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Roman Gold

The managing partner of the Israeli investment platform JSCapital

13.02.2015
16:11

Israel: a country where the startup chooses the investor, and not the other way around




Roman Gold, the managing partner of the Israeli investment platform JSCapital, wrote a column for russian site Zuckerberg calls, where he dispelled the myth of the Israeli startup market, and discussed what is actually going on in the country.

What’s happening on the Israeli startup scene


Today, Israel is one of the most dynamic startup hubs on the planet. A study by Startup Genome put Tel-Aviv in the second place in the world – after Silicon Valley, and in the Bloomberg list of innovative countries, Israel came fifth, ahead of the USA and the UK. International recognition did not come to Israel immediately or suddenly – the country has been showing impressive dynamics on the venture capital market for the last decade. As it happens, the year 2014 was extremely successful, even against the background of the consistently high achievements of previous years.
Last year Israeli startup companies set a record for attracting investments, with a total of $3.4 billion, which was 46% higher than the figure for 2013, when Israelis “only” attracted $2.3 billion. Israeli venture capital funds also showed a good dynamic for mobilizing capital: 12 funds attracted $914 million, 68% higher than in 2013, when 11 funds attracted $544 million.

All of this shows that the level of confidence in the Israeli startup market is unprecedentedly high. Of course, Israel did not previously suffer from a lack of confidence, especially after the country got the reputation as a “Startup Nation” (after the book of the same name was published). But 2014 was a breakthrough year – the market advanced to a new level of development.

From “Startup Nation” to “Exit Nation”

The evolution of the Israeli startup market was first discussed by the chairman of the economic commission of the Knesset, Doctor Avishai Braverman – last spring he announced that Israel had transformed from a Startup Nation into an Exit Nation, and he saw this transformation in a negative light. The deputy expressed the concern that the pursuit of monetization would reduce the innovative potential of the country, but leaders of the VC industry did not back him up.
The managing partner of Pitango Capital, one of the oldest Israeli VC funds (founded in 1993, with backing of $1.6 billion), Chemi Peres (the son of former President Shimon Peres, by the way) said that the pursuit of a swift exit did not reflect all the nuances of the Israeli startup scene – in fact, there are enough entrepreneurs on the market who want to develop large companies and who regularly turn down M&A offers (mergers and acquisitions).

A report by the IVC analysis company for 2014 confirms Peres’ opinion: the volume of funds attracted for IPOs of Israeli companies reached its highest level in 10 years - $2.1 billion. The 17 IPOs in 2014 show a convincing tendency in comparison with the modest 8 IPOs in 2013.

At the same time, M&A are still the most sought-after thing for investors: the average revenue multiplier for an Israeli M&A deal last year was 6.2. A total of 99 exits took place in Israel in 2014, with a total volume of $6.94 billion. The highest-ranking exit was the Mobileye company, whose public share placement was the most successful IPO by an Israeli company in the entire history of the New York stock exchange.

At the same time, no decrease in the IPO activity of Israeli companies can be seen: in 2015-2016 at least 25 Israeli startups plan to carry out public share placement.

What Russian investors can do in Israel


The answer is banal in its simplicity: invest. Funds such as AltaIR Capital, Flint Capital and Titanium Investments already invest in Israel (these three are the most active on the market), as well as Maxfield Capital, TMT Investments, LETA Capital and others. Vendors include Yandex (which opened an R&D center on the base of the merged Israeli startup KitLocate) and Mail.Ru Group.

Many investors watch the Israeli market for years, not understanding what it can give them – the market changes much more quickly than it appears from the outside. If you want to go on to the Israeli market, either find a reliable local partner, or open your own representative office.

How to enter the Israeli startup market properly

Get ready for the fact that everything is arranged differently in Israel – above all, there is a different attitude towards money. The Israeli startup market does not suffer from a lack of financing. This means that American, European, Chinese and of course Israeli investors line up for good startups. On the other hand, there’s no such thing as too much money – and you can always take your place in this line. The market welcomes new players who play by the rules.
After observing the Israeli startup industry for several years, we at JSCapital have come up with five key principles for foreign investors to be successful in the Holy Land:

Respect. You have money – and you want to invest in Israel? Mazal tov! You are in good company with around 350 VC funds and a thousand business angels, which account for 5 500 Israeli startups. The venture capital market is very saturated, so startups chose the investor, and not the other way around – you can especially feel this at series A rounds and higher.

And one of the serious obstacles for cooperation with potential investors may be an insufficiently respectful attitude of the investor towards the startup. Of course, trying to curry favor with a promising project is also not an option. Our choice is open communication on equal terms.

Speed. Have you found a startup you like? Then join the race: you’ll usually have three months to seal a deal. Around a third of deals break down because the investor does not move fast enough. It’s not absolutely necessary to be move like lightning, but this may be a serious competitive advantage on the Israeli market.

However, there’s an even more important factor – transparency of communications. If the decision-making process takes a month, don’t promise a result in two weeks.

Values. Israel is a very family-oriented country. Traditionally of mutual assistance and charity go back several millennia, and they have not gone away in the 21st century. Incidentally, the foundation of the modern Israeli startup industry was also laid by philanthropy: most of the partner funds for the state fund Yozma were raised by the American investment consultant and prominent philanthropist Stanley Chase thanks to his ties with the American Jewish establishment.

The vast majority of Israeli startups and VC funds, and also foreign players working on the local market, offer their own program of social responsibility. “If you take (invest), then you should give back (help or develop)” is an unwritten rule that has been elevated to the rank of a law.

Chinese investors sponsor Israeli universities, American funds support a range of volunteer projects – all this takes place completely voluntarily, this is simply the way things are done here.

Reputation.This is one of the most subtle aspects, especially from investors from the post-Soviet region. On the one hand, this involves the reputation of the country where the money comes from, and on the other the reputation of the investor and their representatives.

Looking after your own reputation in Israel is such a complex and laborious process that investors practically have just two options for working on the Israeli market: either to create a permanent representative office with people who will join the local startup scene and become an integral part of it (permanent presence in Israel is a necessary condition), or to work through an Israeli partner with an excellent reputation in the country.

Money, connections and even knowledge do not automatically convert into reputation. A reputation is trust, communication and cooperation. And something more as well.

Ritual. Many people regard Israel as an exclusively western nation, but you shouldn’t forget that this is the Middle East. And so it will be extremely difficult to become integrated into the local community without accepting a whole range of rituals. If you want to work on this market, you must go native.

Attending the wedding of the cousin of the co-founder of the startup you are holding talks with – this is not a sign of politeness, but a ritual. Having coffee every day with an Israeli lawyer is not business etiquette, but a ritual. Remembering who was born, got married and joined the army and when is not a tedious necessity, but a ritual. And you must treat all of this like a ritual, as people can detect insincerity a mile away. But sincerity is richly rewarded.
Some of these principles are obvious, while you may find others hard to take seriously until you collide head-on with Israeli reality. We came up with these principles based on our own experience – and we have proven their effectiveness. For example, Flint Capital fund, which we work with, became one of the three most active VC funds in Israel in 2014 in just nine months.

What will happen tomorrow

We see three main trends for the next five years of the Israeli startup industry. Firstly, a continuation of expansion by investors from China, Latina America and Russia. Secondly, the further consolidation of a reputation as an Exit Nation, i.e. an increase in the number of M&A, and especially IPOs. And finally, we expect a new stage of state stimulus in the development of the startup scene – the creation of an innovations department at the Ministry for the Economy.
And generally, we know that tomorrow will be even more interesting than today. Tomorrow our ambitions will grow, and the tasks will become even more difficult. And this means that we will have to think even more quickly and work even better. As for startups – we will have plenty of surprises for you.

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