Rediscovering Israel

Startups getting a cold shoulder in U.S. and Europe are finding a home at home
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Hopes for Israeli startup Aplettix had risen high indeed. It had become one of three world leaders in securing credit transactions over the Internet. Just a few months ago it closed a deal with CIBC, Canada's biggest issuer of credit cards. Aplettix hoped the deal would put it into pole position, but then the global crisis struck and changed the banks' priorities. CIBC suspended its plan to develop a mechanism to secure transactions over Internet. All that remains of all Aplettix's global ambitions is a deal to secure transactions made over the Net using Visa Israel Credit Cards.

Aplettix exemplifies a trend among Israeli startups, which have had to throw out plans for global conquest and devote their attention to the last place they'd thought to do business - the Israeli market. Marketing plans targeting far-away lands have been retailored to suit local tastes.

The list of startups to have discovered the domestic arena includes Whale Communications, One Path, Actimize, Persay and Tel Aviv-based Pelican Security. Elron Telesof, Gallery IP and CTI2 are testing their communications products through the Bezeq phone company, while TVGate, a subsidiary of Comverse Technology (Nasdaq:CMVT), is conducting its product tests with the help of Israeli cable company Matav Cable Systems (Nasdaq:MATV).

Even Internet companies are rediscovering the charms of home turf. E-learning provider Interwise began by building itself as a global company, says chief executive Dan Berger. But lately, it has been expanding its activity at home, "partly because of Israel's need to link up with physically distant areas through Internet." He estimates that the company devotes 10% of its marketing efforts to Israel. "In percent, the increase is not large. But the number of deals in Israel have increased compared with overseas," he says.

Israelis understand what you're trying to sell
Data-security firms such as Still, what do technology companies expect to find in Israel, with its 6 million residents and far less potential consumers, compared with Europe's 500 million, or America's 300 million?

Whale Communications, which secures e-commerce sites and applications using its Air Gap technology, is having trouble selling abroad, mainly in the U.S., hence its new-found affection for the Israeli market, says technical marketing manager Yair Tsoran. Unlike the U.S., sales in Israel have not slowed down, he says.

Pelican's chief executive Irit Rapaport says the company set out targeting the U.S. After the slowdown hit in earnest, the company changed strategy to focus on Europe and Israel. "Testing stages were carried out with American companies and banks, which later purchased our products. Today we're seeing interest from Israeli institutions needing security. It is an advanced market with higher technological understanding," she says, "so sales are easy."

Rapaport adds that while the September 11 terror attacks on the U.S. exacerbated the slowdown, the real long-term problem is the sluggish economy.

Israelis love cellular technology
The only sphere in which Israel was considered to be a serious market was mobile communications. Israelis love mobile phones and slaver for innovations. Israeli startups in these areas found a willing test market and eager customers ¿ and investors - among service providers Pele-Phone Communications, Cellcom and Partner Communications (Nasdaq, TASE: PTNR, LSE:PCCD).

Partner even set up an investment arm to develop services for the global orange cellular service, but in practice the company put money mainly into products suited to the Israeli market. SMS companies such as One Path also found willing buyers in Israel.

A Tel Aviv analyst notes that it's more convenient for cellular-oriented startups to focus on the domestic market, because the global market does not employ uniform standards. Cable and communications equipment are another matter entirely, he points out, but only Britain has made true strides in cable-based communications. Israeli cable is still in diapers, but by virtue of its infancy, it is rich testing grounds for startups.

New attitudes toward the previously-scorned Israeli market are also evident in infrastructure and equipment for communications. The pummeling the industry has taken in the choice markets of America and Europe, coupled with the collapse of newcomer CLECs, left suppliers scrabbling desperately for buyers at home. Happily for them, the Israeli phone company Bezeq has set up a venture capital fund called Stage 1 to invest in infrastructure ventures.

Also, testing equipment at home obviates the need to spend a small fortune on getting set up abroad. Startups don't have venture backing for such whims any more. For better or worse, as they set their sights at the home market, they also avoid the enormous cost of maintaining offices, usually in California or New York, to serve that market.

There is little point in that outlay these days, as even the biggest American firms slam the door on new investment or procuring from foreing firms - whether because of burgeoning losses, shareholder ire, a desire to avoid the risks inherent in business with Israel, or a Buy American patriotism in the wake of the September attacks.