Briefing: Israel - Focus on the future

Israel's history is littered with conflict and insecurity. It comes as no surprise, then, that some of the world's leading computer security companies have their roots in the middle-eastern state.

From the earliest days of computer networking and the birth of the internet, respective Israeli governments have been acutely aware of the need to protect the information housed within the country's firewalls. Israel has always been far ahead of its neighbours technologically and money has been plunged into military and, more recently, private technological advancement.

The fruits of these labours can be seen in the success of firms such as Check Point, Aladdin, Finjan and Trustware, which are among the most trusted names in the information security industry. They grew out of government investment in the 1990s and have benefited from an increasingly robust venture-capital market.

But the country has not always been at the forefront of technical innovation. Prior to the development of its hi-tech industry Israel's economy focused, like much of the surrounding region, on relatively low-tech sectors such as agriculture and mining. But that has changed for a number of reasons.

In the past 15 to 20 years, as global networks expanded, the army has engaged in protecting Israel's networks and has trained individuals to protect their country electronically, as well as physically, and even develop security technology. But personnel leave the army, and the country found itself with a cornucopia of talented, well-trained and ambitious computing experts.

"Israel is indeed in a unique security situation," says Efrat Schneider, marketing manager at Trustware. "The threat is not just physical, it is computerised as well. That's why there is mandatory military service for all citizens.

" Trustware is a good example of how military personnel have formed the basis of Israel's infosec industry. The company's chief executive, Israel Baharav, served in the air force and held top-level executive and operational roles in the Israel Defense Forces (IDF), including head of air force intelligence and head of IDF strategic planning.

In the 1990s, when the Israeli government realised that its financial future did not lie in agriculture, it plunged money into programmes designed to foster new industries. The country was beginning to show global business ambitions, and it wanted something worth exporting. In 1993, recognising the potential of the hi-tech industry, the government began plans to establish a viable venture capital (VC) industry and allocated £50 million to start-ups in the arena.

The scheme was called Yozma, which means "initiative" in Hebrew, and was the foundation of early successes such as Check Point and Aladdin. As part of the programme VC funds were formed in partnership with foreign investors, many of them based in the US.

Each fund was worth between £10 million and £12 million, and the government held a 40 percent share. Established global investing houses such as Advent and Walden took an interest. One of the attractions for foreign investors was the option to buy out the government share after five years, and nine of the ten funds were eventually bought out. In 1996 the Israel Venture Association (IVA) was formed as a direct response to the success of Yozma, which effectively kick-started the VC interest in Israel. The IVA is positioned to support and grow Israeli hi-tech industries and acts as the sector's lobby group.

FERTILE GROUND

Computer security is, of course, not the only sector to have benefited, but it has formed a major portion of activity. "Information security is a significant pillar in the Israeli hi-tech industry, with companies such as Check Point, Aladdin and dozens of other matured organisations and start-ups that have been acquired by other large, international businesses," says Elinor Nissensohn, the US-based global vice-president of sales and marketing for Aladdin.

For Caroline Ikomi, Check Point's technical manager, Israel offers a "holy trinity" for start-ups. "The government promotes innovation, creating an innovative workforce with drive and commitment," she says. "And there is a great legal infrastructure, where copyright is fiercely protected. This means start-ups can be confident their intellectual property will be safe. Thirdly, there is education. We have huge numbers of IT graduates in Israel."

The copyright point is important. There are still many countries that do not have robust copyright laws. Israel's reputation for protecting the intellectual property of its citizens means that foreign investors are more likely to do business, because innovations generally create profit for the innovators rather than copycats.

And Israel prides itself on its intellectual excellence. The office of the chief scientist recently issued a document called The Intellectual Capital of the State of Israel, which highlights the country's continued commitment to cultivating and protecting intellectual property and advancement.

All that means that the Yozma scheme was created in an environment ripe for investment and, with money around to help it flourish, success was almost guaranteed. In the early days, the Yozma funds mostly provided support for entrepreneurs with military backgrounds. But not all companies grew out of the Israeli Defense Forces.

UNIVERSITY CHALLENGE

"If you take Aladdin as one example - its technology and products had no roots or relevance to army-related research or developments," reveals Nissensohn. "Today you see a fast-growing number of entrepreneurs in Israel who look to the global technology arena to gain their inspiration for innovation."

Aladdin grew out of Israel's universities, which received significant funding at around the same time the Yozma scheme was being implemented. "Because of Israel's commitment to IT and its success in creating wealthy individuals through technology, the uptake at universities is excellent," says Ikomi. "It's no surprise the industry continues to be successful when there are so many graduates."

Israel's biggest university is in the capital, Tel Aviv, as is the majority of investment. It is natural then, that a large percentage of software companies are based in that area, or in suburbs such as Herzeliya, Ramat-Gan and Raanana. Israel is also a relatively small country, so to be successful a long way from its major financial hubs would prove difficult.

"The extensive cooperation between academia and the high-tech industry is one of the factors that contribute to the development of systems, products and sophisticated solutions in various fields," says the chief scientist, Dr Eli Opper in The Intellectual Capital.

Being a small country in the middle of a largely unfriendly region, Israel has had to look outwards to sell its products. This has been both a blessing and a curse. It means small companies are immediately thrust into a globally competitive market, with even more opportunity for them to come up against well-established competitors. It also means Israeli companies are created with global expansion in mind.

Going forward, the future looks bright for Israel's infosec industry, with new companies popping up frequently, thanks largely to continued investment from inside and outside its borders. Israel trails only the US as the country with the most NASDAQ-listed companies. Per capita, Israel has one of the highest number of engineers. It also benefits from continued political and economic support from the world's biggest investor - the US.

But, as Nissensohn points out, Israel cannot afford to rest on its laurels: "The future seems bright, but we need to become even more global in many ways. Not only do Israelis have to learn how to behave more globally as the world becomes smaller, but we need to further open Israel itself." She adds that Israel is still closed to many regions politically and industrially -it could, for example, benefit from making use of the growing Indian markets. "We must change some of our regulations and laws to allow entrepreneurs, engineers, developers and marketing experts to come to Israel to work," Nissensohn suggests.

But the Israeli government is proud of its infosec hegemony and is unlikely to drop its focus. There are already efforts being made to tap into other markets. Check Point is currently pursuing connections in the Far East, even opening an office in China.

As Schneider says: "Israel has a clear advantage in the computer security industry compared with the rest of the world. It seems like this knowledge difference is not going to disappear in the near future, and Israel will continue to lead the world in computer security development."

Ben Itzhak, CEO of Finjan is even more bullish: "The security industry will never die. There will always be new technologies that will require protection. I believe all security companies have a goal to become a global company."

Israel has always been a determined nation. Its information security sector looks well-placed to achieve its goal: pre-eminence on the world stage.

THE MINISTER'S VIEW

"The bottom line for Israel's success is necessity," says Gil Erez, minister for commercial affairs at the Embassy of Israel in London. "Historically, and politically still, it is necessary for Israel to maintain expertise in security, both physical and electronic. But behind that necessity there is also a cultural reason for the industry developing. People in Israel love finding solutions to problems. We're a very inventive nation."

Erez maintains that many of Israel's infosec success stories, such as Check Point, have truly led the industry. The people behind these companies came from the same unit in the Israel Defense Forces (IDF). He says that, in their working lives, they were tasked with looking for solutions to the army's need, and that transferred to the businesses they eventually formed.

"Culturally, those who came out of the army had been taught to work out problems on a limited budget and not go home until they had a solution. That's important, because it bred a smart, dedicated workforce. There is also no passion like there is in the army, and that can be infectious," he says.

Erez adds that the Israeli government realised the culture needed nurturing and took great steps to do so. Money was put into universities and education so Israel could become a world leader in the IT and electronics arena.

Once all that was in place, and companies such as Aladdin had established themselves, the industry grew quickly. "There is nothing that breeds success like success. Aladdin and Check Point helped convince Israeli businessmen and entrepreneurs, as well as foreign investors, that our computer security companies could be inventive and profitable," he says.

According to Erez, this led to investment from venture-capital firms that showed confidence in the fledgling industry. "In the early 1990s it was the government that actually formed most of the investment. The Yozma programme (see main copy) ensured the money was there as the industry went through early growth. The government helped take away some of the financial risk, and this gave confidence to the new firms," he says.

Ironically, Israel's small size and virtual island-like status among hostile neighbours has been an advantage in securing a lead in information security. "Because Israel only has seven million people, companies can't expand internally - the market isn't big enough," Erez explains. "So they have to look abroad, and not to our neighbours, but all around the world. This need to look elsewhere automatically makes companies ambitious and global in nature."

"To sell in foreign markets you have to maintain high standards, and Israel has gained a reputation for having those," he says.

The chief scientist's office helps the market grow by supporting new companies. It makes sure they are of a high quality, effectively screening them. It occasionally encourages cooperation between organisations as well, if their technologies or expertise would better work together.

"I think foreign investors like and trust the Israeli market because of this. That is why we get so much investment from the US, but also increasingly from Asia. There is less investment from Europe, although that is improving," Erez says.

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