Silicon Wadi 2.0

Israel's tech sector, already booming, is poised to jump to the next level.

By SHLOMO KALISH
money good 88 (photo credit: )
money good 88
(photo credit: )
The Israeli hi-tech industry is by far the fastest growing segment of the local economy and one of the main contributors to the rapid growth of the domestic market. The sale of numerous Israeli companies to leading international players, combined with dozens of public offerings in the US and European markets, only serves to illustrate this point. As remarkable as it is, the vibrancy of our "Silicon Wadi" is by now well known. The news, however, from close observers of this sector is that the Israeli start-up industry is currently under going a major change. The technology sector is entering its second phase of development, laying the groundwork for the creation of larger companies positioned to become major global players. In this context, it worth recalling that Israel's hi-tech industry is young by any standard. It started emerging as a significant force only in the mid-1990s with the establishment of the government-backed Yozma venture capital fund. Yet even in its infancy Israel's hi-tech sector ranks second only to Canada for number of non-US companies listed on Wall Street. Our success has long been driven by start-up companies using innovative skills provided by local talent to create cutting-edge technologies and solutions. The tangible result has been Israel's disproportionate representation on the NASDAQ exchange, with over 70 companies, with a collective market capitalization of over $75 billion. What is changing is that it would now be a serious mistake to view Israel as solely an incubator for young and promising technologies. As the country moves into its next stage, in addition to seeing a continuation of companies going public and seeking hundreds-of-millions-of-dollars deals, Israeli companies themselves will start to become billion-dollar entities. THE TECH sector's first decade (1995 to 2005) was characterized by a series of firsts: first-time entrepreneurs, first-time funds, and shortage of managerial skills. All sides were looking for the quick exit. This resulted in many local companies being sold for a price that did not reflect their real value, or going public too early. Many of these companies failed to realize their full potential. Some witnessed a sharp drop in market capitalization, others had to change their business models, and some were forced to shut down altogether or be transferred abroad. Only a handful of Israeli companies - giants such as Checkpoint, Amdocs, Orbotech, Nice Systems and Comverse - managed to become world leaders and maintained their position. If entrepreneurs, managers and venture capitalists had demonstrated more patience and had access to additional funding, the entire Israeli economy could have benefited. Companies would have produced higher returns for their founders and investors, created more jobs and brought in more revenues to the State of Israel. One can only imagine what the Israeli economy would look like today if the country had become a home to a dozen or more multi-billion dollar companies. Now, however, the trend is changing as entrepreneurs, managers, and investors are willing to adopt long-term approaches aimed at growing companies into significant market leaders in their fields. AS THE TECHNOLOGY sector evolves from selling technology to building world-class technology leaders, the time and cost required to bring a company from inception to exit has substantially increased. Since 1998, the average number of years between founding and first exit for Israeli technology companies has increased by roughly 25 percent. At the same time, the average amount of capital raised by Israeli technology companies prior to exit has increased more than five-fold, from $3 million 10 years ago to an average $16 million in 2006. The change is led by several factors. Israeli entrepreneurs are more experienced than they were a decade ago, and there is a growing number of second- and third-time entrepreneurs coming back again for the gold. Their successes have endowed repeat entrepreneurs with the knowledge, resources and respect of their peers to impact the Israeli hi-tech community as a whole. Venture capital funds also understand that the market is changing and that they will fail to generate returns if they do not focus on building billion-dollar enterprises. During its formative period, the majority of funding available for the Israeli hi-tech community was seed- or early-stage finance. Today first-decade tech companies are migrating down the pipeline into later developmental stages, creating a "bulge" effect with an attendant need for capital at later stages. Late-stage capital allows successful companies to focus on further improving their products and marketing instead of being forced to find the fast exit. Israel's remarkable initial success in its start-up sector will provide the bed from which will grow even more compelling and lucrative investment opportunities over the next 10 years. As entrepreneurs, managers and investors begin to adopt a "go-the-distance" approach, the entire landscape of the local hi-tech sector will reach new heights, bringing enormous benefits for the entire Israeli economy in its wake. The writer is a veteran venture capital investor and the founder of Jerusalem Global Ventures, which is now raising a $200-million fund that specializes in late-stage investment.