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[Danny Cohen, of Gemini Israel Funds, writes about the Israeli Internet industry. He is hosting a tour of Silicon Valley for a number of Israeli start-ups this week. He is an investor in eSnips, but has no ties to the other companies mentioned.]

A few weeks ago I had a conversation with a general partner of one of the top-tier US Venture Capital firms. I asked him why they stopped investing in Israel. He said that in 2002 they made a decision to shift from semiconductors and communications to digital media and consumer Internet. With the new industry focus and Israel was deemed irrelevant. It’s true, through the Nuclear winter of 2001-2003, most Israeli entrepreneurs moved to other sectors, leaving the consumer Internet scene in Israel completely dry. But the dry period is over. Today, the Israeli Internet scene is hot.

Looking at the short history of the Internet world, Israel has always been there. We invented Instant Messaging (Everybody knows about ICQ, but few people know that an Israeli company called Ubique was behind the IM of Excite). In addition, Shopping.com, Quigo, Answers.com, Speedbit and Hotbar were all “born in Israel”. Today, in every sector, Israeli companies are taking substantial market share. Examples? Metacafe (2nd to YouTube), Double Fusion (In-game advertising), eSnips (content publishing and a Gemini portfolio company), Jajah (VOIP Telephony, 2nd to Skype), Kontera (contextual advertising).

But will this next wave of start-ups out of Israel succeed? I think so because the dynamics of the Israeli Internet scene are stronger then they have ever been in the past. And here’s why:

• The large acquisitive players are entering the market. Google is already there, recruiting positions in Haifa & Tel-Aviv. eBay has a development center, based on the R&D of shopping.com. AOL still owns ICQ, and Microsoft has just increased the strength and size of its Israeli R&D team. The only large player missing is Yahoo, but I am sure they will eventually make an acquisition.

• The talent is increasing. Many Israelis that are Silicon Valley veterans are moving back, so its common to see startups in Israel staffed with ex-Yahoo & Google people.

• Most important, the entrepreneurs are maturing. Many of the Web 1.0 children are now starting their 2nd or 3rd companies, learning from past mistakes.

• Finally, there are some advantages over Silicon Valley. Web 2.0 is all about online distribution, low development cost, and a lot of improvisation. These are core competencies of any Israeli founder. Watch out for companies like ILCU, Spotback, Fixya, Yedda, and Sportingo, Foxeytunes, Sklyow, and Spearcast • Great products, highly relevant to the market, and very lean operations.

ICQ was launched in Novemer of 1996, exactly 10 years ago. Its time for another large Israeli-based consumer Internet company. It’s a good time to be backing Israeli companies again.


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