As Israeli entrepreneurs eschew the traditional quick exit route and opt instead to grow their companies to maturity, they have come to realize that they cannot go it alone. They need the help and experience of peers who face similar growing pains — and they need to join forces so that problems they encounter can be quickly addressed.
“Israelis and the Israeli government have been extremely good at fostering ideas and startups and then selling the companies. They have not developed a method for helping companies grow — which is the stage from which all parties benefit even more. In the three years we have been operating, the change in the government’s perspective and will to act has been dramatic,” said Kerem Nevo, the head of government relations at Wix.com, a Tel Aviv-based do-it-yourself website development company, who also heads the Israel Growth Forum.
The forum, set up three years ago, comprises some 20 mid-size Israeli startups — including Wix.com, Lemonade and Outbrain — defined as companies that have finished developing an initial product and, alongside research and development are now also doing marketing, sales and support; have over a few dozen employees; and have raised more than a few dozen millions of dollars, or have sales in that amount. They have joined forces to lobby the government on issues that concern the Israeli tech community.
Israeli entrepreneurs have a reputation for being inventive and moving fast, developing new technologies and selling off their startups when they are still young. That trend, however, seems to have waned in 2017, as entrepreneurs held on to their companies, raising greater amounts of money privately while staving off buyers in hopes of either developing the company themselves or getting a better valuation in a sale at a later date.
“Previously, local players set their sights on a quick exit, but this appears to have changed in 2017,” said Yaron Weizenbluth, a high-tech partner at PwC Israel, in the consulting firm’s 2017 exits report. This trend reflects “more than anything, a more mature mindset of local technology firms.”
Indeed, according to the report, 2017 was characterized by a greater number of larger deals, with an average value of some $106 million, a 66 percent increase year on year, even when excluding from consideration the year’s two mega deals: the sale of Mobileye to Intel Corp. for $15.3 billion and of NeuroDerm to Mitsubishi Tanabe Pharma for $1.1 billion.
In fact, 2017 saw 11 acquisition deals of over $250 million, while over-$100 million deals accounted for not less than a third of all transactions compared with 15% last year, according to the PwC report.
In addition, companies in the growth stage attracted the largest chunk of capital raised by Israeli startups in 2017, data compiled by Israel’s IVC Research Center shows. And there are some 24 Israeli tech firms that are now ripe for an initial public offering of shares, the Tel Aviv-based data firm said.
The forum’s members meet every so often to discuss what Nevo called their “pain points.” All of the companies had the same issues, regarding taxation, corporate governance and recruitment, she said.
“We need processes in place so we can run our business quietly, and these processes, when it comes to tech companies, still need to be built or smoothed,” Nevo said.
The forum was active in promoting and helping pass a law that eased taxation for Israeli startups that buy another Israeli startup, bringing it in line with the level of taxation offered to multinational companies when they acquire an Israeli company, and also made the taxation process for tech companies clearer and easier to navigate.
The group is also still assessing the impact of Donald Trump’s tax reform, which has lowered the US federal corporate tax to 21 percent from 35 percent previously. This rate cut could increase the incentive for Israeli companies to set up their businesses in the US rather than in Israel, experts have warned.
“We still don’t understand the full impact of the reform on our business, as many of the details have not yet been released, but it could potentially be very damaging to Israel’s tech ecosystem,” said Nevo.
“It may be that a solution to the US tax cut does not necessarily have to come from changing Israel’s tax regime,” she said. “Maybe you can incentivize companies to incorporate in Israel by improving the business environment for them, making the regulatory environment more transparent, and making Israel a great business ecosystem for tech companies. That may be a compensation for the higher taxation rates.”
‘It is hard to be a global company from Israel’
In addition, the forum is working toward adapting the legislation governing Israeli companies that have shares listed on foreign exchanges or are dual-listed, in Tel Aviv and abroad.
“We need to help the government understand our business better and get better knowledge of how the sector operates and what it lacks,” said Nevo. “It is really hard to be a global company from Israel — there are cultural and language differences, and there is a geographical distance from our markets and investors. There are huge incentives for becoming a US company, but we are Israeli, we want to build our companies in Israel and grow them here. And that is why we need to speak up. And the government is listening, is willing to help.”
A shortage of skilled workers is also a huge problem for Israeli startups, Nevo said.
Israeli entrepreneurs have found themselves at their wits’ end as they see the best talent snapped up by giant multinationals that have started operating locally, offering salaries way above the market.
This competition reached new heights last month when the co-founder of insurance technology firm Lemonade took the battle to his Facebook page, accusing online shopping giant Amazon of trying to poach his workers. The post created a storm of comments by other entrepreneurs, while Amazon’s chief technology officer promised he’d look into the matter.
The shortage of workers needs to be addressed very aggressively, said Nevo, as without workers there can be no growth. For the long term, she said, children in school need to be taught code from the age of six. “To become better citizens in the future technology world you need to understand how technology is built, so you will know how to use it and not be controlled by it,” she said.
For the short term, foreign expert workers should be allowed to come to work in Israel, she said.