This story appears in the August 11, 2013 issue of Forbes. Subscribe
"So the safety guard should be put at the whole project rather than the task," said a Palestinian. "Exactly," answered an Israeli Jew, who added: "Also, should the buffer be hidden or public? What do you think?" A second Palestinian spoke up: "Who's gonna hide it?" The room broke into laughter. Yet another Palestinian, oblivious to an abstract painting of the Star of David behind him, asked: "Do you want the truth, or do you want the truth plus protection?"
With official relations between Palestinians and Israelis still poisonous after a century of conflict, any constructive dialogue is newsworthy. But these aren't security forces talking about joint military patrols, nor is this discussion connected to the sudden resumption of peace talks after a three-year stalemate. The group, brought together by Cisco Systems, is speaking their common language: tech management. Nearly 100 times over the past two years Israeli high-tech experts and Palestinian entrepreneurs have gotten together in the hope of making Israel's "Startup Nation" economic miracle a cross-border affair. And it's just one of dozens of business-driven dialogues quietly--in many cases secretly--proliferating across the Holy Land.
"The way to end this conflict is to create a very large middle class and be inclusive in how you go after it across all individuals, regardless of age, religion or gender," says John Chambers, CEO of Cisco, the most actively involved American tech executive in a coordinated effort that includes de facto diplomats from the likes of Intel, Hewlett-Packard and Microsoft. "If you can address those issues and you can get others involved, then you can have a shot at peace in the Middle East."
Of course, there's already billions of dollars' worth of trade flowing between the West Bank and Israel, given their proximity and the latter's border control over the former. Even in Gaza, whose leaders have a stated goal of destroying the Jewish state, commerce furtively passes back and forth on a massive scale. April's Dead Sea meeting, however, represents something much more far-reaching and rarely discussed. Rather than just trading goods, hundreds of Israeli and Palestinians are becoming actual business partners and colleagues in startups that are slowly transforming the Palestinian economy, at least in the West Bank.
It's not easy. Over the course of reporting this story FORBES interviewed scores of high-tech leaders on both sides of the border. Nearly all expressed fears and worries over how their comments would be perceived. (Many insisted on full anonymity; FORBES was granted access to the Dead Sea training session only on the condition that we keep its exact location a secret.) On the Palestinian side a large contingent myopically equates any collaboration with treachery, even if it strengthens the local economy (and especially if it's perceived to strengthen Israel's). While most in the Jewish state would view these partnerships positively, a sizable minority fear that Palestinians armed with the skills and technology that have driven Israel's prosperity would use them against Israel in a future war.
Yet for all the mutual suspicion, collaborate they do. Buoyed by training, investment or partnerships from Israelis or Israeli subsidiaries of American companies, more than 300 Palestinian technology firms now employ 4,500 people, FORBES estimates, up from just 23 firms in the six-year period leading up to 2000. More are on the way: There's at least $100 million in venture cash from Israeli or Western sources either looking for deals or recently put to work in Palestinian or Israeli Arab startups (with the latter community, representing one-fifth of the country's citizenry, increasingly agitating to get in on the action). Meanwhile, Chambers and his peers at U.S. technology giants have pushed their Israeli subsidiaries to outsource research and development projects to Palestinian startups or to hire local Arabs.
This is the real backdrop for the renewed peace talks lurching forward under the aegis of U.S. Secretary of State John Kerry. Feckless politicians will invariably look to blame the other side for inaction. The private sector's detente is delivering results right now, with the intention of creating enough interconnected prosperity to make a lasting peace in everyone's economic self-interest.
Ramallah, the business capital of the West Bank, is just 20 minutes from Jerusalem. On paper. A group of Palestinian CEOs from the disputed, eastern part of Jerusalem had agreed to meet FORBES for dinner in Ramallah but had to cancel. The checkpoint between the two had been closed by the Israeli military, who were grappling with 50 rock-throwing, tire-burning Palestinians.
Such are the difficulties of doing business in Ramallah, which has emerged as the West Bank's tech hub. But the dinner date also demonstrates the city's vibrancy: With just three phone calls and an hour's notice, a different group of locally based tech CEOs shows up in their place. We dine at a Mexican restaurant called Fuego, one of dozens of trendy spots in the city where twentysomething Palestinians sip cocktails, their laptops open, their smartphones on--a scene indistinguishable from one in Austin or San Francisco.
Tareq Maayah, founder of Ramallah-based Exalt Technologies, whose 90 employees handle software development for the likes of Cisco Israel, is about to strike a lucrative partnership with another major U.S. affiliate in Israel. But as Pitbull's "Give Me Everything" blares, he is more eager to talk about a nearby startup he's backing, ShopZooky, which aggregates local Facebook merchant content--such as offers, posts, news and local store information--into one mobile application.
To his right Husni Abu Samrah begins to discuss an app that his company, MobiStine, has designed (it will wake up pregnant women who are sleeping in a position that could be risky to their health or to the health of the fetus), but then he's interrupted by a text. His face lights up.
"My son is 14. I gave him a MacBook and told him 'Why don't you learn iPhone development instead of wasting your time on Facebook?,' " Abu Samrah explains. 'He said, 'Okay, give me the Mac.' " The text was to let Dad know that Apple had just approved his first app, GamesDifferent, a 20-level brainteaser, for the Apple Store.
Such layers of entrepreneurship are a manifestation of both ambition and sheer numbers. Ten different colleges on the West Bank churn out 2,000 engineering and computer graduates a year, while the tech sector employs 4,500 in total, forcing many abroad but creating entrepreneurs, of necessity, out of thousands more. Ramallah recently hosted a weekend-long startup competition that included such entries as online psychiatric services for religious Arab women unable to get out of their houses.
Who's in charge matters. Most of the 300 Palestinian tech firms are situated near Ramallah. Gaza, run by Hamas, with virtually no mobility possible to or from Israel, has no significant entrepreneurial activity in the tech field. One Palestinian tech consultant estimates that there about 3,000 freelance coders there. "Somehow they scratch out a living," he says.
Not that the West Bank has it easy. The blockades are a huge hassle, though most Ramallah entrepreneurs complain more about the advantage it gives to their Israeli competitors than about any personal inconveniences. In fact, the biggest gripe is about a different kind of blockade: the lack of high-speed mobile, which Israel withholds for unstated security reasons. When the U.S. President visited Israel in March, he was greeted with placards: "Obama don't bring your smartphone. We have no 3G."
This dynamic creates a quandary for Palestinians eager to succeed. How to accept help and money from Israel's tech and business communities, when the politicians and army are seen as occupiers? "There is strong sentiment that anything you do today with Israelis that does not involve an attempt or a process that is targeted towards the political side of the conflict resolution is viewed as normalization, which is really kind of the taboo word," says Saed Nashef, who left a top job at Microsoft to become an entrepreneur before cofounding Sadara Ventures, the first venture fund in the Palestinian territories. "And for good reasons, too."
That's a tricky position for Nashef, since he's the go-to person on the West Bank for venture money and by this definition a normalizer, since his partner is a Jew, Yadin Kaufmann, a pioneering investor in the Israeli high-tech industry. Together they've raised almost $30 million, from 24 investors, including the foundations or personal accounts of billionaires George Soros, Steve Case and Jeff Skoll, as well as Cisco and the European Investment Bank. (Tellingly, the other 19 won't allow their names to be known, although Nashef says they're neither Israeli nor Palestinian.)
"A lot of people understand the difference between what we are doing and normalization," says Nashef, as we sit in Ramallah's Movenpick Hotel. "But there are others who won't work with us." He learned that the hard way last year when he was disinvited to speak about building startups at one of the West Bank's top universities, Birzeit.
"So I'm no longer welcome at Birzeit because I'm seen as a promoter of normalization," he laughs. "It doesn't upset me. The only thing I feel bad about is it's a lost opportunity for the students to benefit from the know-how and exposure I have to offer them." While he doesn't "credit or discredit" armed struggle, Nashef says that for him, "there is more than one form of resistance. And one way is to be stronger economically."
As Sadara came together, this wariness worked two ways. "Israelis didn't want to invest in an Arab fund, Arabs didn't want to invest in a fund that was partially run by an Israeli, and it became a somewhat complicated thing," says Stewart Paperin, the former CFO of Western Union, who oversaw the investment for the Soros Economic Development Team.
Nonetheless, since closing the round in 2011, Sadara has made two investments, including YamSafer, an Arabic version of Hotels.com. YamSafer's offices are colorful and resemble a modern loft in New York's Tribeca, as its 12 employees punch out software and book travel. They service 22 Arab countries, and just added Turkey.
Asked if he has any problem that the firm that funded him is partly run by an Israeli, YamSafer's 26-year-old CEO, Faris Zaher, argues that it's irrelevant yet acknowledges that they don't broadcast that fact: "There's a very clear difference between having someone on board who has an added value who happens to be an Israeli human being than taking Israeli money directly from, like, an organization that is somehow affiliated politically."
Such pragmatism will pay dividends. Paperin says that Sadara ideally would have raised far more capital but that the nascent Palestinian market can't currently absorb it. "There's just not that much of a corpus there," he says. But those who embrace the concept of fighting through economic success, rather than through the military, will be rewarded. "Once they've got a couple investments on the boards, what I've suggested to my colleagues is we help them go out and market again for more money."
If Israel can justifiably claim its appointed moniker, "Startup Nation"-- first in the world in startups per capita, third in Nasdaq-listed companies and the highest R&D expenditure as percentage of GDP--then Erel Margalit can justifiably claim to be one of its founding fathers. In 1993 he started one of Israel's first venture funds and persuaded 70 American companies, including IBM, to set up shop nearby. Two decades later the kibbutz-born 52-year-old now finds himself feeling similarly bullish about the Palestinian territories. "There's a lot happening, and people don't realize the extent and the potential."
A large reason the public is unaware, of course, is that both sides are so squeamish about broadcasting it. Not long ago Margalit attended a secret meeting of 40 Palestinian and Israelis tech leaders that went far beyond the Cisco-sponsored Dead Sea sessions. Rather than training and mentorship, this event, held in an office inside an apartment building in Ramallah, was a full-on business networking session, as the attendees discussed potential ways to work together. Afterward many continued their get-to-know-yous at a local restaurant where, says Margalit, they enjoyed "great shish kebab."
"It was just very natural," he recalls, over coffee at a cafe just north of Tel Aviv. "And you felt like, 'What the hell is going on? I mean, these guys are our neighbors, they want to do a lot of things, we're doing a lot of things. We can cooperate. They are 20 minutes from our capital, Jerusalem. We need to open a new chapter. We should do a refresh.' "
Margalit's efforts to do a refresh go further than seeding promising cross-border initiatives. In January he was elected to the Knesset, Israel's parliament, with the intention of forging peace by creating a regional economic powerhouse.
For many in this camp, the natural starting point is Nazareth, Jesus' hometown, which is now the largest city for Israel's Arab community, who make up 20% of the country's population--and run 0% of the 493 companies listed on the Tel Aviv stock exchange. Israeli-Arabs have long felt isolated within the Jewish state, and their exemption from compulsory military service means they miss the tech training, team-building and leadership experience underpinning Startup Nation. "It's really fear of failure," says Imad Telhami, whose Babcom employs 1,500 people in software development and business service outsourcing, making him among the biggest Arab employers in Israel. "Because of this fear, you can't dream and imagine that you'll be able to own a company."
Eitan Wertheimer says he will spend "200%" of his time combating this. In April the son of one of Israel's greatest entrepreneurs (his father, Stef, just sold the remaining portion of his tool-cutting empire, Iscar, to Warren Buffett's Berkshire Hathaway, swelling his family's net worth past $4.4 billion) cut the ribbon on the Nazareth Industrial Park, a $25 million facility that offers incubation services to Arab startups, "so that they can have a clean facility to sit in and not like some dirty garage." Wertheimer backs it up with low-income loans; he's amassed a microloan portfolio that he says supports 12,000 employees and generates $1.4 billion in sales. While this project is less ambitious than the original concept--a "capitalist kibbutz" straddling Israel and Gaza--it's also something that will generate immediate returns. "They're growing 8.5% to 9% a year when the country grows 2% to 2.5%," he says.
Chemi Peres, the son of Israel's president, Shimon Peres, and the manager of Pitango, the country's largest venture capital fund ($1.4 billion), has a similar vision. He's fond of Churchill's "empires of the mind" prophecy, and is quick to point out that Arabic is the fastest-growing language on the Internet and is on track to become the fourth most prevalent in the world, after English, Chinese and Spanish. "The young generation is much more interested in being connected. Many young Israeli-Arabs will tell you, 'Forget about the Palestinians. We want to be part of Israel. We come first.' "
Accordingly, he's raised a $50 million fund called Al Bawader (Arabic for "early signs"), earmarked solely for investments in Israel's Arab community. The funding is unlike anything before seen in the Middle East. The Israeli government has put money into Al Bawader, as have individual Israeli Jews, Israeli-Arabs--and Palestinians. Peres zealously guards investor names and even the names of some of the Arab companies they've invested in. "We don't want to expose some as Israeli funded because they have lots of users in the Arab world. There's a risk that people will stop using it," says Peres, as he overlooks the Mediterranean Sea from his office in Herzliya, Israel's version of Silicon Valley, situated north of Tel Aviv. "We don't have to raise our flags." He fears boycotts or retaliations against companies he funds, especially by extremists who espouse a strict "no collaboration" mandate.
He also sees profit potential in the course of promoting peace. Al Bawader has made seven investments so far, and Peres is especially bullish on Nazareth-based Datumate, which has developed software that can render land surveys in 2-D or 3-D. The founder? An Arab with a Ph.D. in geography. His V.P. of marketing? A Jew. There are dozens of similar examples--just precious few willing to raise their hands. "I can tell you a beautiful story if the guy would talk to you," says Adi Pundak-Mintz, a general partner with Gemini Israel Venture funds ($700 million assets). Then he sighs.
The Palestinians aren't nearly as media-reticent when it comes to collaborating with corporate America. Cisco's John Chambers recalls a visit he paid to Mahmoud Abbas at his office in Ramallah. To his surprise the Palestinian Authority president had his entire cabinet assembled in the room. Chambers pledged $10 million to help seed and mentor Arab startups. "We're not in it for press," Chambers told Abbas, "but I'm happy to disclose what we're doing, if you want, because sometimes it can help prompt other companies to climb aboard."
"Would you really be willing to do that?" asked Abbas.
As soon as Chambers confirmed, Abbas flung his office doors open, exposing a dozen waiting Palestinian reporters and photographers who stampeded into the room.
Chambers laughs as he tells the story. Perhaps more than the Israelis and the Palestinians themselves, the West Virginia native is a true believer in the economic and social benefits that will come from Middle East peace. Chambers was personally recruited to the cause at Davos a decade ago by Jordan's King Abdullah, who asked for his company's help in reforming the region's education system.
"We do this because we want to change the world. And we don't do it on a small scale. It's nice to help a village, but the key is how do you help a country?"
For Cisco, which has put more than $15 million into promoting Israel-Palestine cooperation, it's been a learning process. Its training sessions were initially held in Ramallah, but "too many Israeli teachers were afraid to go there," says Zika Abzuk, the Cisco executive in Israel who launched the ventures. She was, too, at first. "I wear contact lenses, and when we would go to Ramallah in the beginning I used to bring my eyeglasses with me in case I was kidnapped." Sa'd Abdulhadi, whose Al Nasher media-services company employs 80 people, had a different fear: He quit the Cisco training program before his first session when he saw the location was in a border area he feels has been stolen by the Israelis. "We should be connected with the Arab world," he says. "I reject the whole thing."
For most Palestinians, however, the quest for knowledge trumps politics. In the desert town that Abdulhadi objected to, the meeting eventually retreated to a synagogue, the only building with air-conditioning. "This is how determined we are to make sure we develop a country," says Sam Hussieni, one of Cisco's Palestinian coordinators. At another early meeting a sudden checkpoint closure by the Israeli military forced the attendees to meet behind a gas station in a large tent rented impromptu from a bedouin. The group squatted on rugs, like some kind of reenacted Old Testament meeting of tribes.
Cisco's efforts created a ripple effect, bringing in other American tech giants, which also use their Israel offices to work across the border. And as U.S. companies got Palestinian companies comfortable with working with entities based in Israel, large Israeli tech companies have been able to establish relationships, too. Cisco has formalized this by creating a 35-company coalition, Ma'antech ("together" in Arabic), comprising everyone from IBM to Israel's Bank Hapoalim, with the stated goal of creating jobs for Arab tech workers. So far, though, Cisco is the only one to put money into it. "I'm happy to lead the way, plant the seeds," says Chambers. HP now outsources some of its research and development to the West Bank. Microsoft Israel has started putting Palestinian engineers in Ramallah on its payroll.
Intel's efforts are more robust. Like Cisco, it is working to improve the Palestinian IT sector, and it has established meet-ups--its Tech Forum in March brought 60 Palestinian and Israeli entrepreneurs together. Its Jerusalem office offers hope for what a Middle East of the future could look like: At the "coffee corners" on some floors the Israeli and Palestinian men look almost interchangeable, and they mix amicably with Christians and Druze, burka-clad Arab women and wig-donning ultra-Orthodox women, the latter of whom Intel is increasingly recruiting into its workforce.
Another glimpse of the future occurred in late May, when Google brought 100 Palestinian and Israeli tech leaders to its new Tel Aviv headquarters for an afternoon of speeches, introductions and dealmaking. True to the company ethos, it eschewed the kind of discretion that the likes of Cisco and Margalit have insisted upon. The Palestinians successfully lobbied to muffle what could have been a global news story--but there was open debate across social media about whether participating in this event equated to "normalization." PITA, the trade association for the Palestinian high-tech industry, wouldn't attach its name to the event but did attend. Such is how progress measured in the Middle East.
Here's the one thing that everyone in the Middle East tech industry agrees upon: This private-sector effort is not about charity. The Palestinians, flooded for years with foreign aid money that often gets misused and almost never sticks, accept partnerships with Israeli firms and Israeli offices of U.S. firms because it offers them perhaps the best chance to develop their economy--and do it in a way consistent with their proud culture. Despite a population of just 6 million Jews, Israel has become a tech juggernaut by dint of cultivating talent, and, for Israelis, their country's 1.6 million Arabs and the 4.4 million people in the Palestinian territories may be their greatest untapped resource. Cisco, Intel and their peers are equally adamant: If it doesn't make business sense, they won't do it.
Where the sides differ is in their thinking about how this all relates to a future peace. While the Palestinians see the business ventures as improving relations, not a single Palestinian FORBES met with wanted it to become a substitute for a political solution. They are simply being sensible--taking advantage of being next door to one of the world's top high-tech countries. The Israelis, and Americans, to an overwhelming degree, believe that such initiatives are stepping stones to an agreement.
At the end of the day it's semantics. If the condition on the ground creates an economic necessity to get along, the term for the end result is moot.
And so efforts proliferate. On the corporate side Cisco is planning a huge celebration in October to commemorate the third anniversary of Ma'antech. Some of the Palestinian trainers hope to hold another party on the Tel Aviv coastline, permits willing. "It will be the first time for many of the Palestinians on a Mediterranean beach," says Tammy Avigdor, the training leader. The anniversary is prompting them to consider moving into direct collaborative ventures with Palestinian CEOs.
Meanwhile, a new $25 million venture fund is about to be launched by a consortium of major Israeli, American and Arab investors. While the backers are still cloaking themselves, it will dispense with encouraging partnerships and specifically create Arab entrepreneurs open to Western collaborations.
Ultimately, incentives and targeted funding just initiate the process. A free-market solution dictates that the entrepreneurs start mixing themselves, not because they're told to by those who control the purse strings but because it offers them the greatest chance of success.
Izhar Shay, who runs Israel operations for the venture capitalist Canaan Partners, which has $3.5 billion under management, has seen the seeds of this. In January 2012 he launched an online community called Start-up Stadium, designed to let Israel's entrepreneurs talk to each other. More than 15,000 people have signed up so far--up to 10% of them, Shay says, have turned out to be Israeli Arabs. More encouraging still, another 1,000 or so are Palestinians. Those real-world metrics, driven by young people destined to live in this land for six or seven more decades, offer hope for a region as old as recorded history. "On a good day you could be very, very optimistic," says Soros' Paperin. "On a bad day you kind of say, 'Gee, let's wait for another good day.' "
See also the sidebar: "Bringing Israel's Ultra-Orthodox Into Start-Up Nation"
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Related blog posts: "Positively Positeam: A Glimpse Inside Cisco-Israel's Training Of Palestinian Entrepreneurs"
Why So Many Palestinian High-Tech Entrepreneurs Hate My FORBES Cover Story
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Richard Behar is the Contributing Editor, Investigations, for Forbes magazine. He can be reached at rbehar@forbes.com
