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November 2008
Innovation & Start-up
Welcome To The Promising Land
Israel is about to join the OECD and foreign investment is booming, but many Europeans have yet to join the party, says Hanan Sher
Internet telephony, high-speed broadband, computer firewalls, flash memory… many of the cornerstones of the 21st Century were developed in Israel. The tiny state has a high-tech expertise that belies its size and short history and some Israeli firms are now even taking on US technology giants. Yet, despite their shared history and geographical proximity, Israel is doing it largely without European investment partners.
With decades-old treaties, the EU is actually by far Israel’s largest bilateral trade partner: EU imports plus exports totalled €24.6bn in 2007, compared to €17.1bn from the US. But less than 20% of the €27.3bn foreigners invested in Israel between 2004 and 2007 came from Europe. The bulk of foreign investment is American. In 2006 this hit a record €9.6bn, propelled by Warren Buffett’s €2.7bn purchase of 80% of cutting-tools firm Iscar.
Whether it is near-sightedness or the product of extreme political sensitivity, relatively few Europeans have taken advantage of Israel’s sound economic standing or technical savvy by purchasing companies or building plants in the Jewish state.
Among those who have taken the plunge is Germany’s Siemens, which established an Israeli subsidiary in 2000, and now has 300 employees and projects worth hundreds of millions of euros in the electrical, transportation and medical fields.
Compatriot Volkswagen, which in the 1990s invested heavily in a plant that extracted metallic magnesium from the waters of the Dead Sea, is now exploring new non-oil methods of lubrication for its automobiles with NanoMaterials, a start-up based on the discoveries from Israel’s Weizmann Institute of Science. Meanwhile, Deutsche Telecom has established a major research facility at Ben-Gurion University in Beersheba and has launched collaborative projects with a number of Israeli companies.
Early this year the aggressively acquisitive London-based private equity firm Apax Partners completed a €680m purchase of Tnuva, Israel’s biggest distributor of farm products, adding to a portfolio that already includes Bezeq, Israel’s phone company.
Some Europeans have chosen an indirect, venture-capital route. “Some of our biggest investors are from Europe – pension funds, corporations, insurance companies,” says Erel Margalit, managing partner of Jerusalem Venture Partners, which manages around €500m. “In fact, our very first investors, 15 years ago, were French – France Telecom and others.”
Richard Salt, director of trade and investment at the British Embassy in Tel Aviv, rejects the suggestion that Britons have neglected Israeli investments. “We don’t think we’re late for the party at all,” he says, pointing to several blue-chip UK firms in the country, including Rolls-Royce and BT.
Many European investments go unnoticed while the US gets the headlines, asserts Rachel Roei, director of the Investment Centre at the Israeli trade ministry.
Indeed, Roei estimates that over the last few years there have been “several billion dollars” in European investments to Israel (see panel, right), a number she says should be much larger. She suggests several reasons for the gap. European companies and venture capitalists tend to invest in other European countries rather than overseas, she says, and their foreign investments tend to be in new manufacturing plants in nearer low-wage countries, such as the Maghreb states of North Africa.
Another significant factor, points out Roei, is that, on the whole, Europeans “tend to follow their peer group, which means that Israel may see more investments from them in the wake of successful deals.”
LIFE LESSONS
Israel draws on its background to safeguard its future. Hanan Sher looks at the ‘2,000-year-old start-up’ nation
Israel became a hothouse for technology out of a combination of necessity and a sense of national mission. Historians note that Israel developed home-grown defence industries after French president Charles de Gaulle cut off arms supplies in the wake of Israel’s victory over Egypt and Jordan in the 1967 Six-Day War, the high percentage of scientists and engineers in the million immigrants from the former Soviet Union in the early 1990s, and the opening to the world in the wave of optimism following the 1993 Oslo agreements that led to the establishment of the Palestinian Authority and the then-seeming prospect of a settlement of the festering Israeli-Palestinian conflict.
There’s no underestimating these three events. The French boycott prompted Israel to develop an aerospace industry that is the base for its 2007 status as the world’s fourth largest exporter of defence products, one of a handful of countries to launch its own homemade satellite and develop its own fighter plane, and the first to deploy a working anti-ballistic missile system (the Arrow, partially funded by the US). The Russian immigration, in keeping with the national raison d’etre of providing a refuge for Jewish victims of persecution, reinforced already-excellent Israeli academic institutions and is a major reason why Israel leads the world in the number of engineers (135 per 10,000 population, compared to 85 in the US). And one effect of the Oslo deal was lifting the informal taboo that had kept many firms, from multinationals to international banks to global retailing chains, from setting up shop in Israel.
Add to that Israel’s expertise in advanced communications and imaging, garnered by graduates of the Israeli Army Intelligence Corps’s famed technology units, who often become high-tech entrepreneurs, then toss in the research stemming from world-class academic institutions like the Weizmann Institute of Science in Rehovot and the Technion in Haifa, and you’ve got what seems like a sure-fire formula for success.
But that’s only part of the story, argues Yossi Vardi, the guru of Israeli high-tech. Vardi, who established his reputation as a canny spotter of promising tech firms by backing the four twenty-something Israelis, including his son Arik, who established Internet instant messaging pioneer ICQ and later sold it to AOL for over €250m, is convinced that the knack of creating successful start-ups comes from something in the Jewish gene pool, refined by centuries of Jewish homelessness and persecution.
Vardi, who doesn’t look or act like the business genius he’s reputed to be, operates out of an unpretentious home office, decked out in his trademark open-necked shirt, the Reebok shoes he wears with everything, and a rumpled look. His view is equally unconventional.
“We excel in the very early stage of building technology companies, a stage where you have to assume risk, where you have to jump into the water and start something new, leaving everything you have done behind you.
“You can think of us as a 2,000-year-old start-up nation,” he says. “For centuries we Jews moved from place to place, and everywhere we went we had to start all over again. Most of what we could take with us was between our ears,” he says.
Erel Margalit, managing partner of the Jerusalem Venture Partners venture capital firm agrees. “It’s a myth that Israel is only strong in technology,” he says. “Israel is strong in innovation. It is true that India and China are scaling technology as well, but Israel’s advantage is not only in the technology that is developed, but in the business model and business thinking and applications that these companies can bring to the table.”
But attitudes towards innovation and risk-taking are far from identical. “In Japan losing face is a big issue, if you have a start up-and don’t succeed, you lose face and that is bad,” observes Vardi. “In Israel, like in the Silicon Valley, it’s acceptable to fail in a legitimate way. It’s like mountain climbing — you return to base camp, regroup and then go back and try to reach the summit again. Conquest of a mountain is rare on the first attempt.”
Vardi is a veteran at what he calls “playing the start-up game”. In the late 1960s he founded Tekem, one of Israel’s first software houses. After a career which included numerous public posts, including the director-generalships of the Ministry of Development (at age 27) and the Ministry of Energy, Vardi turned to private business. Since the Mirabilis coup, he has put his money into about 65 companies, many of them tiny. Forty of them are still around, and 12 are prospering.
He looks at the people on the other side of his desk before taking them under his wing, comparing technology to a piano : “You need a pianist to extract the right sounds from them.” What interests him is not the idea, the business plan or the PowerPoint presentation, but “the guy who plays the piano.” With the right ones, he can provide the commercial acumen, contacts and some of the cash to help them make beautiful business music.
