The VC fund betting on Israel’s Arabs

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When Itzik Frid was offered the chance to become a managing partner in the venture capital fund Takwin in 2014, he was skeptical. He was already CEO of a gaming startup, had worked for a while at the Herzog Fox & Neeman law firm and had also served as an adviser to Yaakov Neeman during the latter’s stint as finance minister.

But Takwin was founded specifically as a VC fund that invested only in startups with at least one Arab founder. “And I thought, what do I, an Ashkenazi from the center of the country, have to do with that?” he recalled.

Today, he has a different view. “I feel as if I were sitting on an enormous reservoir of natural gas and I’m the only one pumping from it. It’s almost unpleasant for me that we’re a kind of monopoly in the field of Arab entrepreneurship.”

And indeed, Takwin is virtually a mandatory stop for any Arab entrepreneur. Frid estimates that since its founding seven years ago, around 1,000 entrepreneurs with ideas have passed through the fund.

In recent years, the Arab community has begun recognizing the enormous opportunities that exist in high-tech, and the field has become a legitimate and even desirable career path. This is evident in the number of Arab students majoring in computer science at college and the surge in the number of Arabs employed in high-tech.

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“In 2016, the number of Arab computer science students exceeded the total for the previous 20 years,” Frid said. “The percentage of Arab students in technological majors at the Technion is already equal to their proportion in the population, if not higher.”

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But even though young Arabs are flocking to high-tech, they aren’t flocking to entrepreneurship. They prefer working as salaried employees at multinational companies. Frid said that both the Arab techies and the investors are at fault for this.

“There’s a YouTube video in which Imad Telhami, one of the fund’s founders, describes the five factors that deter a young Arab. Among others, he talks about the fear of failure and the lack of a network, because Arab entrepreneurs don’t come from the army, so they don’t have experience acquired in the army or a network of connections.

“Another problem is place of residence,” Frid continued. “If an Arab guy graduates from the Technion cum laude and finds work at a high-tech company in Tel Aviv, he won’t move to the center of the country and rent an apartment on Sheinkin or Rothschild. He’ll prefer to travel two hours in both directions every day, and it’s hard to get ahead like that. That’s why our offices are in Haifa rather than Tel Aviv or Herzliya.”

But investors are also to blame for the situation, Frid said, adding, “A Jewish Mizrahi entrepreneur from Kiryat Shmona would also have trouble raising money.” He was referring to a known psychological bias – the human tendency to invest in the familiar, in what has worked in the past. “A Jewish entrepreneur will succeed thanks to this, an Arab entrepreneur will succeed despite it,” he said.

Fadi Swidan, the fund’s vice president of marketing and business development, agreed with Frid.

“An Arab entrepreneur comes from a different background,” Swidan said. “He may have graduated from the Technion and worked for five years at one of the big companies in the field, but his profile is completely different, and it’s easier for the investor to put his money into the familiar investment profile, which has worked until now, than to take a bigger risk and invest in an entrepreneur from Nazareth.”

Swidan is personally acquainted with this difficulty. “I finished my degree in industrial engineering and management at the Technion in 1992, but I wasn’t able to find work, because a high-tech job back then required a security clearance,” he said. “So I did a master’s degree and moved to the U.S.”

In 1997, he returned to Israel, where he was involved in several different ventures before joining Takwin at the beginning of this year.

Takwin estimates that there are currently 100 to 150 Arab startups, a drop in the ocean of the more than 6,500 registered Israeli startups cited by the Start-Up Nation Central organization. The vast majority are in relatively early stages. There hasn’t yet been an Arab unicorn, nor has any Arab company reached a value of $100 million.

Why is this a problem? Why isn’t it enough that graduates of the relevant departments work at major high-tech companies?

“If you want to effect social change, it’s not enough for three percent of high-tech people to be Arabs working at Intel and Microsoft,” Swidan answered. “You need entrepreneurs who will found companies in the places they came from and create employment there. Every engineer at such a company produces three to five support jobs, from marketing personnel to the company’s suppliers.

Imad Telhami, cofounder of the VC fund Takwin??? ?????

“We need local success stories to create more daring and more entrepreneurship. Jobs at corporations are important, but we also need entrepreneurs who will found companies in the periphery. Startups like that could help the Arab economy and boost it into the digital economy – for instance, by introducing innovation to small businesses.”

Telhami said that a fund like Takwin can solve many of the problems that deter Arab entrepreneurship. “There are objective problems, like the fact that Arabs don’t serve in the army and therefore can’t work at Elbit and Rafael,” he said, referring to two major defense companies. “That I can’t deal with, and in any case, it’s not my responsibility.

“But there are problems I can address through a venture capital fund, namely, financing, mentoring by experienced investors and networking, and thereby create success stories – big exits and entrepreneurs on whom to rely. Today, Arabs have a dream, which I call the little dream – a home, a car and a high salary. But I think the time has come to start dreaming big.”

‘We don’t want handouts’

Given these challenges, Takwin was founded with a big dream and several big names in Israeli venture capital. The cofounders are Chemi Peres, who was also a founding partner in Pitango Venture Capital; Erel Margalit, a founding partner in the JVP venture capital fund; and Telhami, a social activist and founder of Babcom Centers, an outsourcing company that provides programmers and call center operators and currently employs some 3,000 people.

The name, Takwin, means “genesis” in Arabic. Half of its investors are wealthy Israeli Arabs; the rest are Americans and Israeli Jews. Frid knows that some of these investors invested for social reasons rather than in hope of getting a return on their investment, but that doesn’t matter to him.

“The only way to effect change in Arab society is by creating astounding success stories,” he said. “Nobody should give us handouts with pity and arrogance.”

Takwin is helping support a growing group of Arab-owned and operated startup companies, still only a small fraction of Israeli tech firmsRami Shllush

The fund has so far raised $12 million, and it naturally focuses on early-stage investment, both because of its size and because of the needs of Arab entrepreneurs.

“We set up the fund in the understanding that Arab entrepreneurs aren’t as prepared,” Frid said. “Some even come to us without a PowerPoint presentation, sit down and start talking. Therefore, the fund has a proactive approach, both in supporting startups and in the fact that we really hunt for the best entrepreneurs.”

Takwin hasn’t yet had any exits, but Frid claimed this would happen soon. “We’ve invested in eight companies whose value was less than $8 million when we invested,” he said, “and today they’re worth more than $170 million. And that’s a valuation based on follow-up rounds that already took place – a fair market value audited by the Ernst & Young accounting firm.

“These companies employ 150 people and are located from Nazareth through Tel Aviv to Be’er Sheva. Three of the eight companies are led by women, and they have all kinds of impossible connections, like two reserve major generals who are involved in them.

“We were close to selling two companies, but decided not to sell because of the price. We have a few companies that ought to reach a value of hundreds of millions of dollars.”

Takwin’s portfolio is very different from that of other VC funds. It has no cyber, fintech or online advertising companies.

“We’re a fund that wants to have an impact twice over – increasing Israel’s gross national product by integrating Arabs into entrepreneurship and also having a social and environmental impact,” Frid said. “This is reflected in the companies we invest in.”

For instance, one company in the fund’s portfolio is Soos, which develops technology that uses sound waves to change chicks’ gender from male to female in the egg. This prevents male chicks from being destroyed, which is standard practice in the egg industry today. The company has about a 70 percent success rate.

Myndlift, another company in the portfolio, is involved in home treatment for attention disorders. Seismic AI’s field is predicting earthquakes. OlfaGuard, a food safety company that can “smell” salmonella, is based on ideas produced by Prof. Hossam Haick of the Technion. Feelit, which is developing a nanosensor for industry, recently raised $7 million.

A substantial portion of the companies in Takwin’s portfolio deep tech firms, meaning the solutions they offer are based on a patent or academic research.

“That’s another characteristic of Arab entrepreneurs,” Frid said. “They often come to entrepreneurship better educated in terms of the number of hours of study than Jewish entrepreneurs.

“This stems from the fact that a Jewish entrepreneur acquires confidence during his military service, but an Arab entrepreneur will feel confident enough to embark on an entrepreneurial path only after a master’s degree, or sometimes a doctorate. And often, their startups are based on their research.”

‘Our agenda: amazing technology’

One floor below Takwin’s offices, you’ll find Imagry, the fund’s flagship company. It was founded by Adham Ghazali and Majed Jubeh, both from East Jerusalem.

Imagry, a vision-based autonomous driving company that tries to imitate the way people identify objects, was founded by Adham Ghazali and Majed Jubeh – both from East JerusalemMajed Jubeh

“Even as a child, I liked taking things apart and putting them together,” Ghazali said. “One day, I decided I want to build a robot, so I took parts from all kinds of toys, like batteries and engines, and I managed to build it. But it would take four steps and fall down, and I got discouraged. I felt that I hadn’t succeeded with it.

“At age 18, I went to hear a lecture on robotics, and the lecturer showed us videos of robots in which millions had been invested. And they all fell down after a few steps. I realized that this was a real problem, and that I wasn’t so terrible.”

Ghazali went to Jordan to study biomedical engineering, then did a master’s degree in brain science at Tel Aviv University. But he decided that an academic career was too slow for him, and he would rather build something than write articles.

“I read one article that greatly influenced me,” he said. “It argued that the engineering of the future would be inspired by biology.”

He ran with this idea in founding Imagry, a vision-based autonomous driving company that tries to imitate the way people identify objects.

“We use cameras that aren’t much different from the ones found in smartphones to analyze the environment – this is a street, this is a traffic light, this is a dog,” Ghazali said. “And then we make decisions – not on the basis of rigid rules, but using a cognitive model that interprets reality.”

So far, the company has racked up 130,000 kilometers on the roads. “In 2022, we’ll start running tests with customers from the auto industry, and toward the end of 2023, the system will be commercial,” he added.

Imagry was Takwin’s first investment. It’s also the largest company in the portfolio in terms of the number of workers, with 70 employees. It has offices in Haifa, the United States and the West Bank city of Rawabi.

It has also raised a lot of money, more than $20 million, and now has the highest value of any of Takwin’s companies, at $80 million. Its investors included Samsung, the 2B Angels VC fund, the Afifi Group from Nazareth and the government’s Office of the Chief Scientist.

When the latter made its investment, Naftali Bennett – then the economy minister and now the prime minister – tweeted, “Excellent news. Imagery was founded by Adham Ghazali, a brain scientist from the Arab community, and Majed Jubeh, a software engineer. That’s rare. I hope to see a lot more startups from this community.”

When asked what is the proportion of Arab to Jewish workers in the company, Ghazali answered that, “I don’t know exactly.”

“There are some of both. Takwin’s agenda is to integrate Arabs, but our agenda is to build amazing technology. That’s the focus.”

Frid said he is “familiar with Palestinian and Egyptian entrepreneurship, and I’ve even seen some Iranian entrepreneurs at an entrepreneurship competition I judged in the Persian Gulf. Most of them are looking at the here and now. They’re looking for local solutions to the problems of their own societies.

“With Israeli Arab entrepreneurs, that’s not the case. In 99 percent of cases, they’re looking at the distant horizon and want to solve something at the global level.”

Takwin is currently engaged in raising money for a second fund. The goal is to raise $80 million to $100 million – several times the size of the initial fund. But this time, too, its managers are insisting that half the money come from the Arab community.

“There’s a joke in the industry that if you ask a venture capitalist which he would prefer, raising money for a new fund or undergoing a colonoscopy, he’d prefer the colonoscopy, because that’s at least under anesthesia,” Frid said with a smile, referring to the fact that this isn’t an easy process.

But despite the difficulties, Frid said the fund had just reached its initial closing. In other words, it is now assured of an initial sum of $20 million that will enable it to start making investments even while it continues trying to raise the rest of the money. And there’s already a startup waiting for this money, he said.

A fund on this scale would significantly increase opportunities for Arab entrepreneurs. It would also make it possible for Takwin’s existing companies to raise more money in their follow-up rounds.

Frid, a diehard optimist, predicted that in another few years, Arab entrepreneurs will have closed the gap with their Israeli Jewish counterparts. “If 20 years ago, an Arab doctor had come up to you in the emergency room, you would have thought to yourself that this is very unusual and even said something racist under your breath about how he doubtless purchased his degree in Bulgaria,” he noted. “Today, 20 percent of Israel’s doctors are Arabs, and nobody raises an eyebrow.

“So mark my words. The same thing will happen with Arab high tech.”