June 11, 2007

We need companies which acquire other companies, and are not acquired themselves.The Israeli high tech industry has an excellent reputation in the global market. The hundreds of start up companies currently active in Israel, and the dozens of new start ups established every year, have turned Israel in to the leading source of technological entrepreneurship outside of the USA.

This is probably why international giants such as Google, Cisco, Microsoft, Intel, IBM, and many others seek to acquire fresh and innovative Israeli technologies. In 2006, the local start up industry set an international ‘ratings’ record, with international corporations paying nearly $3 billion for the acquisition of dozens of private Israeli technological companies.

These numbers are a source of pride to the venture capital funds, which are the primary financiers of the start up industry in Israel. Successes are marked with profits of impressive multipliers, however the significant impact of these successes on the product of the Israeli market is one-time only.

Therefore, we cannot evade the question of why the shelf-life of Israeli entrepreneurship is so brief. Why can’t the Israeli mind come up with more large international corporations, which acquire companies themselves, and are not acquired themselves within a few years of establishment.

The claim that Israel, with its seven million residents, is a mere speck of global economy, is a lame excuse. Finland, a country with a population of 5 million, and with far less entrepreneurship than Israel, has introduced Nokia to the global economy. Nokia’s power has a great deal of influence on the growth of the Finnish economy. So when will there be another Israeli Teva, or, perchance, even Nokia?

Many see Teva, the largest generic pharmaceutical company in the world, as an ‘Israeli Nokia’ of sorts. Amdocs and Comverse, which employ tens of thousands worldwide and are global market leaders, also have a clear Israeli orientation.

But that pretty much sums it up. At the end of the day, Israel, whose strength lies in its ideas, is far less competitive when it comes to execution. The amount of international corporations established in Israel, which manage to grow with long term vision and execution, is rather small.

Israel has more entrepreneurs than Germany; however, Israel isn’t producing enough large companies from this entrepreneurship. While it is true that some of the traditional industry in Israel is incapable of generating large companies such as car manufacturers, which require market proximity and immense production costs, there are plenty of other industries with lower production costs and in which the physical distance from markets poses no difficulty in the age of the global village.

Therefore, the goal is for Israeli entrepreneurship to improve its capabilities in idea application and execution, in order to establish a long term high tech industry. Collaborations between the government and private sectors can make Israel an appealing destination for the establishment of local giant corporations seeking to build manufacturing plants for pharmaceuticals, communications equipment, chips, and semiconductors, as well as equipment upgrade plants.

This would enable capitalizing on the technological manpower, trained for service in the IDF and currently without productive employment after the service, particularly in the periphery areas. Such initiatives work very well in countries such as Taiwan, Finland, and Ireland, and have no reason not to work just as well in Israel.

Venture capital funds play an important part in this process, however there is also need for complementary financial tools. The financial structure of VC funds limits the duration of the funds? investment in companies to five to ten years. Afterwards, the funds must realize their investment and return the profit to their investors. The funds start investing, at the pre-seed stage, in ideas with good potential for growth. Later on, the funds invest in companies with high potential for leveraging.

After the companies reach maturation, the funds are required to sell the portfolio companies at a profit. NASDAQ IPO?s used to be the exit of choice for funds, as the profit multipliers were higher than the average multipliers received for acquisitions of the successful companies. Nowadays, there are far less NASDAQ IPOs. Each IPO requires meeting rigid standards for income, growth, and transparency, and entails steep annual administrative expenses. The alternative public market in Britain is no real alternative to NASDAQ. Its structure as well as the auxiliary banking structure facilitates trading of local consumption, and not multinational technological corporations.

We believe that serious consideration of selling VC-backed companies to private equity funds, which can provide the companies with the necessary takeoff, is in order. This market has yet to prove itself, but appears to have a great deal of potential.

To build a stable high tech industry in Israel, management skills also need to be improved. Israel is developing its managerial tradition lazily, while globalization is posing competitive challenges versus caches of administrative personnel from the finest training programs and the most successful companies. Over time, there has been a gradual improvement of management, however, we should practice assimilation of skilled managers trained in international companies to improve management skills.

Israel is the second largest source, after India, of senior management in the USA. Furthermore, high-quality boards of directors composed of foreigners and Israelis, which are capable of giving feedback to the management of Israeli companies and improving management performance, should be established. Improvement of companies’ management skills requires an improvement of executive skills. Successful companies leverage ideas for a business, and ensure that the international deployment and manufacturing will eventually bring the profit into Israel.

Ultimately, Israel cannot ignore rising global forces, and must redefine its competitive edge over China and India, in addition to its competitiveness in Western markets. The country’s responsibility is to fortify the programs for professional training and higher education, as well as to facilitate construction of an effective business infrastructure for expansion of the operation of Israeli companies.

Developing such a solid technological industry would generate additional workplaces in the Israeli economy, foster growth and productivity, create solid economical infrastructures, and ultimately ensure larger financial stability for the next generation.

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Jason Harris

Jason Harris

Executive Director

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