Israel: Land Of Milk And Venture Capital

U.S. firms are lining up to fund Israel's high-tech startups

One evening last October, some senior members of Weiss, Peck & Greer Venture Partners grabbed some bottles of Calistoga water and sat down to talk about their future. They were in the midst of another record-breaking year for their San Francisco-based firm, which invests exclusively in high-tech startups. But with fierce competition in the venture-capital industry, where could they look to keep up the momentum? One answer: Israel.

Weiss, Peck & Greer realized that they had been eyeballing at least 20 Israeli business plans every month--a fivefold increase from just a year earlier. "It floored us when we really began to look at it," says Gill Cogan, a managing partner of the firm, which also operates out of Silicon Valley. By December, Cogan's outfit had teamed up with Evergreen Capital Markets, an investment firm in Tel Aviv, and Robertson, Stephens & Co., a San Francisco-based high-tech investment bank, to start a new $50 million venture fund.

FRENZIED PACE. That Israel could generate such interest 7,500 miles from its borders isn't as unusual as it sounds. Despite its turbulent political status, Israel has emerged as a potent laboratory for some of the brightest--and most lucrative--ideas in technology. In 1996 alone, 18 Israeli companies went public in the U.S., more than from any other foreign country. The vast majority came from the high-tech industry, and $678 million was raised from all Israeli equity offerings, four times the amount in 1992, according to Securities Data Co. Today, only Canada has more companies traded on U.S. stock exchanges than Israel. Mergers and acquisitions between the U.S. and Israel have swelled, too, with $1.2 billion in mostly high-tech deals in the last two years.

No surprise, then, that Israel is home to an estimated 2,000 high-tech companies, promising plenty of future opportunities for entrepreneurs, bankers, and venture capitalists alike. The frenzied pace is leading many industry experts to dub Israel the new Silicon Valley. Says Roni Hefetz, a partner at Walden Israel, an arm of a San Francisco-based venture capital firm: "Let's face it: Israel is probably more like Silicon Valley than, say, Iowa or Florida."

As it turns out, a lot more. For starters, both regions have an unusually high concentration of skilled professionals. Israel has approximately 130 scientists and engineers for every 10,000 workers, according to Israel's Ministry of Industry & Trade. That compares with 80 and 75 in the U.S. and Japan, respectively. These highbrow populations, say experts, tend to exhibit similar characteristics when it comes to business. For instance, deals are routinely consummated in jeans, not suits. Risk-taking is viewed as a badge of honor, and working into the wee hours is de rigueur. Explains Efraim Arazi, an Israeli who is chairman of Electronics for Imaging Inc., a printer technology company in San Mateo, Calif.: "In Germany, if you have six engineers with a good idea, they will probably be put into a division or department. But in Israel or Silicon Valley, they will set up their own startup. It's a mentality that very few other places in the world."

The likenesses don't stop there. The financial infrastructures needed to fuel entrepreneurialism are beginning to look the same. All three San Francisco-based investment banks specializing in emerging high-tech companies have flocked to the Israeli marketplace. Robertson Stephens teamed up with Evergreen Capital while Montgomery Securities last year partnered with Jerusalem Global Consultants. Hambrecht & Quist is putting the finishing touches on a deal with Tamir Fishman, a newly launched investment-banking boutique in Tel Aviv, say sources familiar with the negotiations. Some 20 high-tech deals done with Israeli companies last year involved at least one of these three banks. "I'm surprised there's not a nonstop flight between Tel Aviv and San Francisco," says David J. Blumberg, a San Francisco consultant to Israeli companies seeking ties to Silicon Valley.

So are venture capitalists. Just two venture-capital funds operated in Israel in 1990. Now there are 40 solely devoted to technology and another 30 with more diversified investment strategies. Add in money flowing directly from Silicon Valley venture firms, and an estimated $1.5 billion has been raised for investments in a country smaller in size than New Jersey. Even the corporate names that dot Tel Aviv's high-tech corridor--Intel, Sun Microsystems, 3Com, Hewlett-Packard--read like a Who's Who of the Silicon Valley elite.

These connections are the fruits of years of coaxing. The Israeli government offers attractive tax incentives and grants to lure U.S. technology companies. Israel, for instance, is helping Intel Corp. finance a $1.6 billion facility in Kiryat Gat. It has had to. While Israel's military history has led to numerous technological innovations, the country lacks access to well-developed financial markets or a large enough consumer base. That's where Silicon Valley comes in. "The name of the game is to leverage Israeli technology with the marketing power from Silicon Valley," says Shlomo Kalish, president of Jerusalem Global.

That strategy worked well for Check Point Technologies Ltd., a company headquartered in Ramat-Gan and Redwood City, Calif., that makes Internet security software. Check Point's technology was impressive in 1994, but it was relatively unknown in the marketplace. An introduction to Sun Microsystems Inc. changed that when Sun agreed to use its clout to distribute the software. Applied Materials also took advantage of Israeli technology when it paid $285 million for two high-tech companies in November with combined sales of $100 million. "It was easier for us to buy into two companies that already had technology than start from scratch," says Dan Maydan, Applied's president. "If we do our job right, they will have sales of $1 billion in a few years' time."

LABOR SQUEEZE. And if the government does its job, commerce between U.S. and Israeli companies will continue to rise. That's one reason why the Israeli government decided in 1994 to move its economic consulate out of downtown San Francisco and into the heart of Silicon Valley. "Our objective is to help companies here find profitable ways to do business in Israel," says Shlomo Shalev, Israel's economic consul in Santa Clara, Calif. "We act as business matchmakers. There is a fit between the Israeli economy and the Silicon Valley economy." The same could be said for the Binational Industrial Research & Development Foundation (BIRD), a 17-year-old organization jointly funded by the U.S. and Israeli governments. BIRD, headquartered in Tel Aviv and Santa Clara, has invested more than $120 million in 480 ventures.

These government groups may be doing their jobs a little too well. Like Silicon Valley, Israel has too few skilled workers to support its exploding technical economy. "We are looking to hire 10 top-notch software engineers and will be lucky to find one," laments Check Point's CEO Gil Shwed. And though Israel's labor used to cost businesses half of what they paid in the U.S., those savings have been all but wiped out. "The typical engineer will cost you as much in Israel as it does in Silicon Valley," says BIRD's U.S. director, Daniel Tal, noting that at least 3,000 jobs have been created from high-tech development.

On top of these issues is Israel's ever-present political instability. Yet despite concerns from some executives, investment in the region has continued apace--largely because politics has not interfered with business. "During Desert Storm, we lost only one day of work because the schools were closed," says Craig R. Barrett, Intel's chief operating officer. Recent investors in Israel include Silicon Graphics, Bay Networks, and 3Com. A source says even former junk-bond king Michael Milken is close to funding two Israeli high-tech startups.

Such big-name interest--and the flourishing high-tech industry--seem to quell any misgivings potential investors might have. "We've just begun to see the flow" from the Israeli-Silicon Valley partnership, predicts Duane Kirkpatrick, an international strategy adviser to Robertson Stephens. At least that's what everybody seems to be hoping.

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