The founder and chief investment officer of a $500-million Denver-based investment fund believes that Israel is just at the beginning of its technology boom, with a vast amount of untapped opportunities awaiting insightful investors.
“There is a huge opportunity in Israel,” said Justin Borus, the 41-year-old founder and chief investment officer of Ibex Investors, a fund that in February made an 8,600% return on an investment in an exchange-traded instrument, according to a Bloomberg report.
“People are going to be blown away in the next five years with how many billion-dollar-plus exits you’re going to see coming from Israel,” Borus said in a phone interview from Denver with The Times of Israel.
With the highest concentration of startups outside of Silicon Valley, and the highest number of startups per capita in the world, Israel has become a hot spot for international investors and corporations, who are flocking to its shores to study the ecosystem, invest in its companies to keep abreast of the latest technologies, and also set up local R&D centers.
According to a recent report released by IVC Research Center, corporate investments in Israel surged 30% in the first three quarters of the year, accounting for some $807 million, compared with the annual figures for 2013-2014. Total investments in Israeli tech firms totaled $4.5 billion for the period. In 2017, total investment in Israeli tech firms reached a record $5.5 billion, as the nation’s high-tech exit activity soared to $23 billion in 112 deals that year.
“Israel is just getting started,” Borus said, with an “incredible” pipeline of very “creative companies” that are “solving major problems” globally.
This opportunity is still widely untapped, he said. “In 15-20 years, people will look back at Israel and ask themselves, ‘How did I miss this opportunity?'”
Whereas there are just some 20-25 venture capital funds operating in Israel that have enough money to invest in a “proper series A funding round,” this is very little, relative to the scope of investment opportunities in Israel and the amount of VC firms operating in Silicon Valley. “There should be 200-300 VCs” in Israel, he said.
Ibex has created a $300-million fund that focuses only on Israeli investments, in both privately held firms — startups that have raised series A funding rounds through later stage rounds, which make up some 35% of its investments; and publicly listed shares, which make up some 65% of its Israeli portfolio. These investments include a wide variety of industries, including enterprise software, cybersecurity, media, medical devices, agriculture and water technologies, and consumer products, according to its website.
The fund is open-ended, meaning new money is raised from investors on a regular basis, with the fund adding some $50-$100 million a year for new investments. Since its inception in 2012, the Israeli fund has provided a compounded annual return of some 20% to its investors, Borus said.
In 2017, some 700 new startups were set up in Israel, and there are 6,000 active startups operating in the nation, with some 320 multinationals like Google, Apple, Deutsche Telecom and Bosch setting up research centers locally, according to data compiled by Start-Up Nation Central, a nonprofit that tracks the industry.
All of this activity is evidence of Israel’s booming tech ecosystem. But it is also generating an acute shortage of talent, due to the increased competition for workers. This is also causing salaries to soar and endangering the local tech ecosystem, which has been a key growth engine for Israel’s economy.
Even if the nation is facing a shortage of talent, Borus said, competition in Israel for workers is not as high as in the US, and Israeli startups are still very conscious of how much money they go through a month.
“Any time you have innovation, there is going to be competition for talent,” continued Borus. But the competition is not “nearly as profound” as the lack of skilled engineers and programmers the US is witnessing.
“Israel does have competition, but relative to the number of talented people graduating from the military and the university, we still think there is a huge run rate of growth ahead” for the nation, he said.
The international multinationals that are flocking to the country to tap into Israeli technologies are “an opportunity” for Ibex, he added, because “these are companies that could end up acquiring the companies we’ve invested in.”
So, albeit there is indeed a lot of activity in Israel, continued Borus, it “pales in comparison” to the opportunity available.
The Ibex Israel fund is generally “very selective” in its investment process; it invests in only two to three new private companies per year. In the public markets, the fund is generally very long-term focused and has a low level of turnover in its portfolio. In any given time, the fund has approximately 15-20 public companies in its portfolio.
In mid-2018, the fund set up a Tel Aviv office, led by Elan Zivotofsky, a partner of the Israeli fund, who will be vetting the Israeli companies on the ground. The vetting process takes months, said Zivotofsky, but once an investment is made, the firm works closely with the companies to help them reach their full potential.
“Writing a check is actually the easy part, ” Zivotofsky claimed. “The most challenging part, the real work, comes after that — working with the companies.”
Since setting up the Israel fund in 2012, Ibex’s investments in private Israeli firms include Dome9, recently acquired by Check Point Software Technologies Ltd.; Glassbox, Nexar, Zimperium, Innovid, Kaminario; Gauzy and Cynet.
The fact that Israeli entrepreneurs make sure that even small investments go a long way is also an important factor for investors, Borus said.
It is not unusual to see Israeli startups with “12 programmers inside an office space the size of a tiny conference room, whereas in Silicon Valley you have to have your foosball table, your ping-pong table, your coffee machine,” explained Borus. “In Israel, $500,000 can go a long way.”
And, with startups, “having a long runway is really the difference between success and failure.”
The majority of the investors in the $300-million Ibex Israel fund are non-Jewish investors who believe in the potential of Israel’s tech scene, Borus said. They are family offices and high net worth individuals and a few institutions.
Besides its Israel activities, Ibex uses behavioral finance strategies, based on data-driven, rules-based techniques to measure and profit from emotions in the market. Its strategy assesses crowd behavior and then invests in equities, exchange traded funds and volatility linked instruments to make money on market anomalies caused by fear, panic or complacency, the website says.
The fund also invests in the technology for driverless cars and in small US firms that are traded on the stock market.
There are, however, challenges with investing in Israeli startups, Borus continued: one of them is pinpointing the best investments, when there are so many good technologies being developed.
The other is cultural: “Negotiating with Israelis is tough. What in America might be a 10-minute negotiation over a cup of coffee, in Israel could be a six-month negotiation, where both parties walk away twice, yelling and screaming at each other. So that’s definitely a challenge.”