by Arlene Marom
Note: HTIA recently merged with Israel Life Science Industry to become the Israel Advanced Technology Industries (IATI, www.iati.co.il) – the largest umbrella organization for Israel’s High Tech and Life Science Industries. This interview took place following approval of the merger and implementation of the first steps – and just prior to Oded’s move to Silicon Valley with his family. Oded now represents Rhodium in Silicon Valley.
Arlene Marom – AM: What was the Government’s Role in the Creation of Israel’s High Tech Industry?
Oded Hermoni – OH: The government developed an important and very successful program – Yozma – which created the entire high tech industry from $100m, reaching $18b, with 99% foreign investors. And it was structured so that it would not interfere with how startups work. It acted like an LP, with no regulations, very liberal. In other programs, such as the incubator program, where the government is more involved, you don’t see the same success rate, or the same exit rate.
AM: What industries were invested in then and now?
OH: Originally, most of the investments were made in semiconductors and enterprise software. Today, there are not so many fabless companies; the majority of investments are more in Internet-related companies and life sciences.
AM: How many funds are active today?
OH: There are only around 15 VC funds active today that are traditional VCs. There are many foreign VCs (80% of the total comes from abroad). There are also angels, holding companies, and incubators.
AM: Do you expect further consolidation? How many will be able to continue raising capital? How many will remain?
OH: This is the big question in the industry, and it’s hard to answer because many are not raising money these days. The ones who survive will be those that can create very high returns, weather the cycles, be part of a mature industry that can pick the right startups.
AM: How many of the funds invest in early stage startups? What fields? What investment levels?
OH: Today, most are aiming for later stage companies; the big problem is the A round. There are more angels in seed than in the past, but the A round is not being covered by angels or VCs. In 2011, there was around $1.7 billion invested. After a big decline in 2009, about 500 companies raised VC money. The number of early stage companies being funded is lower and lower. And, due to capital efficiency, they are investing more in the Internet sector, which requires less money, unlike semi conductors that need a lot of funding.
AM: How many angel investors are there in Israel? Angel groups?
OH: No one knows how many angels there are. There are at least 20 groups that are active and 10 or more accelerators.
AM: What can entrepreneurs do to increase their chances of investment by VCs? By Angels?
OH: In some cases, they can go to the US. Internet startups can get funding from angels in Israel and then go to the US for the next rounds. Companies will need traction and a good team. People invest in good teams that have proven themselves at least somewhat in the market. There are very few examples these days of companies raising funds with just a presentation.
AM: How long does an exit really take?
OH: We need to educate all parties about the reality. Everyone needs to realize that successful exits can take 10-12 years, and not the 5-7 that are often expected. We need to lower the pressure on entrepreneurs through the use of secondary markets/alternative investments, VCs buying shares before exits, etc.
AM: What can be done to encourage the building of large Israeli companies?
OH: Today, we see many more second-timers. They have the money, and they don’t need a quick exit, so they want to create big companies. The government should encourage industries that are already working without government help, so that they can become many times larger. We need to create a generation of people who know how to market and sell and export things from Israel. The only ones being acquired are R&D companies, not businesses. Companies can grow to be at least 3 times larger. 888 has 500+ employees. Others can become large – Babylon, Whitesmoke, Incredimail, Wix, Sweet IM, Kenshoo – all are exporting from Israel.
AM: Which countries tend to invest in Israeli startups and why?
OH: Europeans come to Israel for deal flow. US investors are also always looking for interesting companies, and Asia looks for technology that can leverage their go-to-market capabilities.
AM: Can the government do anything to make investments in Israeli startups more attractive?
OH: The government needs to maintain up-to-date information about the high tech industry, and to support a range of programs. They should open an incubator in Silicon Valley that will open doors for Israeli startups. Unfortunately, the government is focused on R&D only, and often, the reality is that marketing is more important. They are now taking their first steps in this direction.
AM: How will the new angel law affect the number of investments?
OH: The new law will not cause dramatic changes; it will affect only a small percentage of potential angels and startups. It’s a good idea, but as it is written, it won’t become really helpful.
AM: How can we increase the number of Israeli angel investors in high tech?
OH: We need a good angel law; we need new ways of subsidizing and supporting serial angels so that they will make more than 10-15 investments per year; we need to support those who will risk their own money, and who have a proven track record of building good companies. And, we need to help them locate more good companies.
AM: How can we encourage foreign angel investment in Israeli high tech?
OH: Most angels invest only in their own regions. The exceptions are Jewish angels, whose investments are determined 10% by Zionist feelings and 90% by the business aspects. We need to work with Jewish communities, and develop angels for early stage and A round investments.
AM: How can Israel’s education system train more and better entrepreneurs? Maintain Israel’s competitive edge?
OH: Israel has not sufficiently invested for the past 20 years in its education system. We will begin to pay for this neglect in 5 years from now; we will have less qualified engineers. When you compete with China, they are looking for 80 engineers and can get 80,000 candidates from top universities. You can’t let yourself stay behind; you need the top of the top. India and China are continuously closing the gap. Statistically, if you have 80,000 people, one will have a good idea; innovation can emerge in those countries due to the sheer numbers.
We had a meeting of multinationals and the Minister of Finance. They agreed that education is the main problem. There is a big fear, and the government understands this and is moving in the right direction. But, they need to keep thinking about how to improve; it is a crucial time for the industry. If we won’t have enough engineers and local VCs, there will be problems 5 years down the road.
Note: Oded laid the foundation for the merger with ISLI which began under his stewardship. He left the Israeli High Tech Community in a significantly better place, and will continue to assist us from his new location in Silicon Valley.
About Oded Hermoni
Oded’s selection to head HTIA was a stroke of genius. He has a unique background that combines every possible aspect required to get this incredible job done in the most professional manner possible, and in the shortest possible time. He knows the industry and the industry knows him. He was a well-known journalist – Editor of the High-Tech, Consumer Electronics, and Communication sections of TheMarker, part of the Ha’aretz Daily Newspaper, and was “Captain Internet”. As the senior high tech reporter, he analyzed thousands of Israeli and international high tech companies, and covered hundreds of VC deals. He headed the Israeli branch of the Red Herring Magazine, and published articles for the international professional high tech community.
He was an entrepreneur who founded two companies, one of which was acquired. He handled business development and investments at Meytag High Tech Ventures, part of the Capital Point Group, and was responsible for deal flow, screening, due diligence, and negotiations. He worked closely with startups through hands-on management of portfolio companies in the areas of IT, semi conductors, healthcare and clean tech. He was the perfect choice, he did a Herculean job, and he left an unforgettable legacy. We wish him equal success in his next adventures.