Transcript The Israeli VC Industry: Emergance, Operation and Impact

The Israeli VC Industry:
Emergence, Operation and
Impact
Morris Teubal and Gil Avnimelech
Objectives
• To Analyze the emergence of the Israeli VC industry
in the 90’s: background, triggers, operation and
growth.
• To Analyze the emergence of the Israeli Hi-Tech
industry.
• To Analyze the role of R&D support policy with
connection to the emergence of the Israeli Hi-Tech
industry
Background – The Israeli Hi-tech
Industry Till the 70’s
• 50’s-60’s: emergence of innovative agriculture industry.
• Early 60’s: Strong science academic departments in Israel.
• After 67’: a major objective of the government was to generate
relative independence from external supply of military equipment.
• 60’s-70’s Academic links with Europe and US are being strength.
• Military R&D cooperation with US, Germany and France –
transfer of technology from those countries to the Israeli military
industry.
Background – The Israeli Hi-tech
Industry Till the Mid 80’s
• 70’-80’s: many Israeli scientists emigrated to the Silicon
Valley.
• 70’s-80’s: dominance of strong military industry.
• 70’s-80’s: first foreign multinational companies establish R&D
centers in Israel including Motorola (1964), IBM (1972), Intel
(1974) and National Semiconductors (1978).
• In 1972, Elscint (Hi-Tech company) became the first Israeli
company to be traded on an US stock exchange.
Background – The Israeli Hi-tech
Industry From the Mid 80’s
• The reconstructive of the military industries (sharp reduce
in military expenditures) – led to enhanced flow of engineers
to civilian Hi-Tech industries.
• A new trend of creating new Hi-Tech companies (startup
companies) in the late 80’s, with high rate of failure.
Background – Government Policy
Supporting R&D Till the 70’s
• 50’s-60’s: add-hock solutions supporting academic and industrial
R&D.
•After 67’: strength of the military industries.
• Military R&D cooperation with US, Germany and France –
transfer of technology from those countries to the Israeli military
industry.
• The establishment of the Office of the Chief Scientist (OCS) and
the creation of the “R&D Industrial Fund” program. This program,
which is a direct neutral support for R&D in individual companies,
is the backbone of Israel RD/Innovation/Technology Strategy. The
OCS budget grew from $2.5M in 1969 to almost $400M in 1999.
Background – Government Policy
Supporting R&D Till the 80’s
• Incentives to capital investment in Israel (1964)
convince the first foreign multinational companies
establish R&D centers in Israel and later on
manufactories including Motorola (1964), IBM (1972),
Intel (1974) and National Semiconductors (1978).
Background – Government Policy
Supporting R&D From Mid 80’s
• The reconstructing of the military industries.
• Successful macroeconomic stabilization program.
• Liberalization process which generate a better environment
for doing business in Israel.
• the new R&D low of 1984; and increase in R&D incentives
in the mid 80’s.
Triggers to the Emergence of the Israeli
Silicon Wadi – Global Environment Triggers.
• The global growth of the IT industry in the 80’s and 90’s.
• The de-Regulations in the telecommunication market in the
90’s.
• Globalization of Capital and Assets markets – enhanced
opportunities for startup companies to get financed.
• The rapid grow of global capital markets (Nasdaq effect).
Triggers to the Emergence of the Israeli
Silicon Wadi - Environment Triggers
Related Only to Israel(1).
• Readiness of the industry after the rapid changes in the 80’s
and deeper understanding of the Israeli market failures.
• The breakdown of the Soviet Union, which brought a very
large number of immigrant Scientists and Engineers to Israel.
• Greater legitimacy acquired by Israel after the Gulf War.
• Entrance of global investment banks into Israel during the
late 80’s and 90’s.
Triggers to the Emergence of the Israeli
Silicon Wadi - Environment Triggers
Related Only to Israel(2).
• The emergence of several Israeli communication
technology companies including Tadiran, ECI, Fibronics,
DSPG, NiceCom, Efrat and others during the 80’s.
• Few successful Exits of Israeli startup companies in the
early 90’s, in which the entrepreneurs and investors made
very high profit (including Scitex, Megic, NiceCom and few
others).
• A new trend of Israelis that return to Israel after few years
in the Silicon Valley.
Triggers to the Emergence of the
Israeli Silicon Wadi – Policy
Triggers(1)
• The reconstructing of the military industries; Successful
macroeconomic stabilization program; Liberalization
process; the new R&D low of 1984; and increase in R&D
incentives in the mid 80’s.
• US guarantees of $10B, after the Gulf war.
• Structural change which help transferring the environment
to become more adjusted to Hi-Tech.
Triggers to the Emergence of the
Israeli Silicon Wadi – Policy
Triggers(2)
• Technology Incubator program – supporting startup
companies in very early stages..
• INBAL program – gives guarantee to public VC
companies on the down side.
• MANET program – Support generic R&D.
• Yozma program – the creation of the Israeli VC industry,
though establishing 11 VC funds.
Yozma Program – Background
• Readiness of the Israeli Hi-Tech industry.
• Long history of incentives to R&D.
•Shortage of finance for startups (high demand for VC money).
• Weak management and marketing capabilities in the Hi-Tech
sector.
• Verity of supporting programs.
• Strong supply of experience manpower and good ideas.
Yozma Program – Objectives
• Creation of stabile VC industry.
• Ensuring that their won’t be a monopoly in the VC industry.
• Ensuring minimum government intervention in the
management.
• Ensuring the industry will continue to survive after the
government incentive stops.
• Fast learning of local VCs and creating added value to SUs.
Yozma Program – Creation(1)
• Long preparations and Continues consulting with the
Treasury and other government offices.
• Long consulting and negotiation with global VCs and with
local financial institutions.
• Changing Israeli corporate low.
• Creating 10 Yozma funds – 5 in 1993, 2 in 1994, 2 in 1995
and 1 in 1996.
• Total government investment of $100M; Investment of $8M
in each fund; Total capital managed by Yozma funds was
$310M.
Yozma Program – Pre-condition
to Become a Yozma Fund
• Investment in technology startup companies.
• raising private capital of $12M minimum.
• strong local office based on a local financial institution
or corporate.
• strong foreign partners/investors represented in the
management company.
Yozma Program – Growth
• Most Yozma funds management companies has at least 2
additional funds.
• All but 2 of Yozma funds bought back the government share.
• The total sum managed by Yozma funds management
companies is approximately $5B.
•At least 8 out of 11 Yozma funds management companies are
among the top 20 management companies in Israel (out of
approximately 100 VCs).
•Yozma program was a critical element in the amazing growth
of the Israeli VC industry.
Stages of Evolution of the Israeli
VC Industry.
Phase1 (1993-1995/6) – Creation and Learning.
Phase2 (1996-1998) – Rapid growth and fast maturation
process.
Phase3 (1999-2000) – mature and bobble.
Phase4 (2001-) – Back to reality and first big obstacle
(overcoming the global slowdown).
Phase1 (1993-1996) – Creation and
Learning(1)
•Very dominant by Yozma funds.
•Very low valuation in private investment .
•Small funds (~$20M).
•Small amount invested in each startup and small numbers of
investments.
•Many co-investment with other Israeli VCs in order to
increase total amount invested, to reduce risk and Little coinvestment with US VCs.
•Little seed investments and No specialization in areas.
Phase1 (1993-1996) – Creation and
Learning(2)
•Foreign partners had important role and operational role.
•Learning mostly from lowers and attorneys on VC operation.
•Cumulative learning in the industry.
•Very little understanding of the market and the VC business - Very
small added value.
•Goal of VCs to make fast exit through M&A (in low valuations $10M-$70M).
•Israeli VCs were very important for startup both due to shortage in
access to capital and due to need in added value both operational and
during Exit.
Phase2 (1996-1998) – Rapid Growth and
Fast Maturation Process(1)
•First round of private VC funds (not related to Yozma) but the
market is still dominate by Yozma funds.
•still low valuation in private investment, comparing US
startups.
•medium funds (~$100M).
•Increase in the amount invested in each startup and Decrease
the portfolio companies.
•Increase in seed investments and Beginning of specialization
in areas.
•Foreign partners had less important role and non-operational
role.
Phase2 (1996-1998) – Rapid Growth and
Fast Maturation Process(2)
• Learning, mostly from investment-banks, the core business of
VCs.
• Less co-investment with Israeli VCs- less collective learning
and increase in co-investment with US VCs.
• VCs have better understanding of the market and Increase in
VCs added value.
• Goal of VCs to make successful IPOs.
• Israeli VCs were very important for startup both due to
shortage in access to capital and due to need in added value.
Phase3 (1999-2000) – Mature and
Bobble(1)
• Many VC companies, verity of VCs.
• Normal valuation in private placements, comparing to US
startups.
•No change in number of portfolio companies amount of
investment grows rapidly.
• Most VCs have specialization in areas and Increase in seed
investments.
• Learning mostly from strategic partners which helps in
understanding of future demand and the dynamics of the
market - Increase in VCs added value capabilities.
Phase3 (1999-2000) – Mature and
Bobble(2)
• Minimum co-investment with Israeli VCs– increase in
competition; and increase in co-investment with US VCs.
• Goal of VCs to create successful independent companies or
very high valuation Exits.
• Israeli startup companies has small need in Israeli VC’s added
value both due to easy access to capital market and many exit
opportunities and due to experience management. Moreover,
successful Israeli startups has direct access to US VCs.
Phase4 (2001-) – Back to Reality and
Global Slowdown(1)
• The first time many startups and fund will be closed down.
•Verity of funds’ sizes ($50M-500M).
•Decrease in the amount invested in every startup (and in
number of investments) and many down-rounds.
•Strong specialization in areas, abundant of areas and decrease
in seed investments.
Phase4 (2001-) – Back to Reality and
Global Slowdown(2)
• Co-investment with Israeli VCs and with US VCs.
• VCs have little added value.
• Main business of VCs is to decide which startups to close and
which to keep supporting and the Goal is to have any kind of
Exits or to find the next investor.
• Israeli VCs are very important for startup both due to shortage
in access to capital and due to need in added value.
In Depth Analysis
Of A Sample Of
Israeli VC Companies
The Sample
• We interviewed 20 VC companies including 9 of Yozma Funds
and 11 other VC companies.
• They represent more than 60% of total capital under
management in Israel's VC industry - $6B.
•These fund were usually established according to the phases in
the Israeli VC industry.
•We identified rapid growth in the fund’s size.
•The average size of the last fund in the VC management
companies we have interviewed is above $200M compared to
average size of the first funds of $32M.
Company
Apax
Founding
Date
Yozma
Yes
95
Number of Funds
3 (95, 99, 01)
Total Capital Under Management (M$)
Last
Fund
(M$)
740 (40, 100, 600)
600
Table1: Descriptive Statistics
BRM
No
99* (93)
3 (93, 99, 00)
355 (2, 100, 253)
253
Concord
Yes
93
4 (93, 96, 00, 01)
475 (20, 75, 180, 200)
200
Formula VC
No
98* (93)
2 (98, 01)
180 (80, 100)
100
Gemini
Yes
93
3 (93, 97, 00)
346 (36, 110, 200)
200
Genesis
No
96* (92)
2 (96, 99)
353 (90, 263)
263
Giza
No
92
3 (92, 98, 00)
316 (45, 60, 211)
211
ISP
No
95
4 (95, 96, 98, 00)
257 (6, 11, 40, 200)
200
JG
No
99
1 (99)
190 (35, 73, 82)
190
JVP
Yes
94
4 (94, 97, 99, 01)
605 (20, 75, 160, 350)
350
PCM
No
00
1 (00)
65 (20, 45)
45
Star
Yes
93* (89)
11 (89-01)
1,000 (89-93:57,94-98:300,99-01,650)
400
Vertex
Yes
97
3 (97, 99, 01)
295 (35, 50, 210)
210
Walden
Yes
93
2 (93, 98, 00)
200 (20, 80, 100)
100
Yozma
Yes
93* (92)
3 (93, 98, 01)
170 (20,80, 70*)
70**
Company
Apax
BRM
Concord
Formula VC
Gemini
Genesis
Giza
ISP
JG
JVP
PCM
Star
Vertex
Walden
Yozma
Mean
Date of Funds
95, 99, 01
93, 99, 00
93, 96, 00, 01
98, 01
93, 97, 00
96, 99
92, 98, 00
95, 96, 98, 00
99
94, 97, 99, 01
00
89-01
97, 99, 01
93, 98, 00
93, 98, 01
2.8
Exits
6 (5,1,0)
3* (2,1,0)
12 (9,3,0,0)
2 (2,0)
18 (11,7,0)
11** (11,0)
14 (5,8,1)
4 (1,2,1,0)
0
12 (10,2,0,0)
1***
>30
8 (6,1,1)
4 (4,0,0)
10 (6,4,0)
Table2: Direct Indicators of Vc-performance
9 (5.5,3.3, 0.2)
IPOs
5 (4,1,0)
3 (2,1,0)
6 (4,2,0,0)
2 (2,0)
10 (7,3,0)
6 (6,0)
5 (3,1,1)
1 (1,0,0,0)
0
7 (7,0,0,0)
0
>20
2 (1,0,1)
2 (2,0,0)
4 (2,2,0)
M&As
1 (1,0,0)
0 (0,0,0)
6 (5,1,0,0)
0 (0,0)
8 (4,4,0)
5 (5,0)
9 (2,7,0)
3 (0,2,1,0)
0
5 (3,2,0,0)
1
>10
6 (5,1,0)
2 (2,0,0)
6 (4,2,0)
Portfolio
33 (10,17,6)
22 (2,10,10)
45 (13,25,7,0)
21 (21,0)
66 (36,20,10)
44 (27, 17)
59 (17,22,20)
33 (9,10,10,4)
17 (5,5,7)
42 (17,22,20,0)
12
>100
55 (26,10,19)
42 (22,15, 5)
45 (20,25,0)
Direct Indicators of VC-performance
• Average number of portfolio companies: 50-60
• Average number of Exits is 9, which represent between 15%-20%
of success.
• The percentage of success is higher in the first phase – 30.
• The percentage of IPOs is 1%-2% higher then the percentage of
M&As.
• The percentage of IPOs in the first phase is more then 20% while
the percentage of M&As is less then 10% in this phase.
• These figures demonstrate the strength and the maturity of Israeli
hi-tech and VC industries (IPO is considered to be more
complicated and requires not only good technology but also
additional capabilities).
Company
Bes t Exit
Reputable Inves tors
S tructure of Inves tors
Apax-95
3-Commtouch
Apax International
Ins titutional
BRM-93
1a – Check Point
IBM, NTT and Applided
Materials
S trategic & Corporate
Concord-93
1b –Galileo
HarbourVes t, Goldman-Zachs ,
JP Morgan & Bell Atlantic
Ins titutional & Financial
Formula-99
3-Cons olidation
3D
UBS Capital, VantagePoint
Financial
Gemini-93
3-Commtouch
Advent, Telecom Italia, Bear
S tearn,
All types
Genes is -96
1a,b-AudioCodes
CIBC, IBM
Financial, Ins titutional
and Corporate
Giza-92
1b-Libit, MS ys tems
GE Capital
Financial & Ins titutional
IS P-95
2-Compugen
IBM, AOL, UBS , S ilicon Valley
Bank
All Types
JG-99
3-No Exit
AOL, Motorola,, Merril Lynch
Corporated, S trategic,
Finance
JVP-94
1b-Chromatis ,
Jak ada
Merril-Lynch, Jafco, France
Telecom, Lucent
Finance, Ins titutions ,
Corprate
PCM-00
3-Non
Bank Hapoalim funds
Public
S tar-89
1a-Cienna,
Lannet, Ork it
S iemmens , TVM
S trategic
Vertex-97
2-Vis ionTech,
MoreCom
S ingapore Technology, Vertex,
NTT, Hitachi, Jafco, Nomura
As ian Corporate and
Financial; Is raeli
Financial and Ins titutions
Walden-93
2-Terayon
Walden, HarbourVes t
Ins tittutional, financial,
and Angels
Yozma-93
2-Commtouch,
Bios ens e
Is rael Financial Ins titutions
Is rael Financial
Ins titutions ; and Angels
Table3: Indirect Indicators of Vc-performance
Indirect Indicators of VCperformance
• 7 VCs had at least 1 very successful Exit (valuation of at
least $500 million), and another 3 VCs had at least 1
successful Exit (valuation of at least $200 million).
• 7 VCs has leading strategic investors and 11 VCs has
financial institutions as investors (investment banks, private
equity funs...).
• 6 VCs had at least one office out of Israel.
Founder and Initial Team Background
• We identified
very strong background of the VC’s founders and initial team.
Israeli venture capitalist are characterized by very strong technology
background including science degree, actual work in R&D.
• Education - In 11 VCs, some founders/initial team members had a
Technological Educational Background. 10 Had a Business/Economics
education. 6 VCs had Technological and Business/Economics degrees.
• Work Experience - the founders/Initial team of 5 VCs had Work Experience
in MNEs; 5 had experience with SUs; and 2 in Israeli Global Companies.
• Investment experience - 11 had investment banking or VC background.
• Management Position background- All VCs in our sample had management
Position background; In 9 cases they previously had founder background.
• R&D position background - In 8 VCs, at least one founder/member of
initial team worked in R&D positions.
• In 5 cases at least one VC founders/Initial Team held M&S positions; in 4
cases- Accounting/Finance positions
Type of VC
• During foundation, (4) of the (15) VCs where not Limited
Partnerships; but of these (3) adopted such an organizational form in
the course of time.
• (8) of the VCs were part of Yozma.
• (5) VCs are part of a Global Network of VC companies (All of
these are also Yozma funds).
• (4) VCs are part of an Investment Bank, and (1) is part of a
Holding/Investment Company.
• At foundation, (2) VCs had publicly traded funds, but in the course
of time one became a Limited Partnership.
• Phase of Creation - (10) VC companies were created in Phase I; (2)
during Phase II; and (3) in Phase III.
Trigger to VC Foundation
• (8) VCs where Yozma Funds that is they received Yozma
incentives.
• (2) additional ones did not receive such incentives but still
their creation directly resulted from Yozma.
• (5) were created in the wake of prior Israeli VC industry
successes.
• (7) were directly the result of prior personal success in
investing in high tech SU- entering the VC industry was a
natural phase in their evolution
Linking Characteristics With the
Model of a Successful VC Company
success is a function of four basic operations:
Deal flow- good SU who apply to the VC;
Scanning Abilities- Identifying a subset for Due Diligence;
efficient due diligence process; and successful selection of SU;
Value added "operational' activities- ability to help
companies during startup and early growth phase;
Value added during Exit- networks with Investment Bankers
or with Strategic Partners; timing of exits, preparing the
company for the exit, etc.
Linking VC Characteristics to
Performance-some Hypothesis
• Hypothesis I: prior Management Experience is a necessary
condition for VC entry and VC success. It however cannot
explain success & failure.
• Hypothesis 2: Important Role of Founder
Technology/Science Education combined with R&D Work
Position --absence of founder Technology/Science Education
background and R&D Work Position/Function is strongly
associated with failure.
• Hypothesis 3: Belonging to a Global Network is Strongly
Associated with VC success.
Prior Management Experience Is a Necessary
Condition for VC Entry and VC Success. It
However Cannot Explain Success & Failure
All VC partner has prior management experience.
Moreover, considering the VC business it seems trivial that
all VC partners must have prior management experience in
order to be successful VCs.
The Absence of Founder Technology Education
Background and R&D Work Position Is Strongly
Associated With Failure
Founders/ Initial General Partners of (7) out of the (15) VC companies did not
have a combination of Technology/Science Education and an R&D Position.
-(4) Our of the (7) were significantly below average performance (among the (5)
lowest)
An analysis of the other (3) shows the following:
-(1) VC was founded in 1992, had Investment Banking experience and had an US
investment bank as partner in the first fund.
-(1) VC had a partner with US VC experience and all founders had an Investment
Work Position.
-(1) VC is Yozma, qhich its General Partner is Yigal Erlich.
Belonging to a Global Network Is
Strongly Associated With VC Success
In (4) out of (5) cases of belonging to a Global Network were
successful VCs. The fifth case did have neither a founder
Technological Educational background nor a prior R&D Work
Position. Belonging to a Global Network, however, is not
necessarily the cause of success; rather it may be in indicator
of success and of factors leading to success e.g. of good
founder initial capabilities.