Israeli-Born Tech Firms Are Poised to Soar - TheStreet

Israeli-Born Tech Firms Are Poised to Soar

Armed with Silicon Valley-like speed, style and capital, only their accents set them apart.
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Adam Lashinsky traveled to Israel to check out a high-tech scene that arguably is second only to Silicon Valley for its explosive growth, wealth creation and consumption of venture capital. His reports on specific companies to watch, trends in Israel's high-tech sector and the small country's booming VC industry continue this week.

TEL AVIV -- What's striking about some of the most exciting Israeli start-ups is how thoroughly indistinguishable they are from their competitors in Silicon Valley.

The target market almost always is the U.S., not Israel. The PowerPoint presentation is the same as it would be back home -- in English. The financial backing typically comes from some of the elite U.S. tech-oriented venture capitalists. Indeed, all that seems different is the Hebrew accent of the entrepreneur and the location of his headquarters.

And even these two factors are likely to change for the most promising Israeli start-ups. Most plan to hire U.S.-based senior administrative, sales, marketing and business-development executives and base all non-R&D operations in North America.

The common denominator for these companies, however, is that their genesis is in Israel, often as the brainchild of an entrepreneur who first started noodling with computers in the Israeli defense forces. And although every Israeli entrepreneur targeting the U.S. market -- and nearly every one is -- spends hours on airplanes between Tel Aviv and New York, Washington, D.C., or Silicon Valley, many remain in Israel with their R&D team.

Those teams have a reputation for delivering on time and on budget. Robin Hacke, a U.S.-born venture capitalist and consultant currently raising a VC fund called

Portview Communications Partners

, notes that an American start-up team will begin by assuring potential investors of the size of the market they intend to address, and then may or may not be able to deliver the product on time. In contrast, an Israeli company begins by describing a product it absolutely will be able to deliver on time, but then may or may not know how to market it. "I invest in four guys who are four chief technology officers," she jokes, no matter what their individual business cards say.

In addition, a common comment about technical support reveals one advantage to the time difference and physical distance that otherwise are handicaps: It's normal for U.S.-based customer-service personnel to submit queries and problems to the Israeli technical team at night before logging off for the day, and have an answer first thing the next morning from the Israel-based employees whose day hasn't yet ended. Bottom line: The Israeli technology company truly is 24/7 in a way that U.S. Internet companies only pretend to be.

Here then are three of the most promising start-ups in Israeli. You can't invest in any of them now, and you may never be able to, as they've each positioned themselves in one sweet spot or another of today's Internet economy and therefore will be ripe for takeover if they're successful. Each is "pre-revenue," of course. Two are in business-to-business e-commerce, and a third is into networking gear.

Watch for these companies down the road. If they hit it, they'll be the next examples of the Israeli high-tech boom that's creating leading companies the rest of the world won't even know come from Israel.

A Name You'll Hear Again

Orni Petruschka is on his second start-up,

Chromatis Networks

. Technically, the company is headquartered in Bethesda, Md., but 80 of its 100 employees are in Israel. Petruschka and his co-founder sold their first networking products company, Scorpio, to U.S. Robotics, which then sold out to

3Com

(COMS)

, which discontinued Scorpio's product line.

Chromatis has all the markings of the hot next-generation networking gear companies that are fetching huge valuations in Silicon Valley and beyond. It plans to make a product aimed at telephone carriers that will improve data and voice traffic in metropolitan areas. Existing products focus either on long-distance or local service. Chromatis will focus in between those markets.

Though customer trials won't begin until December and its product won't be broadly available until the second quarter of next year, Chromatis already has attracted attention. It has spent its first $12 million of venture funding and is in the process of raising another $36 million. Backers include

Crosspoint Venture Partners

,

Communications Ventures

,

Lucent Venture Partners

, two arms of

Hambrecht & Quist

and a fund related to billionaire

George Soros

.

Quips Petruschka, a veteran fighter pilot, "Most companies in this league are well financed."

Petruschka says Chromatis is totally focused on the U.S., largely because of the competitive telecommunications environment, but also because this will improve the company's chances of gaining acceptance as a Nasdaq-listed company.

"It's a good housekeeping seal of approval for the rest of the world and the stock market" to be a success in the U.S, he says. "To be successful on the Nasdaq you need either a strong bottom line, which would take us years, or a product with strong potential in the U.S."

Given that Chromatis aims to compete with

Cerent

, the company

Cisco Systems

(CSCO) - Get Report

is buying for stock initially valued at $7 billion, Chromatis looks like takeover bait. Like any good entrepreneur, the soft-spoken Petruschka won't rule that out. But he's an expansive speaker, and goes on to map out just how likely it is that Chromatis will be acquired -- before or after an initial public offering.

"We don't shut our ears when people approach us," says the 41 year old. "But we are very ambitious for this company. We're getting tremendous response from customers. That just serves to fuel our ambitions. Our product in the hands of a big company could revolutionize communications, and in our hands a little less."

The company already has hired a U.S.-based executive from a

Nokia

(NOK) - Get Report

unit in California who will be president and, eventually, CEO. Petruschka says Chromatis hopes to go public in mid-2001, and as the current budget will run dry earlier that year, it will have to seek additional financing unless things move more quickly than planned.

Chromatis has a host of existing and expected competitors. But it claims to have a lead in one of the networking world's hot new markets. File this one away; if it shows up in headlines as a high-profile takeover, you won't have to ask, "Who's Chromatis?"

Next: Customer-targeting software maker

NewChannel

and

C-Safe

, a maker of software that allows Web-site operators to stop viewers from appropriating their content.

Adam Lashinsky's column appears Mondays, Wednesdays and Fridays. In keeping with

TSC's

editorial policy, he doesn't own or short individual stocks, although he owns stock in

TheStreet.com.

He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.