Making A Social Profit: What Silicon Valley Can Learn From Israeli VC Erel Margalit


Mark Zuckerberg is “Misinformer of the year,” says Media Matters, highlighting Facebook’s starring role in the unfolding “tech backlash.” Overall, 2017 “was a terrible year for the tech industry,” Farhad Manjoo of The New York Times declared recently. Other tech observers chimed in: Silicon Valley is “under regulatory siege,” it has “lost its humanity,” has become “too predictable,” and most of its innovation (funded by over $160 billion in venture capital) is “driven by the latest hype cycle, not the real problems we face.”

Erel Margalit is a leading Israeli venture capitalist who for more than twenty-five years has successfully invested in bothtechnological innovation and innovative solutions to real social problems. “People in Silicon Valley and other business leaders need to realize that they can affect significant change beyond just their own companies,” Margalit told me recently.

Giving back to society through philanthropy is how high-tech tycoons have tried to “change the world” beyond what their companies do, in some cases pledging to donate at least half their wealth to charity. It’s possible, however, to multi-task and actively invest in business and social innovation at the same time, as Margalit has done. His social profit investment model has taken him from building corporations to improving left-behind communities to exporting his country’s expertise and entrepreneurial drive and to exploring regional and global cooperation.

The commitment to pursuing both business profit and social profit came early for Margalit. His mother was an educator and his father a social entrepreneur, establishing the first community center in a small town in northern Israel. After earning a PhD in philosophy from Columbia University, Margalit joined the Jerusalem Development Authority in 1990, where he led an initiative to convince high-tech companies from the U.S. and Europe to open R&D or manufacturing facilities in Jerusalem, helping jump-start the city’s economic and technological development.

In 1993, Margalit founded Jerusalem Venture Partners (JVP), which became a very successful investor in high-tech startups—a dozen went public on NASDAQ and more were acquired by larger companies. By creating independent Israeli companies and the infrastructure to support them, “we brought hope to a young generation who were familiar with Jerusalem’s impressive history but needed a current story, a story that appeals to today’s generation,” says Margalit.

To further invest in its community beyond creating independent companies, JVP established the “media quarter” in Jerusalem, turning the British Mandate-era National Mint building and the Ottoman-era storehouses around it into an innovation and cultural hub, housing startups, an accelerator (of the Hebrew University student union), and performing arts organizations, in addition to JVP headquarters.

The success of the media quarter in Jerusalem led Margalit and his partners to realize that “if we can transform a city with innovation, we can transform a country,” he says. They took their vision to the southern city of Beer-Sheva where, together with the local university, government agencies and other entrepreneurs, they created another innovation hub. This one has been focused on cybersecurity and helped attract large multinationals who opened their cybersecurity R&D centers there, sometimes after acquiring Israeli startups. “We showed that with public-private partnerships,” says Margalit, “a place like Beer-Sheva [in the Negev desert] where camels used to roam, now has a story to tell as a world leader in cybersecurity.”

Later, when Margalit served in the Israeli parliament between 2012 and 2017, this community development vision has expanded to include a total of seven regions in Israel. These include a food tech innovation hub in the Galilee region in the north of the country and a digital healthcare hub in Haifa, Israel’s third largest city. For Margalit, this is all about rallying the business community—in Israel and from around the world—to innovate and make a business profit while increasing social profit in regions that are left behind and are used to thinking small. “The very process of innovation and change gives hope to these places,” says Margalit.

The idea is to make communities think and act like startups. Ambition drives startups and thinking big moves communities forward and helps them retain their members, even attract new ones. “It gives life meaning,” says Margalit, “when you can create something new in your own community and do it in a way that invites others.” For him, creating in the community means not only starting new businesses, but also innovating in all aspects of the life of the community including education, arts and culture.

Some members of the community start their lives in conditions that don’t give much hope for meaningful and productive experience. Making social profit also means helping disadvantaged youth to “experience success,” instead of living under a burden of “other people looking at them as failures,” says Margalit.

So fifteen years ago, Margalit started Bakehila (“in the community”), a non-profit that since its founding has impacted over 25,000 children in impoverished neighborhoods in Jerusalem. Today, the organization is developing new programs aimed at fostering the next generation of social leaders in Israel and is expanding its operations into more neighborhoods in additional disadvantaged communities across Israel, including Arab communities. It has successfully concluded a number of “social exits,” with three communities now running their own program operations independently.

Late last year, Margalit returned to his position as Chairman of JVP. The venture capital fund recently launched a new initiative, JVP Play, bringing together early-stage startups and large multinationals to collaborate on product development from idea generation to market introduction. The JVP Play process increases the startups’ chances of success and provides global players an entry into Israel’s innovation ecosystem.

“Entrepreneurs can build bridges,” says Margalit. Not only between innovators and their potential customers, but also across conflict-ridden regions such as the Middle East, or those that could benefit from more home-grown innovation such as Europe.

Pursuing his belief that “innovation is a bridge,” Margalit recently participated in a regional development conference in Qatar, attended by government officials and business leaders from Afghanistan, Algeria, Morocco, Lybia, Kuwait, Oman, Tunisia, Jordan and Qatar, as well as China, France, Canada, Australia, and Germany. He sees as a “dramatic development” the fact that “innovation is beginning to become a word that is being used in our own region. It’s thirsty for water, for jobs. When you have jobs, you have hope.”

Margalit has known France’s Emmanuel Macron since the latter’s days as an investment banker. “I want France to be a start-up nation,” President Macron told a business audience in Paris last year. A few months ago, Margalit presented to French officials a number of specific proposals for encouraging closer working relationships with Israel, the original start-up nation. “If France wants to become a European leader, it needs technology and innovation, in needs to become a start-up nation,” says Margalit.

In the U.S., Margalit sees a trend towards “opening up to international innovation.” When a country opens up to outside innovation, he says, it doesn’t lose jobs, it becomes a center for something bigger, for global collaboration, driving economic growth.

But also driving social profit, and possibly, steering Silicon Valley towards new places to invest in and apply its creativity. In “Now Tech Moguls Have to Work to Appear Not-Evil,” Bloomberg’s Shira Ovide suggests that Silicon Valley companies “must persuade, with actions, that they’re doing more good than harm.”

Following Margalit’s social profit model is one such possible action and some in the Silicon Valley community have already started on this journey. A great example is the Rise of the Rest, Steve Case’s initiative to encourage entrepreneurship outside Silicon Valley, which recently created a $150 million VC fund with Jeff Bezos, Eric Schmidt and others as investors.

This is a step in the right direction but as Margalit has shown throughout his career, creating startups in left-behind regions is just one aspect of a multi-dimensional solution. “Most innovators don’t go into business just to make money,” says Margalit, “they go into business to do something meaningful with their lives. But if you stay isolated once you’re successful, you are wasting those energies. Instead, you should invite others to participate in your life and your success.”

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