Nothing Ventured Nothing Gained
Nothing Ventured Nothing Gained
Venture capital funds are relatively new to Israel and were brought about mainly by the peace process, rapid economic growth, and the proliferation and high profit potential of high-tech start-ups.
Nechemia Peres estimates that Israeli venture capital funds will enjoy a higher success rate than the 3%-5% achieved by comparable funds in North America and Western Europe.
Nechemia Peres, managing general partner of Tel Aviv based DS Polaris, hastens to add that he defines success as reaching annual sales of $100 million or more within the seven to ten years that the funds require to realize their investment.
"So you can appreciate the economic revolution that high-tech start-ups mean for Israel," he says. "If in the time scale of ten years time 50 of the 1,000 start-ups that will have received investments from venture capital funds reach annual sales of $100 million, that's worth $5 billion, almost all in exports. At present Israel only exports $14 billion of goods a year, including $5.6 billion of electronic equipment. Diamonds, Israel's largest sector only exports $4 billion a year. That's how important start-ups are for the Israeli economy."
Peres explains that venture capital funds are a relatively new phenomenon in Israel brought about by the peace process, rapid growth in Israel's economy and the proliferation of high-tech start-ups, in part due to the high number of immigrants from the former Soviet Union, a highly educated work force who brought with them marketable, innovative ideas. "Between 1991 and 1996 the first wave of 40 funds raised about $1 billion, investing about 70% in 300-400 start-ups," he recalls.
Venture capital funds, Peres explains, are designed to meet the needs of high-tech start-ups, which on the one hand require large amounts of investment funds, but on the other hand are high-risk.
"But we can reduce those risks," states Peres, "by accompanying the development of the start-up. We all have our own extensive experience in high-tech. We offer a limited partnership and we don't want to take them over. We just want to help steer them in the right direction for seven or ten years and then hopefully sell our share, either to other investors, or on the stock market."
Peres pays tribute to the Israeli government's initiative in backing many of these funds. He observes that through government owned Yozma and the government insurance company Inbal, about one third of venture capital was sponsored by the government. Peres himself was previously president of Mofet Israel Technology Fund, one of four venture capital funds traded on the Tel Aviv Stock Exchange backed by Inbal.
"Israel's governments have been uniquely supportive in all aspects of getting start-ups going," he observes. "From technological incubators and counseling programs through to venture capital funds." Peres notes that a second wave of venture capital funds is now being established in Israel, including a second fund by his own company, DS Polaris.
"What characterizes this second wave," he says, "is that overseas investors are being drawn to Israel. Our own company has attracted American investors such as the Travelers Insurance Group, and bankers like Cowen & Company." Peres stresses that Israel is an entrepreneurial society and that Israeli high-tech entrepreneurs are more market-driven than technology-driven.
More than in the past, he says, they are concentrating on marketing, management and finance, rather than R&D. Nevertheless, he emphasizes, local ideas are also in abundance, especially in medical electronics, telecommunications and software. And more importantly, the start-up scene is becoming more experienced with some entrepreneurs already on their second start-up and funds gearing up for a second round.
Peres speaks of Israeli start-up successes like Orckit Communications which successfully targeted the telephone loop market with unique HDSL and ADSL products. Another success he enjoyed at Mofet was VocalTec, which introduced the Internet Phone product.
"I think of the 30 to 40 companies that we have invested in," he remarks. "By the first meeting with the budding high-tech entrepreneur I knew that we were onto a potentially successful company. It's not an impulsive thing. By cross examining somebody who is serious and has a serious idea it is possible to know if something is viable. Of course we then have many more meetings which usually confirm what I had already decided."
Peres speaks with an infectious enthusiasm for the future of Israeli high-tech. "We have marvelous manpower resources," he says, "which generates by far the world's highest production per capita for academics. This manpower is characterized by the speed, daring and improvisation with which it works.
Some of this might be attributable to the military situation here. Many young Israelis become senior army officers with enormous responsibilities at a very young age. In addition the application of military technologies to the civilian sector has given Israeli high-tech an enormous advantage."
Israel, he insists, is building a reputation as an international high-tech power. "We're obviously not going to challenge the United States," he says, "but we can be as powerful as the leading high-tech oriented American states."