Dr. Orna Berry, Venture Partner at Gemini Israel Funds, who became Chairperson of the Israel Venture Association at the start of 2007, sees all the elements in place for the country’s VC funds to increase their profitability.
With increasing numbers of Israeli high-tech startup companies being acquired by major firms, or enjoying successful public offerings, the VC funds that provided their early stage capital are reaping returns from their investments.
She observes that Israel’s advanced technology sector has developed a successful business model based on its innovative intellectual property and spirit of entrepreneurship, which enables startup companies to develop products, technologies and patents to the point where major corporations can partner, integrate and market their systems and solutions. The Israeli startups also provide professional services including sales and after-sales teams. This is a win-win situation for Israel’s high-tech entrepreneurs, the VC funds that invest in them, and the global corporations that eventually acquire or form strategic partnerships with the startup.
Investments in Israeli venture capital funds are recognized by the Industrial Cooperation Authority (ICA) as a direct investment in Israel, and as such, are credited with 150% of the value of such an investment. Over the past decade, figures released by the ICA show that $150 million has been invested in Israeli VC funds through Industrial Cooperation Undertakings (ICU) by such corporations as Boeing, Lockheed Martin, Intel, HP, Dell and Siemens. They invested in a range of Israeli VC funds including Star, JVP and Giza.
The facts about Israeli high-tech are impressive. Israel has more startups in absolute terms than any country outside the US and registers more scientific and technological patents per head of the population than anywhere else. Some of the world’s leading universities and research institutes are located in Israel like the Weizmann Institute of Science, Hebrew University ,Technion in Haifa, Tel Aviv University and Ben Gurion University and 24% of the population holds academic degrees while there are 135 professionals with engineering degrees per 10,000 population.
The breakthrough industrial technological achievements have been many including enterprise network security (Checkpoint), chips for cell phones and cordless phones (DSP), advanced voice mail systems (Comverse), flash data storage (M-Systems), telecom billing systems (Amdocs), instant messaging (ICQ) and VOIP (AudioCodes and VocalTec ). VC investments have enabled many of these companies to transform their innovative ideas into marketable products.
Global technological corporations like IBM, HP, Intel, Cisco, Philips, Motorola and Applied Materials have established R&D centers in Israel and acquired local startups. Over 70 Israeli companies are traded on the US NASDAQ exchange and an additional 30 firms on European stock exchanges.
The growing number of successful exits by Israeli VC firms in 2006 combined with good prospects for the global technology economy saw Israel’s 80 VC funds raise $1.62 billion in 2006 compared to $1.2 billion in 2005. Only the US raised more venture capital in 2006 and in contrast to America most Israeli investments are at an earlier stage in the startups development, thus making any eventual returns higher.
Dr. Berry herself has personal experience of investments through ICA’s ICUs. In 1993, she co-founded ORNET Data Communication Technologies, which was subsequently acquired by Siemens as an ICU. She has also served as the Chief Scientist of the Ministry of Industry and Trade, where she oversaw the Israeli government’s highly successful program to encourage Israeli high-tech through industrial R&D incentives, technological incubators, international R&D cooperation agreements and bilateral funds, and projects to bring industry and academia closer together in generic R&D.
The OCS has implemented the Israeli government’s vision of developing the country’s advanced technology industrial capabilities. “It is technological sophistication,” remarks Dr. Berry, “that has given Israel a qualitative edge over its neighbors and allowed the country to survive and thrive.”
Part of that vision in the early 1990’s was to develop a VC sector in Israel . This was achieved by setting up the government-owned Yozma VC Fund. The fund invested approximately $8 million in each of the 10 funds that arose out of the Yozma project and invested directly in 15 companies. The project became an effective springboard for the first wave of venture capital investing and was responsible for approximately 40% of the total capital raised, which was close to $300 million.
The second wave of venture capital funds set up in the years 1996/7 attracted $1.4 billion in investment, while the third wave, between 1999 and 2001, raised about $6 billion. The latest wave of capital raised by Israel’s VC funds has brought the total amount to more than $10 billion. Now well into their second decade of operations Israeli VC fund managers have accumulated extensive know-how and experience in identifying promising startups, minimizing investment risks, nurturing investments and perhaps most importantly, good exit management.
About half of the VC Funds operating in the country are Israeli, while the other half are from overseas including leading U.S. VC funds such as Sequoia, Graylock and Benchmark.
However, most of the capital in the Israeli funds also comes from overseas including from leading institutional investors such as Goldman Sachs, Chase Manhattan, Morgan Stanley and George Soros’ Quantum Technologies as well as private investors and major global corporations including telecom providers such as British Telecom, Deutsche Telecom and Motorola.
Israel’s high-tech core competencies are in telecom including cellular and Internet technologies and applications, which attract 41% of the country’s VC investments. It is also safe to assume that much of the 15% of investments in software and 8% are also communications related systems. Other areas in which Israeli startups excel include defense and homeland security systems and solutions, semiconductors, biomedicine including medical devices with an emphasis on minimal invasive treatments. A new area of expertise is cleantech including water, energy and environmental technologies.
Among successful exits in 2006 were: M-Systems, which has developed revolutionary mobile storage systems for computer data and was sold to Sandisk for $1.5 billion; Mercury Interactive, a global leader in business optimization technology software, which was sold to HP for $4.5 billion and Colbar Life Science, a biomaterials company specializing in aesthetics and reconstructive medicine which was sold to Johnson & Johnson for $160 million. Among successful IPOs in 2006 Saifun Semiconductors, a provider of IP solutions for the non-volatile memory (NVM) market, raised $11.6 million on the US NASDAQ market.
Dr. Berry observes that the huge capital influx into Israel, both in exports sales and investment, as a result of the country’s successful high-tech sector, has enabled the government to invest in the country’s human capital resources through developing the education system to leverage further growth. This greater available high-tech workforce plus bullish forecasts for the Israeli and global economies in 2007, makes the outlook for the country’s high-tech sector and consequently Israel’s VC funds, highly promising.