Israeli companies 'exit' prematurely, study finds

Israel's start-ups sell too soon at too low a value, withholding opportunities to set up secondary markets.

Tel Aviv view (photo credit: Marc Israel Sellem)
Tel Aviv view
(photo credit: Marc Israel Sellem)
Israel’s startups sell too soon at too low a value and would provide the economy more value if they scaled up, a Milken Institute report released Tuesday said.
“Israeli companies are going to market too fast, without the opportunity to accumulate the value that would attract higher valuations,” the report said. Companies’ value- at-exit ratios (a company’s valuation before it receives financing divided by the total price of venture- capital investment) are lower than those of American and European exits, it said.
“Israel’s startups have not been as successful commercializing the products and discoveries that would build more businesses, new sectors and secondary markets, and gain for Israel a greater share of the product value chain,” the report said.
The report, which urges Israel to “reinvent” its capital markets, cites a litany of reasons for the phenomenon.
But most central is lack of funding options beyond early stages.
VC funding in Israel skews 80 percent toward early companies, as opposed to about half in the United States.
“The lack of late-stage financing, along with human capital constraints, is leading startups to premature exits through mergers and acquisitions,” the report said.
“Knowledge-based firms and their exports, the heart of Israel’s competitive advantage, require a longer financial runway for takeoff in transitioning into global companies.”
The capital markets have dried up, it said. Only 9% of exits happened through initial public offerings between 2002 and 2012, as opposed to 20% in the US. The amount of money raised was also just a fraction: $32 million on average in Israel versus $237m. in the US.
The regulatory burden for going public – even on the Nasdaq – makes public offerings a bad choice for many companies, the report said.
“Israel needs to put the mechanisms in place to finance the expansion of its hi-tech companies and disruptive technologies so that they can become self-sustaining,” it said.
The report recommended increasing transparency for foreign investors, creating new financial products, removing “regulatory, institutional, legal, tax and market infrastructure requirements,” creating a “technology bridge” trading platform linking institutional investors to pre-IPO companies, and reduce the costs and regulations of going public.
A similar sentiment is strong in Israel’s business community.
Speaking on Tuesday at the Axis Innovation in Tel Aviv, Perion CEO Josef Mandelbaum lamented that there were not enough role models for how to develop big companies in Israel. If more emphasis was placed on teaching Israelis how to manage large companies, and being an executive carried the same social cache as an entrepreneur, people might not be so quick to sell, he argued.
If the founders of Google had been raised in Israel, there would probably be no Google because they would have sold the company in its early phases, Mandelbaum said.