Business 2.0: The Startup Factory

How a little-known Israeli telecom became the world's most successful incubator.

Twenty years ago Yehuda and Zohar Zisapel ran a tiny startup in Tel Aviv, selling modems. Today they still run the same company, Rad Data Communications, but modems have for years taken a backseat to Rad's longest-running hit product -- new companies. To date, the Zisapel brothers have spun off 23 telecom-related startups. Seven were sold for a total of more than $1 billion. Another six went public on Nasdaq. All are based inside Rad's 1.5 million-square-foot campus, brimming with more than 2,500 employees. Thus, Rad isn't your average holding company or incubator; it's a family of companies that play off one another's strengths. Here's how Rad has succeeded where other startup factories have fallen short.

Build the Team First and the Product Next
"We identify a niche, develop a business plan, hire a CEO, and have them start R&D," Yehuda says. "There's no predetermined product." Take Radvision, a $64 million seller of VOIP gear. In 1992, Yehuda assigned a video expert on his staff, Eli Doron, to identify holes in the nascent videoconferencing market. Within a year Doron had a plan for a video-over-IP product. Outside investors chipped in $8 million, and Radvision hit the market in 1993. The company, which later moved into voice products, now has 380 employees.

Launch Symbiotic Brands
Unlike U.S. incubator Idealab's far-flung creations, Rad companies all operate within the telecom universe. Their products monitor communications hardware, analyze voice and data networks, and perform a rash of other functions. "The Zisapels invest only in businesses they know and can contribute to," says Ami Talmor, a Gartner analyst based in Tel Aviv. That's a big advantage for their startups, which gain access to all of Rad's customers. When Radvision launched, customers "didn't understand what they were buying," Doron says. "But because it was Rad, they bought it, and we started to show revenue."

Keep the Parent Private
By maintaining control of the umbrella company, the Zisapels retain a flexibility that public companies can't match. They invest in or bail on projects when they see fit, and focus on the performance of each firm without worrying about the overall portfolio. Plus, Talmor says, "it's easier to take a startup to IPO than to spin off a division of a big company." And if a startup fails? Rad has shuttered just three in its two decades, but when it happens, Yehuda says, it's quick and painless: "We make sure that one going down doesn't drag down another."

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