubators that provide substantial financial support to startups.
The government “had no other choice,” said Eugene Kandel, head of Israel’s National Economic Council, which advises the prime minister. The role of government, as he sees it, is to “create critical mass and let it then start … along the way, you create comparative advantages.”
The tiny Middle Eastern nation has an estimated 4,000 startups, or 1 for every 2,000 residents, thought to be the highest density of startups in the world. Though the arid nation’s economic output is less than half that of Illinois, in 2013 it raised more than twice as much venture capital, the lifeblood of emerging companies.
As Mayor Rahm Emanuel aims to double tech employment here in the next decade, his lieutenants, together with tech leaders, are looking to Israel for some of the answers.
Chicago-area CEOs, academics, investors and entrepreneurs in recent months have trekked to Israel to glean ideas for transforming the Chicago region’s more traditional economy. A study trip by Northwestern University’s Kellogg Innovation Network included Howard Tullman, CEO of 1871, and such local investors as former Allscripts President Lee Shapiro and Crate & Barrel founder Gordon Segal.
“It’s a culture that has really mastered a lot of the things that work well in innovation,” Tullman said. “There’s a sense of urgency there.”
And here as well. Emanuel and Gov. Pat Quinn “are desperate for us to have the next giant winner,” Tullman said. “Not a Groupon — that was sort of a so-what. But a real substantial, multibillion-dollar business that not only is started in Chicago, but stays.”
Establishing an identity
The sidewalks of Tel Aviv were packed on a balmy June night as street crooners, dance bands and fringe artists performed during the city’s recent all-night party, “White Night.” As the evening revved up, the municipality ushered a group of foreign journalists through a newly renovated historic district, at one point bringing them into a dank sandstone basement that years ago was a winery. It later served as a repair shop for stealthily acquired damaged aircraft — planes that were fixed up and put into service in Israel’s fight for independence.
“You’ve heard about the ‘Start-Up Nation’? This was the beginning,” said guide Yossi Goldberg, referring to a moniker that has gained currency with the publication of an explanatory book by that name in 2009.
Israel has a brand that has stuck — something that has long eluded Chicago, with its diversified economy. Tel Aviv is piggybacking on the theme, promoting itself as Startup City, but it took awhile for the city’s leaders to recognize that as a natural path.
“It was happening on the surface, but people didn’t open their eyes to see it,” recalled Mira Marcus, the city’s international press director.
Like many cities, including Chicago, Tel Aviv is keen on hoisting itself into the top echelon of cities that attract talent, entrepreneurs and top corporations, so-called global cities. The municipality formed a global city team in 2010 to pursue that objective, and the group traveled to New York, Berlin, Tokyo and Amsterdam to learn what other cities were doing.
“We started to look into our unique characteristics, having per capita the highest amount of startups in the world,” Marcus said. In 2012, research outfit Startup Genome ranked Tel Aviv No. 2 in startup activity worldwide, after Silicon Valley. (Chicago was No. 10.)
Tel Aviv crafted a “Startup City” work plan that details steps to build its digital industry and city visitor levels, including a proposal to offer work visas for startup founders. “We looked at Silicon Valley, the mothership of startup ecosystems, and one thing we found is its workforce is very diversified … very global,” Marcus said.
Israel’s own tech scene was bolstered two decades ago with an influx of tech-savvy immigrants from the former Soviet Union.
The key for cities that want to establish a fresh identity is to “see their greatest assets and to package them in a new way,” said Erel Margalit, a former venture capitalist who is a member of the Knesset, the Israeli parliament. “Think about what Starbucks was. It didn’t invent much. … It came up with a cup of coffee that now is selling not for 90 cents but for $4.50, and you have a new coffee experience. That is what redirection is about.”
Israel, which has built expertise in such areas as food production, life sciences and cybersecurity, aims to sharpen those identities through specialized incubators run by private firms and supported by the government. The venture firms provide startups with mentoring, back-office support and seed capital, preparing them to raise external funding. The government also provides loans, which the startups pay back if they begin to generate revenue.
In the rocky, terraced hills outside Jerusalem, early stage investment firm Trendlines Group operates an agriculture incubator. The scent of a neighboring dairy farm seeps into the cut-limestone office building as scientists puzzle over robotic chicken-feeding systems, ultraprecise irrigation equipment and automated grafting processes.
The company, which has Chicago investors, sees potential demand worldwide. “All the problems this country was facing during the years — lack of water, lack of arable land, harsh climate, small resources — these days, these are faced all over the world,” said Nitza Kardish, the incubator’s CEO.
Building a talent base
Big data analytics firm SiSense has an office in Tel Aviv’s port district that looks like startups everywhere — hardwood floors, exposed brickwork, marker scribblings on glass room dividers and a youthful staff dressed in shorts and T-shirts.
The firm helps companies such as eBay, ESPN and Merck manipulate huge amounts of data, very quickly.
Its co-founder and chief technology officer, Eldad Farkash, got his first intensive experience in such work at age 18 when he served in an elite Israeli army intelligence unit, filtering data from radar. By age 25, he had three startups under his belt. The first two failed. SiSense, however, is on a promising trajectory: It is making money, it has raised $50 million from investors and it recently won a $250,000 prize from the New York City Economic Development Corp. to open an office in lower Manhattan.
“The advantage of the army is that it takes young people and educates them but does it in real-life scenarios,” Farkash said. “Think of it as getting exposed to stuff you would get exposed to only if you worked for many years at Google.”
Israel’s tech talent pipeline has been filled by highly trained veterans — their military training serves as a calling card, and the service itself leads to lifelong personal and professional networks.
Clearly, circumstances are different in the U.S., a much larger nation with a volunteer army, but observers say universities can do more to develop teams of talent that can energize their local economies.
“The equivalent network in the U.S. are colleges, and I’m pretty sure … you can get more out of them,” said Zohar, of Wix. “Maybe create a lot of incubators and startup hubs within the college, so people will not leave when they are done but stay in the vicinity and start building their companies.”
The biggest challenge for the Israeli military and the private sector is one familiar to Chicago’s tech scene — how to keep top-flight engineers and computer scientists from migrating to Silicon Valley, Boston or New York.
“We will never be able to pay what they get in California,” said a lieutenant colonel in the army’s technical division, who spoke on the condition of anonymity. “The only way we are able (to retain top talent) is to offer them very interesting and very challenging tasks. “
But work environment alone is insufficient, said Margalit, founder of Jerusalem Venture Partners, which developed a cluster of projects around its headquarters, which overlooks the ancient hills of Mount Zion and the Mount of Olives and the fortresslike limestone walls of the Old City.
The compound, anchored by a renovated British-era mint building and Ottoman-era warehouses, includes a music club and restaurant along with JVP’s incubator for media-related companies, an accelerator for mentoring early stage companies and offices of an independent crowdfunding company, OurCrowd. Crowdfunding companies raise money from a large number of small investors, often via the Internet, to fund startup projects.
Nearby, JVP and Margalit redeveloped the area surrounding the city’s old train station into an entertainment complex with a man-made beach, bike path and rentals, cafes, restaurants, artisan kiosks and an array of arts and culture programming.
“Leaders need to realize that young people are not horses that just sleep and work,” Margalit said. “I created that train station compound at the time of the second intifada. If I didn’t create it, then the young people would just skip the city and go west and stop in Tel Aviv, London, New York, Chicago.”
On an evening in June, reggae music was wafting across the landlocked “beach” outside the old rail station. Children were digging in the sand with plastic shovels while nearby, young adults were sipping beer and smoking cigarettes at a tiki bar.
Technology consultant Matthew Gelband, 33, was there with his three kids, the two oldest scooting around the boardwalk area on tricyclelike contraptions while his toddler lurched between strolling couples and families.
“Hot spots like this, they increase the quality of living,” he said.
In Tel Aviv, some of Israel’s top tech investors are opening gathering spots for startups in transitional industrial districts filled with oil-stained machine shops, motorcycle dealers, sprawling graffiti and a smattering of urban pioneers — artists, designers and musicians.
Pitango Venture Capital and Genesis Partners were among the investors in a co-working space for startups that opened this spring in a former plug factory on an edgy corner of south Tel Aviv, a recognition of the growing appeal of urban centers over suburban office corridors for young tech inventors.
“I like this concept of having a startup hub in the middle of old, dirty southern Tel Aviv, the nitty-gritty here,” said startup founder Barak Ben Ezer, who rents space at the hub, which is called SOSA. His company, Neema, is developing bitcoin-related financial services.
The role of government
Israel has a dizzying array of incubators, accelerators, shared workspaces — some strictly private, some publicly assisted. The public-private programs range from tax breaks for multinationals that open or expand R&D centers in Israel to government financial support for startups in specialized incubators run by private firms.
“We focus funding on early stage development, when there is very high risk,” said Hasson, the chief scientist. “Without it, we wouldn’t have a pipeline for venture capitalists and strategic corporations.”
While Israel has made a name for itself as a startup center, there is discussion about whether existing tools are sufficient. New initiatives under discussion, according to Haaretz newspaper, include allowing the government to make investments, issue grants to businesses, raise capital in Israel and abroad, and establish technology investment funds.
The Chicago region has a history of fragmented efforts at economic development, including in the tech sphere, but observers say collaboration among government, academia and the private sector is on the rise.
The public-private efforts behind such projects as 1871 at the Merchandise Mart and the planned digital lab for manufacturing are steps in the right direction, said urban strategist Peter Creticos, president of the Institute for Work and the Economy, a Chicago-based research firm.
Still, the tech scene here has not yet achieved critical mass, he said, noting that can take years to achieve.
“We are a big enough metro center — huge by U.S. standards — that we should be seeing lots of 1871s and other places sprouting up,” Creticos said.
What the future holds
Israel’s coordinated effort is landing some new public-private ventures, including a biotech incubator that involves one of Chicago’s big life science players, Takeda Pharmaceutical Co., a Japanese firm whose U.S. headquarters are in Deerfield.
The project, FutuRx, launched early this year and is a joint venture of Takeda’s venture affiliate, Johnson & Johnson and OrbiMed Israel Partners, a health care investment firm. It will be located near the Weizman Institute of Science, a renowned research university.
This planned collaboration on pre-competitive research “is a new concept for pharmaceutical companies to engage in,” Martin said.
Israel also has updated its incubator program for startups, which began as a way to employ tech-savvy immigrants from the former Soviet Union. While the early programs had their share of successes, there also were a lot of sophisticated science projects that proved unmarketable, observers said.
The incubators have been privatized, licensed to venture capital firms and corporations with track records of recognizing startups with market potential and fostering their success. The number of incubators have been scaled back, with remaining facilities focusing on specific sectors and many located in communities in need of an economic boost. About 50 percent of the startup “graduates” go on to raise capital, Hasson said.
Chicago-area multinationals are among those snapping up companies fostered in Israeli incubators. In 2013, for instance, Deerfield-based Baxter International paid $9.5 million for FlowSense, a medical device company founded by Trendlines, which operates three incubators, including a health care facility in the north of Israel and the agriculture project outside Jerusalem.
Typically, a startup at a Trendlines incubator receives about $700,000 over two years, with 85 percent coming from the government, according to Wilmette native Steven Rhodes, chairman and CEO of Trendlines Group. The group also provides a startup with about $450,000 worth of support services, including office space, bookkeeping, legal services and accounting.
The government is paid back if the company moves on to produce revenue. And if intellectual property is taken out of the country, another fee must be paid.
“What the government license gives us is access to attractive funding — it incentivizes us to take risks we wouldn’t otherwise,” Rhodes said. The venture firms take a stake in the startups, the government does not.
Government loans to startups carry political risks — some companies inevitably fail, and others may be slow to add jobs. In Illinois and many other states, government assistance tends toward a more traditional approach: tax breaks to established companies that promise short-term job creation. Some Israeli entrepreneurs suggest a shift in thinking.
“If Chicago wants to differentiate itself … give incentives based on innovation,” said Ronen Gadot, CEO of Herzliya-based ElMindA, which has designed noninvasive headgear that can map brain activity, assessing damage from concussion or illness. “A lot of startups are not immediately creating a lot of jobs, but they are creating an entrepreneurial spirit … which down the road will generate jobs.”
Because Israel is a small country — population of 8.1 million compared with 9.5 million in metro Chicago — startups scout overseas markets and office locations very early on. And their founders have suggestions for Chicago as it tries to land some of that foreign investment: Set up a temporary accelerator in Israel to scout startups that may want U.S. offices; offer rental assistance; host tech conferences and contests.
“I think the people here, to be honest, are not so familiar with what is happening in Chicago,” said startup co-founder Eran Ben-Shushan, sitting in a cafe on Rothschild Boulevard in central Tel Aviv, a leafy historic district dotted with tech firms, Bauhaus architecture, theaters, music clubs and cafes.
“It’s a matter of PR and marketing the city … and it’s a lot about becoming active, whether people or accelerators from Chicago come here,” said Ben-Shushan, CEO of Bizzabo, which produces software to integrate social media into conferences. Its U.S. offices are in New York.
Chicago no longer has a direct flight to Israel, and re-establishing the route would be the most effective way to deepen ties, said Roey Gilad, Israel’s consul general for the Midwest, who is preparing a pitch to Israeli airline El Al.
Companies are drawn to specific locales for a range of reasons — from personal connections to proximity to universities, talent, customers, strategic partners or investors.
The key, for Chicago, will be its ability to act as a sophisticated matchmaker that helps to line up cross-border partnerships, said Sherwin Pomerantz, the state of Illinois’ trade representative in Jerusalem.
Discussions with Israeli entrepreneurs indicate the city faces a monumental task.
ElMindA, for instance, has opened offices in Elk Grove Village because a key investor and executive lives in the metro area, and its first customer, Athletico Physical Therapy, is based nearby, in Oak Brook. But it is considering establishing a hub in Boston as well.
“We need access to biotechnology,” said Gadot, the CEO. “Chicago is sort of a center of biotechnology, but maybe not as much as Boston. … Boston is the hub of excellent schools that are generating great scientists.”
Chicago, too, is home to world-class universities, but it has yet to distill its myriad strengths into a global tech identity, said marketing strategist Yoram Wind, a professor at the University of Pennsylvania’s Wharton School.
“I don’t think Chicago is known for a specific cluster,” he said. “Chicago needs to get together the presidents of its universities, see their key research and provide them with incentives to build a culture of entrepreneurship.”
Twitter@ kathy_bergen
