Fledgling high-tech entrepreneurs striving for success

It's Thursday afternoon and Yuval Davidor, founder of Schema Advanced Optimization, and his 10 employees take an office cleanup break after another week of 12-hour days spent developing software for the shipping industry. The CFO gets the garbage, the marketing director mops the floor and the head technician puts away the Calvin and Hobbes books. Davidor slices a watermelon and the team sits in its kitchen-workstation located on Kibbutz GlilYam to reassess the week's progress.

Nearby in Herzliya's industrial park, employees at major-leaguers like Scitex, Digital and Cellcom work in sterile highrises while company directors meet to discuss quarterly results in closed boardrooms. No Calvin and Hobbes books, no cleanup sessions, no reassessment over melon.

Schema's youthful entrepreneurs have Wall Street in their eyes. But before newborn high-tech companies can reach the coveted IPO (initial public offering), they must first reach adulthood. And with only a one-in-10 chance of success, fledgling entrepreneurs must pull out all the stops.

Many of Israel's high-tech godfathers were "baptized" in the army before setting out to find civilian applications for military hardware.

These entrepreneurs, along with a new generation of Israeli computer buffs and armadas of highly skilled postcommunism immigrants, have turned Israel's high-tech industry into an international wunderkind.

In 1991, as the government tackled the challenges of mass immigration, the office of the chief scientist of the Ministry of Industry and Trade established a so-called incubator program designed to give entrepreneurial inventors — many of whom had 30 years of work experience in the former Soviet Union — a place to develop their ideas.

With subsidies of up to $260,000, project participants could create their own companies and, within two years, bring them to the startup stage. So far, the incubators have hatched more than 100 independent firms, many of which managed to attract hundreds of thousands of dollars in venture capital.

Schema's Yuval Davidor, now 35, was a math professor at the Weizmann Institute in 1993 when he came up with the idea that certain algorithms could be used to create software that would help shipping companies discern the most efficient way of loading cargo.

He left his job at the prestigious institute and with one of his students established Schema in his Tel Aviv apartment. At first Davidor, who earned a salary by moonlighting as a consultant, had to rely on others' kindness. His accountant did not charge him for a year; when he needed to move to a proper office, Kibbutz GlilYam offered space with a flexible rent contract. His young employees accepted only 50 percent to 60 percent of their agreed-upon salaries.

"These young people wanted to create, and there is something enchanting about a group of young people becoming possessed by a vision," said Davidor.

Slowly, he and his growing team of programmers drew the attention and support of venture capitalists.

Today his product is in the testing phase. If potential clients like what they see and the glitches are fixed, Schema will be able to start selling.

Like adolescents, companies ready to independently market their goods still need "parents." And high-tech firms, which would prefer to avoid the costs of venture capital entirely, must rely on them first to supply much-needed research and development funds, and later to finance various production and marketing stages.

Venture capitalists tend to be home-run hitters, striking out on most of their brainchildren and raising an Einstein only once in a while.

"Two-thirds of all companies, no matter how much you invest, remain stuck in the land of the living dead," said Ed Mlavsky, president of the Gemini Israel Fund, which has invested about $15 million in Israeli high-tech companies.

But sometimes companies that seem permanently lost in limbo are suddenly revived by changes in the market.

In his basement in 1982, Barry Shaked founded Point of Sale, a company that brings PC technology to the checkout counter.

Although the firm experienced local success, international growth was slow. From 1985 to 1989, retailers worldwide seemed unwilling to make the leap to a Windows-based world. The company lost key employees and huddled on the verge of closure.

But when retailers opted for a PC-based model, Point of Sale had the goods. From 1989 to 1993, the company, which supplies programs to international food chains, gas stations and other retailers, experienced a 500 percent growth in revenues.

Revenues are a key indicator of a company's chances of going public. Most investment bankers, who underwrite initial public offerings, generally require that a firm show minimum annual sales of $10 million and growth over four quarters.

Once a company meets these requirements, it is generally considered to have, in the words of Gemini's Mlavsky, "crossed the chasm." This means the company is not only selling its goods to the early adopters, or the people who rush to buy anything new, but also to conservative corporate buyers who generally avoid products lacking a solid reputation.

When an Israeli company crosses the chasm, it heads for Wall Street. With a final round of financing and one or more willing investment banks, the IPO is usually a few months away.

Check Point Software Technologies, which was established in 1993 and grew from $794,000 in 1994 to $9.5 million in 1995, entered the media spotlight last spring as Israel's latest Nasdaq sensation.

The Tel Aviv-based maker of network security software products in February began negotiations with investment bankers and held meetings with Israeli CEOs and CFOs who could help prepare the company for exposure to Wall Street and the whims of unknown investors.

"When you establish a startup, you do it with the intention to go public," said Check Point CFO Hagi Schwartz. "But before you go public, you need to feel confident."

While IPO is the ultimate dream, dramatic shifts in stock prices often show entrepreneurs that Wall Street is not Easy Street.