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A white drone with a 12-foot wingspan banks sharply over an artificial lake on the outskirts of Tel Aviv. The unmanned aerial vehicle, or UAV, is so quiet that herons on the water’s edge don’t budge until the hawklike aircraft is barely a hundred feet away. As the drone swoops in, its cameras beam high-resolution images of the terrain and the birds onto a large outdoor screen for a rapt audience of military analysts and arms buyers while a presenter extols the aircraft’s virtues. “It allows a military unit to peer down on enemies hidden behind hills or buildings and then call in artillery or air strikes,” he says.

Inside an adjacent, hangar-size convention hall at Israel’s annual Autonomous, Unmanned Systems & Robotics (AUS&R ) convention, some 500 attendees hailing from Israel, the U.S., Europe, Asia, and Latin America inspect a score of other drone models. They include a tiny, kamikazelike craft bearing an explosive charge that hovers and surveys its surroundings until its controller directs it to crash into and blow up a target; a drone as large as a tank that can ferry soldiers and cargo in and out of urban combat zones; and a UAV with the wingspan of a business jet that can stay aloft for more than a day on espionage missions.

In less than 30 years, Israel, once better known for its agricultural kibbutzim, has transformed itself into a high-tech industrial nation with a per capita income of some $35,300, just behind France’s and nearly 9 percent greater than Japan’s. Silicon Wadi, a 125-mile corridor stretching from the plains around the northern port of Haifa to the Negev Desert in the south, has spawned more high-tech start-ups than all of Europe. Only the U.S. claims more high-tech start-ups, and it has a population nearly 40 times larger than tiny Israel’s 8.2 million.

The boom has attracted a rising tide of foreign investment from global tech giants looking to bolster their research and development operations and tap into promising new technologies, and from foreign venture capital firms eager to finance hot new start-ups. Israeli companies are especially strong in products and services related to military activities and protection against Internet attacks. The nation is the world’s second-leading exporter, after the U.S., of both military drones and cybersecurity services — two of the hottest digital-era industries.

The ramifications of this two-decade-old surge have spilled into diplomacy and geopolitics. The technological prowess of the Israel Defense Forces (IDF) and the Israeli military and cybersecurity industries is gaining the country informal alliances even with longtime Middle East antagonists like Saudi Arabia and the Gulf emirates. Israeli media have reported that the country has exchanged intelligence on Iran and Yemen with Saudi military officials in the past year. In July a Saudi delegation led by retired general Anwar Eshki visited Israel and met with intelligence officials to discuss cybersecurity and antimissile defense systems, according to local press reports. In September the New York Times reported that Israel’s NSO Group was selling smartphone surveillance spyware to the United Arab Emirates. “More and more nations see Israel as a potent partner,” Prime Minister Benjamin Netanyahu told the United Nations General Assembly in September. “Because of our unmatched experience and proven capabilities in fighting terrorism, many of your governments seek our help in keeping your countries safe.”

Billions of dollars in venture capital and high-tech export earnings pour into Israel each year despite continued global criticism of the country’s half-century occupation of the West Bank, which has inspired the Boycott, Divestment, and Sanctions movement. Google, Facebook, Microsoft Corp., Oracle Corp., and hundreds of European and Asian businesses are investing heavily in their Israeli R&D operations, which account for about half of the nation’s 290,000 high-tech jobs, and snapping up promising young ventures. “The boycott campaign is annoying, but it has had no material effect on our business,” says Joseph Gaspar, chief financial officer of Elbit Systems, the country’s largest exporter of military drones.

Underpinning this high-tech boom is a uniquely Israeli ecosystem that links elite military units, hundreds of start-up companies, and a multilayered investment community.

Typically, high-tech entrepreneurs are young veterans of IDF intelligence groups who learned to operate in tightly knit teams while working on technological solutions to military needs. The most celebrated of these intelligence outfits, Unit 8200, is Israel’s equivalent of the National Security Agency. It has spawned thousands of fledgling entrepreneurs and other start-up executives who network at the annual gathering of alumni in June. “It’s an opportunity to meet a partner at a venture capital firm or the CEO of an established company, and believe me, a lot of business cards get exchanged,” says Nir Lempert, chairman of the Unit 8200 alumni association and CEO of C. MER Industries. Lempert regularly recruits Unit 8200 alumni for MER, a supplier of mobile communications infrastructure for antiterrorist security networks.

Over the past two decades, Israel has built a sophisticated, deep-­pocketed investment community for start-ups. The venture capital market has slowed in many parts of the world, but it continues to swell in Israel. Last year $4.4 billion in venture capital poured into Israeli companies, a figure that is on course to hit $6 billion in 2016, according to the IVC Research Center in Tel Aviv, which tracks the high-tech sector.

Increasingly, the money is coming from abroad. Last year non-Israeli firms supplied 85 percent of new venture capital, up from about 50 percent a decade ago. “You can find more modest deals than in the U.S.,” says Paz Eshel, an applications software and information technology specialist at the Israeli office of Boston-based Battery Ventures, which has invested in more than 30 Israeli start-ups in the past two decades. There aren’t as many unicorns in Israel, he adds, but there are plenty of start-ups with $200 million outcomes to attract foreign investors. 

At the top of this food chain are multistage venture capital firms that take a start-up from seed stage to an initial public offering. Other venture firms are early-stage investors, exiting before a start-up goes public. Crowdfunding — drawing upon numerous small investors — accounts for the remainder of start-up capital. “Forget about writing a $50,000 check to a venture capital fund, because they want millions,” says Jon Medved, founder and CEO of Jerusalem-based OurCrowd, one of the largest crowdfunding platforms, with almost 15,000 investors and $250 million in assets.

To be sure, Israeli start-ups face plenty of challenges. Entrepreneurs dream of growing large enough to move their headquarters to the U.S. while keeping their R&D in Israel, but most founders are technology wizards who lack the patience or managerial skills to build their companies up to the IPO stage. Instead, they are serial entrepreneurs who sell out to larger Israeli or foreign, usually American, companies and then go on to a new start-up. According to IVC Research, the number of exits — both IPOs and acquisitions — has averaged about 100 annually over the past decade; the average exit was worth $86.5 million last year, compared with an average of $62 million over the past ten years.

“A lot of Israeli entrepreneurs are young and inexperienced,” says Yoav Tzruya, a partner in Jerusalem Venture Partners (JVP), one of the largest local venture firms, with $1.1 billion under management. “When they are faced with an exit that yields tens of millions of dollars, they go for liquidity.” The same can be said about Israeli venture firms, most of which are early-stage investors with only a ten-year horizon. “That’s not enough time to create a billion-dollar company,” concedes Tzruya.

Competing against foreign multinationals in their own backyard can be daunting for Israeli start-ups. Some 350 global companies from the U.S., Europe, and Asia have R&D operations in Israel. Many of these outposts were created by acquiring Israeli start-ups whose founders doubted they could achieve the scale to compete with Silicon Valley behemoths. In 2015 a record $9 billion was spent, mainly by foreign companies, to acquire 104 Israeli outfits. Microsoft alone bought five businesses, most notably paying $320 million to purchase Adallom, a cloud security company. Oracle acquired three companies in the first half of this year, including Ravello Systems, a provider of cloud-based software services, for $500 million.

But none of these constraints is slowing down entrepreneurs who see opportunities in a world under mounting unconventional military and Internet-era threats. This is particularly true in the cybersecurity field. Few countries have been quicker and more effective than Israel at creating companies to cope with hacker attacks on governments and businesses — and to cash in on an increasingly lucrative market.

Israeli companies don’t confine themselves to cyberdefense. According to media reports, an Israeli start-up, Cellebrite, was hired by the U.S. Federal Bureau of Investigation to successfully crack the iPhone security code of the San Bernardino, California, terrorists after Apple refused to cooperate. (Neither the FBI nor Cellebrite will confirm these reports.) Another Israeli security company, NSO Group, has gained notoriety for selling spyware to Middle Eastern, African, and Latin American governments tracking critics and dissidents.

According to research firm Gartner, global cybersecurity revenue grew 4.7 percent in 2015, to $75 billion, and will soar to $170 billion by 2020. Hardly a week goes by without news of a massive breach. The hacking, presumably by Russian intelligence agencies, of the e-mail accounts of Democratic Party organizations and officials has become a focal point of the U.S. presidential campaign, with Hillary Clinton criticizing Moscow for allegedly trying to influence the election, while her Republican opponent, Donald Trump, has contended that the e-mails, released by Wikileaks, show Clinton as corrupt. The recent disclosure that hackers stole data on 500 million users of Yahoo! in 2014 threatens to disrupt that company’s $4.8 billion sale to Verizon Communications.

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