Biggest Beneficiaries of Israeli High Tech Success – Foreign Investors

By Eliav Alalof

It’s no secret that the really big money is currently chasing high tech’s next success stories. And the really big money comes mainly from Israeli and US venture capital funds, which are on the outlook for the next hit. One of Israel’s most prominent venture capital funds, Giza is run by Zeev Holtzman (chairman), Zvi Schechter, and Giora Bitan. Bitan, a former vice president for finance with Scitex, joined the Giza group in 1997, and, in his capacity as Giza agent, led Libit’s sale to Texas Instruments for $360 million.

“Globes”: Don’t you have a feeling that Israeli venture capital funds have missed out on the Internet revolution?”

Giora Bitan:“I don’t think so. I haven’t seen a single Israeli eBAY yet. In fact, with the exception of Mirabilis, I don’t know of any serious Internet company that’s not American, so it’s impossible to say that the venture capital funds have missed out on anything if no such companies have emerged. In the past year, to be sure, massive investments were made in the Internet sector, but their results will be visible only in a year or two. Even Kleiner-Perkins took two-three years to get eBAY off the ground.

“As for Giza, we’ve looked into dozens of Israeli Internet companies, but I’m not sure that Israeli .com companies can become international success stories. On the other hand, the companies we considered attractive are Internet companies involved in enabling technologies, namely technologies for constructing the network’s infrastructure and the services provided over it.”

What kind of companies are you referring to?

“Take, for instance, companies such as Libit or Orckit. Without the Internet, such companies wouldn’t exist, although they’re not involved in the Internet themselves. The very notion of high-speed data transmission over telephone or cable lines wouldn’t have acquired such importance if it were not for the Internet.”

Zvi Schechter:“Israeli companies have a problem with building up an advantage in the marketing concept area – to race ahead with an idea, to hit the market in four months, and to get sold in a year. Take, for example, the issue of online chats between two or more people on the same site. Israel is the only country to have five such companies already. Of course, they have competitors from the US, so that the Israeli companies don’t have a competitive edge in terms of the speed at which they hit the market. Proximity to the market is very important, because the technological threshold is very low.”

Zeev Holtzman:“I’d like to draw attention to a problem currently facing non-Internet entrepreneurs, which is that fund raising has become extremely difficult. Venture capital funds are busy only with hype, to the neglect of areas, such as medical technology, which are expected to become attractive in the years ahead.

“Nowadays, investors aren’t interested in companies developing various medical technologies. Who wants to invest in a complicated thing that may be realized in 4-5 years, when you have a fashionable hot item that’s realizable in 6-12 months, such as the Internet?

How will the Internet fever affect the financial aspect of corporate management?

Zeev Holtzman:“Because the Internet sector is attracting all the attention, the Wall Street bar for non-technology companies is being set ever higher. That’s why we see many Israeli companies turning to Europe. I’d describe this trend as ‘private placements on public stock exchanges.’ With the exception of the German Neuer Markt, investor interest is scant, and there’s hardly any trading activity in stock exchanges such as the Nouveau Marche in France and Belgium.

Recent weeks have seen a heated controversy over the Chief Scientist’s role, the size of her budget, and the intention of Finance Ministry officials to raise the royalties technology companies pay the Chief Scientist’s office. The Ministry of Finance’s initiative was rejected at last Sunday’s cabinet meeting.

Do venture capital funds have an interest in the existence of an institution such as the Chief Scientist’s office?

Giora Bitan:“Foreign investors intending to put money into venture capital funds like to see a supportive environment created by the government. It’s important to realize that, by putting up relatively tiny sums, the government creates a favorable, nurturing environment for the high tech industry.”

Zeev Holzman: “To put things in perspective, the Chief Scientist’s budget, including incubators, amounts to $400 million. If we add to this the royalties received from companies every year, the net budget ranges from $250-300 million. This is peanuts compared with the funds allocated to haredi (ultra orthodox) associations.

“The significance of investments in start-up companies is tremendous, and the budget should be increased to foster economic growth and create jobs. In my view, the original model of venture capital funds should be duplicated. Under the practice of ‘matching funds’, the Israeli government put up 40% of the capital to be invested, and the entrepreneur and private investors put up the rest. In a $30 million fund, $12 million were a government loan, repayable to the government with interest and linkage after seven years. Israel’s first venture capital funds were fashioned on this model.

“If the same model were introduced into the biotechnology sector, I’ve no doubt that a serious biotechnology industry would develop in this country. A $30-40 million budget on the ‘matching’ model, would have made it possible to set up venture capital funds with world class expertise. We’ve reams of knowledge in our universities and research institutions, but it takes money to apply. Just as the Israeli government has built transportation and communications infrastructures, it should set up an infrastructure of technology and biotechnology entrepreneuring.”

Giora Bitan:“I’d like to take up the feasibility of selling companies versus floating them. We’re seeing dozens of Israeli companies traded on NASDAQ at scant turnovers and low value. This is apparently the outcome of premature issues held when issuing was just too easy.

“Selling is a reasonable solution for an Israeli company with a good technology but without the marketing arms of a well-established US company.

“If we take a look at the US market, we’ll see that the number of start-up companies being sold is eight times higher than the number of companies holding an IPO. If we take a look at stock markets across the world, we’ll see over 100 Israeli companies traded on public stock exchanges. Has this figure been matched with 800 acquisitions and mergers among Israeli companies? I don’t think so, which only goes to show that Israeli companies may be choosing the wrong exit.”

So your conclusion is that selling is pretty good at the international level?

“Definitely. The sell-or-float controversy in Israel is outdated. We’re talking mostly about R&D activities rather than about plants. In most cases, Israeli companies that have been bought turn into local development centers and their staff grows significantly. Each new high tech sector employee has an employment multiplier, because he consumes services (catering, cleaning, accounting, lawyer’s services, etc.), which is why the acquisition of start-up companies whose operations are exclusively R&D is a blessing for the Israeli economy.”

At the national level, there’s yet another conceptual problem. Nearly all the money in Israeli venture capital funds comes from abroad.

Giora Bitan:“This is certainly absurd. For me, as a venture capital fund, it doesn’t make any difference, because I’ve got the money. But, as an Israeli, I notice that foreign investors are the major beneficiaries of all the big successes of Israeli high tech.

” I don’t know whether it’s funny or sad that the pension fund of Detroit’s construction workers invests in an Israeli venture capital fund and enjoys an annual 30% return, when Israeli pension funds are making do with a 5% return on government bonds.

“Every US institutional body allocates some of its portfolio to high-risk investments such as venture capital funds. Only Israeli institutional investors are scared of doing so, and the losers are funds’ beneficiaries. Can you tell me why things are different in Israel?”

Perhaps because Israeli institutional investors aren’t exactly famous for their courage.

(Laughs)”You said that.”

Published by Israel’s Business Arena August 25, 1999