Asian interest may foster ‘2nd-generation’ Israeli tech companies – VC investor

The burgeoning interest from China and India in Israeli technology presents Israeli start-ups with an opportunity to grow their business rather than seek out a quick exit, Eden Shochat, co-founder of the Tel Aviv-based Aleph venture capital fund, said in an interview.

In the past Israel has tended to sell “its best” companies young, Shochat said. “With countries like China and India opening up to Israeli technology and the huge markets they bring with them, we have an opportunity to move from being just a start-up nation to building a second ‘school’ of companies, those with much higher valuations,” he said.

If traditionally foreign investors have snapped up Israeli companies while they are still in their infancy and at low valuations, that trend seems to be reversing. Israeli companies now seem to be holding out for longer, thus getting higher valuations when sold.

In 2015 Israeli high-tech exits — the term used when start-ups are either sold to other companies or their shares are issued on the stock exchange — generated proceeds of about $9 billion, the highest in the last three years, according to data compiled by the Tel Aviv-based IVC Research Center, which tracks the nation’s technology industry.

The average exit deal reached $87 million in 2015, up from the $62 million 10-year average. The size of the average merger and acquisition deal also increased in 2015 compared with previous years, the IVC -Meitar Exists Report 2015 said.

The figures show that Israeli companies are still being bought for their human resources and their technology, Alon Sahar, a partner in the law firm Meitar Liquornik Geva Leshem Tal said in the IVC-Meitar Exits Report. “However, in more and more cases Israeli companies are beginning to have an ability to penetrate markets and establish an impressive business.”

India and Israel are strengthening their bilateral ties including in the field of innovation, while the amount of Chinese investment in Israeli companies and venture capital funds has surged to record highs.

This trend of Israeli companies striving to grow and reaching higher valuations is “the second golden age of Israel, the first one being in the 90s, when new army technology propelled Israel into the high tech” scene,” Aleph’s Shochat said.

Born in Kibbutz Ruhama in the Negev, 39-year old Shochat founded face.com, a facial recognition platform that was sold to Facebook in 2012 for an estimated $55 million to $60 million. He co-founded Aleph in 2013 with partner Michael Eisenberg.

Aleph, which has $154 million dollars under management, was founded to ”focus on enabling Israel to create bigger companies.” Shochat said. The fund accompanies the companies it finances for a period of 12 years, removing the pressure on them to seek a quick exit, he said.

“For venture capital to work, you need to build big companies that truly impact the world and have a broad reach,” Shochat said. “The most important thing is to finance them with money and help them with recruiting, approaching their market, setting out a sales strategy and business development. We need to drive them toward opportunities where their technology and products have the biggest impact.”

Even so, startups globally are finding it harder to reach higher valuations. The number of venture capital-backed so-called unicorns, or companies valued at $1 billion or more, fell back to 2013 levels, according to data compiled by CB Insights, a New York based data firm. Only five new VC-backed unicorns were created in the first quarter of this year globally, compared with a peak of “unicorn frenzy” in the second quarter and third quarter of 2015, when 24 and 25 new $1 billion-plus companies were created, respectively, CB Insights said. In total, there are 166 unicorn companies globally, although this number also includes companies without VC backers.

China was Israel’s third-largest export market in 2015 and Israel’s biggest market in Asia, totaling $3.1 billion, data compiled by the Israel Export & International Cooperation Institute show. Exports to India in 2015 posted a 21 percent rise year on year to $1.3 billion.

“China has such an enormous target population and many big industries like insurance and finance that are considered solved problems in the West still represent significant opportunities in China,” Shochat said. “It is still a very much untapped market.”

Relations with Japan are also warming, Israel’s Ministry of Economy and Industry said. Representatives of the ministry and their Japanese counterparts met in Jerusalem on June 9 to strengthen trade ties and attract investments.

“The economic dialogue with Japan, the world’s third-largest economy after China and the US, is of strategic importance to the Israeli economy,” Ohad Cohen, the head of the ministry’s Foreign Trade Administration who led the discussions, said in a statement.

“In the past, Israel’s level of trade with Japan was relatively limited, due to, among other issues, Japan’s sensitivity to the Arab boycott,” Cohen said. “Nevertheless, the current prime minister of Japan, Shinzo Abe, is promoting a policy of stimulating innovation. This policy has made Israel more attractive to the Japanese, due to Israel’s unique global position as a country that fosters innovation.”

Over the past two years Israel has been witnessing a “very significant increase” in the interest Japanese companies are showing in Israel with a higher number of companies visiting Israel and hosting Israeli companies in Japan, the Israeli ministry said in the statement.

Tel Aviv will hold a joint China-Israel summit in September in cooperation with Israel’s Ministry of Economy and Industry and in parallel to the DLD Tel Aviv Innovation Festival. The summit is expected to host more than 1,000 visitors from China and 500 Israeli high tech companies, the conference organizers said in a statement.

The objective of the summit is to encourage collaboration between Israeli and Chinese companies in the fields of technology, innovation and investment in light of the growing interest of Chinese companies in the Israeli economy, the statement said.