Israeli startups chase Mobileye as next automotive tech unicorn

TEL AVIV, Israel — Israeli automotive technology CEOs frequently joke about the crazy driving in their country.

Traffic is hectic and dense and there's constant honking. Scooters and bicycles dart in and out erratically. Road signs are more guidelines than rules. Neighbors Abu Dhabi, Bahrain and Saudi Arabia may host F1 Grand Prixes, but the morning commute here feels like a race event.

That could be why this tiny Middle Eastern country, with fewer than 4 million cars on the road, has become a global leader in autonomous driving and other mobility technology. Israeli companies are pushing the development of automated driving systems, advanced sensors, chips, software and cybersecurity.

Transportation technology is one of the nation's major industries. It is powered by more than 650 startups hoping to be the next Mobileye, which has built a $35 billion market cap from its advanced driver-assistance and autonomous driving systems, or navigation app Waze, which Google bought for $996 million in 2013.

Israeli automotive technology startups have raised more than $200 million this year, according to IVC Data and Insights, an Israeli venture capital industry research organization. Investors poured more than $1 billion into automotive and mobility sector startups last year.

Global automakers, including Ford, General Motors and Mercedes-Benz, have opened R&D centers in Israel.

GM maintains an automotive technical center with 830 employees working on battery innovation, advanced driver-assistance systems, autonomy, software development and related venture capital investment opportunities.

"Despite the size of Israel's automotive market, and the fact it's a transportation island, everyone is opening a research center," Ben Ellencweig, a senior partner and automotive expert at McKinsey & Co., told Automotive News.

For much of its 75-year history, Israel had almost no indigenous automotive business. One automaker, Autocar Ltd., of Haifa, produced models for several decades with names that played off the Hebrew word for horse. But it went under in the early 1970s.

As innovations advanced over the last two decades and the auto industry started to invest in electric vehicles and automated and autonomous driving systems, the Israeli tech community saw new opportunities.

Better Place, an EV battery charging and swapping venture using cars assembled by the former Renault-Nissan alliance, launched in 2007 and opened its first station near Tel Aviv a year later. It raised more than $800 million, proving that the venture capital community could be attracted to Israeli automotive technology.

After selling about 2,000 vehicles, the company flamed out and filed for bankruptcy in 2013. "Israel was always good on the R&D but wasn't very good on the business model," Ellencweig said.

Mobileye and Waze proved that has changed.

"Mobileye showed that you can be a meaningful actor in the automotive industry without being a mammoth company with 100,000 employees," Amnon Shashua, the Jerusalem company's CEO, told Automotive News.

Israeli entrepreneurs learned they could claim a piece of the auto industry by developing chips, sensors and software for vehicles, he said.

Indeed, the range of disciplines auto companies here are pursuing is broad. The common thread they all leverage is the nation's technology expertise.

"A car is not a car anymore and it is not going to be a car as we go along," said Roy Fridman, CEO of C2A Security, at a panel discussion at EcoMotion Week here in May. "A car is a computer — a computer on wheels." C2A is one of about a dozen Israeli automotive cybersecurity companies.

Software, chips and imaging sensors make up much of the country's automotive industry.

Ree Automotive, an electric truck startup in Herzliya, looks to be the only company attempting to produce vehicles, but barely. The company will assemble its commercial vehicles at a plant in Coventry, U.K. CEO Daniel Barel said he sees Ree Automotive eventually morphing into a powertrain and technology supplier rather than a vehicle manufacturer.

Valens Semiconductor, of Hod Hasharon, started out designing chips for high-resolution video. They enable high bandwidth and long distance with zero latency and no errors, said Dana Zelitzki, the company's senior vice president of marketing. Its customers include consumer electronics companies such as Sony and Panasonic and developers of high-end home entertainment systems, Zelitzki said.

But as software becomes an integral part of a vehicle's architecture, the industry's connectivity needs have snowballed, opening a vast new market for Valens. Mercedes-Benz and Stoneridge, an automotive technology supplier, are now customers.

Although automotive customers accounted for 18 percent of Valens' revenue last year, Zelitzki said she expects it to become a majority of its business.

Israel had plenty of technology expertise before discovering the auto industry. Its success is understanding how its expertise applies, Ellencwieg said.

"The level of innovation actually starts with the military ecosystem," he said.

Throughout much of its history, hostile neighbors have surrounded Israel. Although it has made peace with some, it still faces threats from Gaza, Lebanon, Syria and Iran.

"It is a country that needs to innovate to keep a technological advantage, to keep itself safe," Ellencweig said.

Imaging sensors, chips and software are at the core of many of the country's weapons systems. Cybersecurity, an automotive technology growth area, is another discipline required for national defense.

But Israel's success in spawning automotive and other technology companies also is linked to its cultural and educational systems, said Eran Ofir, CEO of Imagry, a Haifa autonomous driving system developer, and Barel of Ree Automotive.

Barel remembers his third-grade daughter coming home from school with a group assignment to create a consumer product. Her classmates settled on a dog training device and crafted a mockup from shoe boxes. Members of the group had to develop a budget and a marketing plan. The budget came into balance only after Barel's daughter learned the team could get shoe boxes without purchasing shoes.

There is a tradition of learning from failure, something every entrepreneur is sure to encounter, Ofir said.

"We are being taught from a very young age to experiment, to try to challenge everything that we are being taught," he said.

Later, Israelis serve in the military, some in technical units.

"They're running small groups. They're managing projects," said Eitan Gertel, executive chairman of Opsys Technologies, a solid-state lidar company in Holon. "They develop technology for specific targets in the most efficient way. They get budgets. It is very entrepreneurial."

People come out of that environment and look to transfer their knowledge to civilian applications, he said.

Israel also benefits from access to capital. "You have an environment in Tel Aviv where you can see 10 VCs in one day," Gertel said. "The access to venture capital resources is pretty immediate, at least the seed stage round."

Israeli entrepreneurs will continue to look at the automotive sectors, said Mike Granoff, managing partner of Maniv Mobility, a venture capital fund in Tel Aviv and New York.

"There is more and more need for software and innovation around automotive and mobility," Granoff said. "Israeli entrepreneurs are looking for that kind of a challenge."