Sunday 21 May 2000
Investors cash in on Israel's Silicon Wadi
21 May 2000
High-tech start-ups are booming as former army commandos and computer 'geeks' adapt their skills to civilian use. Report by Matthew Kalman.
THEY call it Silicon Wadi.
It is Israel's booming high-technology sector.
For years American investors led the way in providing capital for Israel's burgeoning high-tech venture-capital scene but now British fund managers are getting in on the act.
That much is clear from the fact that Wellcome Trust is among several household names taking part in a $200m ( #135m) seed fund focused on early-stage Israeli internet and communications companies.
Horsley Bridge is the lead investor in Israel Seed IV. Its manager, Israel Seed Partners, says it is the country's largest fund devoted to providing high-tech seed capital.
Half the fund was raised in Britain from investors such as the London offices of Axa, Deutsche Bank and UBS Capital. American investors include IBM, America Online and the founders of Yahoo, eBay and Netscape.
Israel Seed's previous successes include Tradeum, a business-to-business net trading platform recently purchased by VerticalNet for $475m ( #340m).
Tradeum's co-founder is Zvi Schreiber, son of the British furniture millionaire David Schreiber. His brother, Daniel, runs Alchemedia, another Israel Seed company, which has patented a system that prevents the copying of pictures displayed on the web.
Both companies were founded less than two years ago, but once Alchemedia has floated, Zvi and Daniel will probably have amassed the same kind of fortune as their father took a lifetime to acquire.
Several more of Israel Seed's portfolio companies plan to go public in the next 18 months with a hoped-for return to early investors of more than 1,000%. They include DealTime, an online comparison-shopping site that has just begun operations in Britain.
Sandra Robertson, Wellcome's head of private equity, says Israel provides better opportunities for investors than anywhere in Europe. She says: "We find Israel particularly attractive because of the developments that have come out of there.
It really did mirror for us what has happened in Silicon Valley. I believe it's a hothouse of technological development."
Robertson argues that the venture-capital sector is more developed in Israel than in either Britain or continental Europe. "We have not invested very much money in Europe at all until this year in true venture capital," she says.
Graham Clempson, Deutsche Bank's co-head of European investment banking and head of European private equity, says Israel Seed Partners' previous fund is showing returns of more than 400%.
"We have more investments in Israel in the technology funds than we do in any of the European countries. In many respects it has stolen a march in terms of the kind of relationships between venture capitalists and entrepreneurs," says Clempson.
Israel Seed IV represents the latest wave in a rising tide of foreign investment in Israel's high-tech sector triggered by the start of the Israeli Palestinian peace process in 1993. Since then, hundreds of highly trained graduates of the Israeli army have founded dozens of start-ups based on the transformation of military know-how to civilian use. Instead of beating their swords into ploughshares, the young Israeli entrepreneurs have turned them into share options, attracting strong interest from the new net economy and delivering high returns for investors. Many have gone public on Wall Street.
There have been some spectacular deals in recent years. In 1998 America Online paid $287m for Mirabilis, the creator of ICQ software, which enables users to communicate with one another through the net. In 1999, Intel acquired DSP Communications for $1.6billion.
Last year venture-capital funds invested more than $1billion in more than 200 Israeli companies, up from $600m the previous year. In the first quarter of this year alone, more than $590m poured into Israel's venture-capital market.
"The Israeli army produces a rare mix of geeks and commandos," says Neil Cohen of Israel Seed Partners. "The geeks come from the army computer-training programmes and have the technical skill. The commandos go straight from elite units into marketing and management. It's an unbeatable combination."
London-born Cohen says the fund has targeted Britain and Europe to raise money, unlike many other Israeli companies, which usually go to America. One of Israel Seed's first investments was to put $700,000 into FoxCom Wireless, which makes communications hardware for domestic high-speed video and data. The firm, which began with three people in a workshop, is now worth at least $3.5m and may be worth far more when it floats.
Sasha van de Water, managing director of the European Fund of Funds for Axa, says such high-tech successes are very attractive to investors.
"You can say that past performance is not necessarily indicative of future performance, but they've done it," says Van de Water. "Those kinds of stories tend to spread like wildfire among the entrepreneurial community."
Van de Water says Axa had invested $25m in three Israeli funds managed by two companies: "We have not committed that much capital to a country-specific venture-capital fund anywhere else in Europe."
Israel Seed Partners' strategy of concentrating on early-stage investment is now being followed by other local venture capitalists. Polaris, a Tel Aviv fund headed by Chemi Peres, son of the former prime minister Shimon Peres, is about to announce the largest-ever Israeli fund of $500m. It says it will also focus on seed capital, providing more funding as businesses grow.
"In the past 18 months most venture-capital funds have realised that to have a good return on investment they have to start early," says Ella Jacoby, high tech analyst for Globes, the Israeli financial daily.
"Israel Seed has a very good name but has yet to prove itself because the seed fund that was established a few years ago hasn't completed any really significant exits yet and that's the way to prove your investments and your reputation."
But such considerations leave Wellcome unruffled. "Venture capital is a long term game," says Robertson. "We don't expect a two-year turnround. What's happening at the moment is unusual. When we go into these funds, we regard it as a five-year investment cycle followed by a five-year harvesting cycle. If it happens sooner, it's great."