New interest is key for Israeli high-tech

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A laser image of a keyboard beams on to the table. Infrared and a small camera from a small box track the tapping of each “key” and the letters magically appear on the handheld device. It is a gizmo that would hearten anyone who has struggled with a finger-fumbling portable keyboard.

This virtual keyboard was developed by an Israeli company called VKB in May 2000, just before the global high-tech boom went into a nose-dive. Almost five years later, the company has an array of partnerships and the device is making its way into the European and US markets, thanks in part to revived investment in the high-tech sector.

Some 428 Israeli high-tech companies received $1.46bn from local and foreign venture capital investors in 2004, a rise of 45 per cent from $1.01bn the previous year, the Israel Venture Capital (IVC) Research Centre reported last month.

The figures would suggest that Israel's reputation as a point of innovation and entrepreneurialism has survived not only the slump years but also the bruising Palestinian conflict.

“Israel is a global technology and innovation centre that keeps attracting international investors, foreign VCs and multinational corporations,” says Zeev Holtzman, chairman of the IVC Research Centre.

“We anticipate 2004's $1.5bn investment pace to continue in 2005.”

Israel's population is only about 6m but good educational standards and high levels of research and development in the large military sector allows the country to punch above its weight in high-tech. This is coupled with a wealthy diaspora that seeks to support the state.

Israelis have also embraced high-tech in their daily lives. There are about 150 “hotspots” where web surfers can hook into the wireless internet dotted around the country. Mapa, the internet information service that compiled the hotspots list, expects the number to double this year.

There are also growing signs that more Israeli companies are seeking foreign stock market listing after a relative lack of activity in the past few years. Visonic, which makes electronic security systems and alarms, was the first Israeli company to list in London last year since 2000. Smaller companies tend to list in Europe, on exchanges such as London's small to mid-cap AIM, while there are about 100 Israeli companies listed in the US.

Much of the flow of venture capital has gone to communications, followed by software, life sciences and medical devices, says IVC. Within these, mid-stage companies received the bulk, while seed companies attracted only about 8 per cent of the total capital raised.

The figures illustrate how it can still be difficult for small companies with innovative ideas to raise initial funding. Patus is a company that sells Odorscreen, a vanilla-scented petroleum jelly that is applied beneath the nostrils to guard against offensive odours. Developed by a scientist at Israel's Weizmann institute, it has proved popular with emergency response teams responsible for collecting body parts after suicide and other attacks. “As a start-up, getting funds was slow,” says Ilan Shatz, chief operating officer of Patus. “I had to put all my cash on the table, go to family and friends, then the government, and then go to the VCs.”

Some investor caution can be attributed to the wish not to get caught out again following the heady boom years of sky-high valuations. But it also points to a bias in favour of the areas in which Israeli companies have proven success, such as software, and away from more untested waters, such as consumer products.

“This is practically the first time that a consumer electronic product is coming out of Israel,” says Jonathan Curtiss, VKB president, of the virtual keyboard. “There's so much sheer guts and energy coming out of Israel but it doesn't really have a track record in producing consumer items.”

Mr Curtiss joined the company in 2002 and was recruited primarily for his marketing skills and experience, which he gained in his native Britain. “VKB was typical of many Israeli companies in that it had a nice technology but hadn't found the route to market or the product mix that would make sense for consumers,” he says.

Through partnerships, such as one with the technology corporation Hutchison Whampoa, VKB's virtual keyboards are becoming more easily available to consumers while the company explores other applications, including those within the medical and auto sectors, or the embedding of the technology in the cellphone itself.

However, venture capital funds are not involved and the company's total funding of about $11m was raised from some 10 individual entrepreneurs.

“We have benefited from the experience of these investors, who are not necessarily interested in a fast exit,” says Mr Curtiss.

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