innovation ecosystem sources of israeli innovation of israel. … · 2015. 11. 4. · 2 table of...

Sources of Israeli innovation

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Innovation Ecosystem of Israel.

Opportunities for Russian-Israeli Cooperation.

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Table of Contents

Executive Summary 4

Introduction 6

Sources of Israeli innovation 7

Additional elements (mostly non-governmental) of Israeli Innovation

ecosystem 10

Universities 12

R&D centres of leading technology companies 21

Defence Forces 29

Cooperation between Russian and Israeli companies 32

Case Study: Joint Product development and marketing to Western

European and American markets 32

Case Study: Ray Q and Bee Pitron cooperating on Global defence and

aviation markets 34

Case Study: Israeli high-tech company performing a multimillion

project in Russia 36

Case Study: Israeli software developers outsourcing software

production to Ukraine 39

Analysis of Israeli venture capital industry 45

Sources of funding 45

Opportunities for Russian investors 52

Attitudes and experience in outward investment of Israeli institutional

investors and VC in particular 54

In conclusion 57

Experts 57

Appendix 1 – List of events in Israel sep13 – sep14 59

Appendix 2 – Intellectual property law firms in Israel 65

Appendix 3 – Small series producers, prototype and industrial design

experts 69

Appendix 4 – Technology Transfer Companies of Israeli Academic

Institutions 72

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Charts and tables

Chart 1. Hebrew university budget 15

Chart 2. A comparison of R&D commercialization 16

Chart 3. Number of R&D employees in Israel 23

Chart 4. The world of R&D 25

Chart 5. Trend in Israel’s defence exports sales 30

Chart 6. Average salaries of programmers in Israel 40

Chart 7. Average salaries of programmers in Russia 40

Chart 8. Average salaries of programmers in Ukraine 41

Chart 9. World bank “Doing business” survey 46

Chart 10. Total venture capital raised by VC funds 2002-2012 47

Chart 11. Israeli High-Tech companies: capital raised investors vs.

proceeds from M&A and IPO 50

Chart 12. Israeli High-Tech capital raising Q1/2011-Q1/2013 51

Chart 13. Capital raised by Israeli High-Tech by stage 52

Table 1. A comparison of Yozma and Inbal 11

Table 2. A brief review of R&D centres in Israel (of Large multinational

companies) 27

Table 3. Most active VC funds in Israel 48

Table 4. List of possible consultants 57

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Executive Summary

This paper is coming after series of quite diverse papers that

covered various aspects of innovation ecosystem in Israel. Due to the

supplementing nature and quite loosely connected content, it should be

reviewed as collection of separated themes.

Several elements of Israeli innovation ecosystem that were not

covered in previous papers are covered here like Universities, the army,

tech multinationals R&D centers. Each of them is playing its role and

contributing to the outcome. In each of the elements, we choose to

highlight the most relevant for RVC aspects.

Alternative routes of R&D funding by the universities and their

great effort to commercialize the research (through technology transfer

companies) received our attention. Obviously, Israeli universities are

participating in the ecosystem in many other ways but we decided to pick

two and to focus on them.

Same for the military. It’s a very little secret that the defence

related R&D could be considered the founding father of local ecosystem

and that defence R&D was always done in close cooperation with the

military; however we focused on recruitment process and the synergies it

creates between the army and the general society.

R&D centers of multinational tech companies are often overlooked

and not getting full credit for their role as management greenhouse. In

Israeli ecosystem, there is common consensus on their crucial

contribution to the development of today’s leaders of Israeli high tech

industry.

As a general trend, we can see that the market forces shape the

Israeli innovation ecosystem. Obviously, it took fair amount of

government support and intervention (with different degree of success as

can be seen in the first part of the analysis) but now, it is a part of the

global world, and thus affected by the trends that affect the global

markets.

When VC industry suffers elsewhere, VC industry in Israel feels the

pain. This global pressure on VC industry, combined with conservative

approach of local institutional investors negatively affects Israeli VC

industry, when only the best funds are managing to raise capital.

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One of the main objectives of RVC in Israel is to support further

integration of Russian companies into global supply chains through

increase of trade and business connections with Israeli high tech

companies (that in any case are export oriented). Obviously, in order to

start, it’s important to learn existing cooperation stories. Currently the

cooperation exists on many levels and the case studies presented here

show the success stories and the issues arising from cooperation

attempts. The case studies were written after interviews with relevant

people, mostly CEO’s or business owners. Some stories, interesting and

educational were excluded in order to keep the size of the document

manageable and reasonable. The main lesson from the stories is

realization of great potential for cooperation where Israeli and Russian

tech companies can supplement each other and have a mutually

beneficial collaboration. This is the only way it will be sustainable.

Additional important task is to establish a relationship with people

who possess knowledge on specific subjects that might be of use for

technology companies in the RF. Due to the structure of Israeli labor

market, and particularly to the narrowing pyramids in the top

management of the technology companies, quite significant number of

good quality experts are engaged in consulting. They can create

important knowledge base that can be a great support for young

technology companies. With the Venture funds, the situation is quite

different. In several background conversations, managers of good quality

funds mentioned that they would be happy to share their knowledge but

could be able to do it if RVC became an investor.

The appendixes of this report are not trying to create a substitute

to yellow pages but to list several relevant service providers that support

Israeli technology ecosystem. All IP lawyers, engineering companies and

development subcontractors allow sustaining industrial scale of innovation

and based on preliminary conversations they will be happy to see

additional clients coming to them.

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Introduction

When we are coming to review an ecosystem, one thing leads to

another and without noticing we are finding ourselves “deep in the

woods”. We are well aware of the phenomenon however, we are not

completely sure we managed to avoid it entirely. The purpose of this

paper is to touch on many aspects that the combination of them creates

the famous “Israeli Innovation Ecosystem”. Many books and academic

papers were written about it, some accompanied with heated debates,

some widely accepted with long ovation. Nobody got a monopoly on what

is the definition of Israeli ecosystem. Moreover, as the term itself,

adopted from natural science, suggests, ecosystem is ever changing.

Whoever spend long enough time observing it, noticed the constant

change it undergoing. Not only the names of the leaders change, as it

should be in any market environment, but also some industries, that were

the dominant players in the Israeli ecosystem until very recently, are not

around anymore. Like dinosaurs, they disappeared and vacated the space

for new industries that emerged and are now attracting top talent.

Taking into account the ever-changing nature of the ecosystem, we

tried to cover some elements and tendencies that are not related to the

specific industry but rather characterize the relationship between parts of

ecosystem or highlight long term phenomena. Nobody should look on it as

“definitive description” or “full review” or worst of all “prescription”. We

are rather happy to offer the intelligent reader a view from within,

highlighting the aspects we perceive as important, ask questions, think

about applicability of some ideas and try to derive something useful from

them. There is something useful to learn from every well-functioning

system or company, however, in Russian–Israeli context, we believe that

there is much more to do. The amount of personal, business and cultural

connections between today’s Russia and Israel is mind-blowing. Free

movement of people, ideas and goods between the countries,

supplemented with approximately million Russian speakers in Israel

creates great opportunity for both countries. More importantly, in both

countries there is a growing understanding of big potential and willingness

to develop it. We believe that although unique, there is something to

learn and to adopt from Israeli experience, and will be happy to focus our

research on specific subjects based on the feedback we are hoping to

receive from the target audience of this report.


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Very little argument can be about the origin of Israeli innovation.

First there was a need – the need to survive in a very complex

environment that mixed Middle Eastern (ME) conflict with global political

game.

Before 1948, when the current territory of Israel was part of the UK

ME mandate (with Transjordan, Egypt, Iraq and most of the Arabian

Peninsula) and the UK was imposing military rule, Jewish underground

movement was craving for weapons. Small underground arm industry was

created. In kibbutz tractor shads, at night, young self-made experts were

making hand guns, grenades and explosives. The process escalated

together with the situation in the country when it became clear that

British mandate would come to an end. Interesting to mention that Stef

Wertheimer, who later built and subsequently sold ISCAR (producer of

high end cutting tools) to Warren Buffett for $6 bn dollars, started his

mechanical engineering activity by repairing guns for Hagana

(Underground Jewish Military Organization) in 1947. In order to fully

understand the challenges of the young state, we need to look back on

the world of early fifties. In 1950, UK, France and the USA signed an

agreement that materially limited their ability to supply weapons to the

Middle East. The idea was to prevent the arm race in the region. Nasser,

the president of Egypt, was trying to purchase weapons from the USA,

however Eisenhower refused. The same embargo was affecting Israel as

well and effort to build self-sustainable arms industry became one of the

top priorities of the young state. In 1955 Czechoslovakia sold $250 worth

of Soviet weapons to Egypt (organized by Khrushchev), which was not

only a milestone in the cold war but also further energized Israelis to build

and develop their own arms systems.

These are the years when emerged such important companies as

Rafael Advanced Defence Systems Ltd. (founded 1948), Soltam Systems

(founded 1950), IAI (Israel Aerospace Industries) (founded 1953), and

IMI (Israeli Military Industry) founded 1953.

The second round of advancement was done after French embargo

of 1967 was imposed. Israel needed more advanced systems in order to

deal with new threats and challenges. Soviet Union started to provide

massive supplies of advanced weapons (radar systems, SA-3 rockets,

Sager missiles etc.) to Egypt and Syria as part of their strategy in cold

war with the USA. This situation forced Israelis to act again. New wave of

companies, engaged in military electronics and sophisticated systems


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(Elbit, TAT Technologies, Rada Electronics, Magal Security Systems) were

founded between 1967 and 1970.

The companies mentioned above and the army created strong

demand for professional workforce to produce and maintain the

equipment. Technical high schools affiliated with the army and the air

force were founded and trained technicians. The relevant departments in

Israeli universities (mechanical engineering, electronics, and aeronautics)

also grew quickly and trained young engineers who got access to the

modern systems and quickly gained relevant experience. When

international tech companies started to approach Israeli market in mid-

60s and early 70s, the qualified workforce they were counting on, were

exactly the people we mentioned – technically trained for the army

purposes and ready to take on any challenging mission.

These were also the years when Israeli aerospace industry was

becoming a serious player. With the increase of importance of aviation

and missiles on the modern battle field, the relative significance of the

entities engaged in development of these systems grew accordingly.

Through the 70s and 80s, RAFAEL and IAI, alongside Elbit and its

daughter companies, became more significant than Soltam and IMI that

were engaged in production of more traditional arms systems. One of the

highlights (followed by major disappointment) of Israeli aerospace

industry was the development of IAI Lavi, Israeli jet fighter that was

supposed to replace F-16 as a major fighter of Israeli air force. Despite

very successful test results the project was cancelled in 1987 after

building 3 planes only. The major reasons were high costs and pressure

from the USA, which saw Lavi as a dangerous competition for their own F-

16. The effort that was made in Lavi’s development paid off because

many technologies that were originally developed for Lavi, were

implemented in different projects of IAI. Moreover, 1500 engineers who

were working on the project, went to the civilian market and took leading

roles in high tech industry1. Even now many of them are leading Israeli

high tech companies in diverse fields like medical devices or advanced

mechatronics systems.

1 Start-up Nation: The Story of Israel's Economic Miracle


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Today, Israel is one of the biggest defence exporters with more

than 150 defence companies operating and more than $7bn of annual

defence export in 20122. Approximately 50 thousand people are engaged

in defence related industry and new branches dealing with the latest

technology (cyber warfare, UAVs) are joining the club.

Not only had the defence needs shaped the industry. There are

several examples when one company in some field of endeavor became

so prominent that by its own right (obviously with all the “environmental

and infrastructural” parts of ecosystem in place) it created an industry

around it. Several examples for this phenomenon are:

Teva Pharmaceutical Industries Ltd. – It is the largest generic drug

manufacturer in the world and one of the 15 largest pharmaceutical

companies worldwide. The foundations of Teva were laid by Salomon,

Levin, and Elstein Ltd, beginning of the 20th century wholesaler of

medications in Jerusalem. Nothing exciting probably was coming out of it

if Hitler was not taking power in Germany. In early 30s, Germany was the

world most advanced pharmaceutical country. Traditionally, many

pharmacists were Jewish (like in every trade that not required land

ownership). Teva (Hebrew for “nature”) was founded in 1935 by Elsa

Kuver and Dr. Gunter Friedlander in Jerusalem3. In the same years two

2 http://www.haaretz.com/news/diplomacy-defense/israel-s-arms-exports-increased-by-20-percent-

in-2012.premium-1.492990 3 http://www.ishitech.co.il/israelat60.pdf

http://www.ishitech.co.il/israelat60.pdf


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additional and similar companies were created (Assia and Zori). After

Teva merger with Salomon, Levin, and Elstein Ltd and independent

growth and development, Assia and Zori merged and acquired controlling

stake in Teva (that meanwhile went public in 1951). All the 3 companies

finally merged creating Teva Pharmaceutical Industries Ltd.

Additional elements (mostly non-

governmental) of Israeli Innovation

ecosystem

As every ecosystem, this organism operates as a combination of all

its parts and elements that are feeding and influencing each other. It’s

very difficult to identify the pieces of the puzzle that are “the success

factors”. Having said that, we still believe that it will not be fair not to

mention several elements that either are carrying some lesson or can be

somehow implemented in Russian environment and where RVC can play a

significant role. The list below is partial but provides a brief observation of

the variety of success factors. Since this paper is following very

comprehensive report prepared by E&Y focused mostly on government

related factors, we are trying to cover some other angles. Israeli high tech

industry and VC scene are operating in an environment with very low

government involvement so we believe that other factors are essential in

an attempt to understand it better.

A Bit of Government involvement to start with – Tale of

two programs

As a classic proverb says, “success has many fathers while failure is

an orphan”. As much as people tend to remember and praise "Yozma"

(Enterprise) program, they tend to forget about “Inbal” that came before

and spectacularly failed albeit providing us with some important lessons.

The Inbal Program was the first attempt at implementing a targeted

ITP directed to the VC industry. It was launched in 1991, 1-2 years before

the implementation of Yozma. Its central idea was to stimulate VC funds

by guaranteeing the downside of their investments. The mechanism that

was used was a Government insurance company ("Inbal") that provided a

70% guarantee to VC funds traded on Israeli stock market (TASE). The

program imposed certain restrictions on the investments of the 'protected'

funds. Four funds were established within this program. It failed. Both


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programs had almost similar goals, but different impacts due to a

different 'design'4.

Table 1. A comparison of Yozma and Inbal

Yozma Inbal

Promoted by the Office of the Chief

Scientist and mostly structured as

Fund of Funds with a single objective

of promoting a VC industry.

Promoted by the Treasury and

structured, as a Government owned

Insurance company. Dual objective:

promoting TASE & VC industry.

Limited partnership form of VC – the

ideal form of organization according

to the US experience and to Agency

Theory.

Publicity traded form of VC; no value

added; hard to leverage current

success to fundraising, low incentives

for managers and bureaucracy.

Leverage Incentives to the Upside.

Attracting professional VC teams.

Downside guarantees, which favour

the entry of non-professional VC firms.

No government intervention in the

day-by-day operation.

Government frequently intervened in

imposed bureaucratic requirements on

supported VCs.

Limited period of government

incentives; and clear and easy way

out of the program.

Unlimited period of government

incentives and complex way out of the

program.

Strong incentives to collective

learning, to VC cooperation, and to

'learning from others' (through

requirement of having a reputable

foreign financial institution).

No such incentives (legal limitations to

cooperation).

Created a critical mass of VC

investment

Sub-critical mass of VC activity.

Most "Yozma" funds are among the

20 leading VCs in Israel.

None of the "Inbal" funds are among

the 20 leading VCs in Israel.

Follow-up funds & strong growth of

capital.

Very few secondary issues.

4 Avnimelech G "VC policy: Yozma program 15-years perspective", CBS - Copenhagen Business School,

Denmark, June 17 - 19, 2009.


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Universities

According to the European Commission CORDIS (Community

Research and Development Information Service): some 30% of the total

R&D carried out in Israel (including the defense sector) and 45% of

civilian R&D take place at the country's universities, colleges and

academic R&D centers5. There is nothing particularly unusual about it

however, two important aspects of R&D are creatively treated by the

universities: financing of the research and its commercialization.

Finance

Israel's total expenditure on education as a percentage of GDP has

the highest rate (8.5%) in comparison with other OECD countries6.

The higher education portion of the state budget, amounted to $1.7

billion in 2010, and was set at $1.85 billion for 2011 and at $1.99 billion

for 20127.

According to the ministry of Education, 63% of the funds are

allocated for research in the fields of mathematics, natural sciences and

medicine; 16% for social sciences and law; 16% for engineering and

architecture; 3% for agriculture; and the remainder in undefined fields. In

total, almost 60% of the funding originated in Israel and the rest from

abroad8. This 40% percent are of particular interest. This allows the

Universities to maintain certain “academic freedom” in funding of the

research and to preserve the best talent in the system reducing the brain

drain. All Israeli Universities are actively engaged in fundraising activity,

with quite sizable endowments. Each of the Universities has a special unit

that purposely works on bringing money in from various sources. Most of

the donations from within Israel are coming from corporate sponsors

5 Israel's R&D Capacity - a Promising Land, CORDIS: < http://cordis.europa.eu/israel/rd_en.html>

6 The Intellectual Capital of The State of Israel, Produced by the Office of the Chief Scientist,

Jerusalem, November 2007. 7 Goldschmidt R. INFORMATION REGARDING SCIENTIFIC RESEARCH AND RESEARCH AND

DEVELOPMENT IN ISRAEL, Prepared for the meeting of the Science and Technology Committee with members of European Parliaments, February 6, 2011. 8 Siegel-Itzkovich J. "Israeli universities received NIS 1.5b. for R&D", The Jerusalem Post, 18/4/2012.


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while the donations from abroad are collected through a very well

developed network of “Friends of ….” Associations that are very active

globally, mostly within Jewish communities. Hebrew University is widely

considered the best Academic institution of Israel so we would like to look

on its fundraising practices as an example.

Case study: The Hebrew University of Jerusalem

Fundraising

As of 2013, the university's budget is $714 mln. On average: 55-

65% is governmental money ($370 mln in 2013), around 10% is tuition

fee and the rest comes from donations9. Different kinds of fundraising

methods and techniques are applied. The main means was organizing

fundraising events for specific research groups (for example Brain

Sciences, Sustainable Agriculture, Medical Research) alongside appeals to

donate for new books, support for students from underprivileged

background, involvement in the community and future development of

the university.

The Hebrew University Friends associations worldwide create a very

good framework for collecting these donations and making various

appeals10. The following list shows what a broad and deep network the

University has established:

IFHU - Israeli Friends of the Hebrew University

AFHU - American Friends of the Hebrew University

CFHU - Canadian Friends of the Hebrew University

AUFHU - Australian Friends of the Hebrew University

BFHU - British Friends of the Hebrew University

BEAUH - European Friends of the Hebrew University

UHJ - France - French Friends of the Hebrew University

RFHU – Russian Friends of the Hebrew University

NVHU - Dutch Friends of the Hebrew University

9 Dattel L. “The Hebrew University is preparing for huge budget cuts due to a deficit of 200 million",

The Marker, 11.2.2013. < http://www.themarker.com/career/1.1926786> 10

The Hebrew University of Jerusalem, How to give. < http://support.huji.ac.il/giving-to-hu/how-to-give/>


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Those associations are responsible for another 5-8% of the

University’s annual budget11.

Additional layer of non-governmental funding of higher education

and research is provided by variety of funds. Some are relatively small

funds created by middle class families to honor their deceased family

members, some are substantial professionally managed funds where

Hebrew University is only one, although frequent, beneficiary.

One of the visible examples is the Edmond J. Safra Fund:

Edmond J. Safra, one of the 20th century’s most accomplished

bankers and a devoted philanthropist, established a major philanthropic

foundation to ensure that individuals and organizations in need would

continue to receive his assistance and encouragement for many years to

come.

Following his passing in 1999, his wife Lily, continued to manage

the Edmond J. Safra Foundation. The Foundation has assisted hundreds of

organizations in over 40 countries around the world, and its work

encompasses four areas: Education; Science and Medicine; Religion; and

Humanitarian Assistance, Culture, and Social Welfare.

In 2009 the fund donated to the Hebrew University 50$ million for

building the Brain Research Centre. In 7.3.2013, the new building was

inaugurated12.

In total the funds are responsible for additional 5-8% of the

university's budget.

Special case of fundraising is to finance tangible projects that can

be named after donors. Here as well, there is a large variety and every

size of donation can give a donor an opportunity to put his or her name or

the name of the family member on everything starting from buildings and

ending up with audio equipment or furniture in the dorms. All the

openings are turned into big events which in turn are used for more

11 Bassok M. " Hebrew University President: Budget of 2.5 billion is not enough, we have an

existential threat", The Marker, 23.1.2010. < http://www.themarker.com/career/1.570105> 12

The Hebrew University of Jerusalem: < http://www.hayadan.org.il/brain-reaserch-in-huji-0106099/> < http://new.huji.ac.il/article/16781>


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fundraising and the donors’ names are put on the wall of Benefactors

dedication or wall of Life Dedication.

All Israeli Universities are engaged in active fund raising either to

fund research or to free money for research by funding capital needs with

alternative sources.

In total, The Hebrew University of Jerusalem received $113.5

million in 2009, from different kinds of donations, trustees and etc. Tel

Aviv University’s funds totalled $91 mln. The Weizmann Institute of

Science in Rehovot received $69.5 mln, followed by Haifa’s Technion-

Institute of Technology with $64.3 mln, and Ben-Gurion University of the

Negev in Beersheba with $55 mln.

Chart 1. Hebrew University budget

R&D commercialization

R&D commercialization is one of the Israel's universities strengths.

All the universities work closely with the industry, mostly on a grass root

level. University researchers have a good awareness of market needs and

hands-on industrial experience. Many of them participate in start-ups

either as founders or as consultants alongside with their academic

activity. At the same time scientists and engineers in Israeli industry

maintain strong connection with the academic “mother ship”, have

various arrangements to use university laboratories (crucial for small

technology companies that are not able to purchase expensive equipment

for their needs) and maintaining strong connection with their academic

colleagues.


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All seven universities have their own technology transfer

companies, which take out thousands of new international patents each

year. According to the IMD survey, Israel was ranked 4th out of 61

countries in terms of knowledge transfer13. (See the chart below)

Chart 2. A comparison of R&D commercialization

Below there are a few reviews of major aspects of their activity with

examples of successful projects.

"Yissum" - the technology transfer company of the

Hebrew University of Jerusalem

Founded in 1964 to protect and commercialize the Hebrew

University’s intellectual property, Yissum has registered over 8,300

patents covering 2,337 inventions; has licensed out 700 technologies and

has spun-off 72 companies, including Mobileye, Keryx, Nasvax, and

Novagali. Products that are based on Hebrew University technologies and

13 The Intellectual Capital of The State of Israel, Produced by the Office of the Chief Scientist,

Jerusalem, November 2007.


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were commercialized by Yissum generate today over $2 Billion in annual

sales14.

Success story - Cherry tomatoes and long shelf-life tomatoes:

The world’s most popular cocktail hybrids for greenhouse

production with improved shelf-life, yield, and quality, which

revolutionized the fresh market industry, both indoors and in open fields.

The Daniela variety is only one example of the novel developments.

More than 15 years after its first release, Daniela and related cultivars are

considered today to be among the world’s leading greenhouse varieties.

In Europe they have become an industry standard.

“Yeda” - the Technology Transfer Company of the

Weizmann Institute of Science

Yeda Research and Development Company Ltd. is the commercial

arm of the Weizmann Institute of Science (WIS). Yeda initiates and

promotes the transfer to the global marketplace of research findings and

innovative technologies developed by WIS scientists.

Yeda Statistics for 2010-2011:

Over 2500 introductions & presentations of WIS Technologies to

companies. Over 130 presentations of confidential information to

interested companies (under signed NDA agreements). Over 65 new

license and option agreements signed. Over 70 research projects at WIS

were funded through Yeda by companies, by the chief scientist of the

Ministry of industry and trade and by Yeda itself, including through joint

funds with companies such as Johnson & Johnson. Over 160 patent

disclosures submitted by WIS scientists15.

Success story – Copaxone:

The first innovative drug to be developed in Israel and to receive

FDA approval, Copaxone is a unique multiple sclerosis immunomodulator:

the first and only non-interferon agent for the treatment of relapsing-

14 Yissum Research Development Company of the Hebrew University of Jerusalem Ltd:

15

Yeda Research and Development Company Ltd:


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remitting multiple sclerosis. Copaxone is licensed to Teva Pharmaceuticals

Ltd.

"Ramot" - Tel Aviv University's technology transfer

company

Ramot is Tel Aviv University's (TAU) technology transfer company.

The company provides legal and commercial frameworks for inventions

made by TAU faculty, students and researchers, protecting discoveries

with patents and working jointly with industry to bring scientific

innovations to the market.

In keeping with TAU's goals, Ramot seeks to promote the

university's developments in applications that make a positive impact on

society16.

One of the main efforts of Ramot is to attract external funding

(from the industry and other sources) for promising research with high

commercialization potential. Ramot creates various funding opportunities

for the researches.

Funding Opportunities

Industry-Sponsored Applied Research Funds Program -

Premium Access to Marketable Discoveries

In conjunction with TAU, Ramot runs an Industry-Sponsored

Applied Research Funds program. Companies in various industries

become Corporate Partners by funding research in their fields of interest.

This allows them to get a direct access to world-class research, the results

of which can be transformed into marketable products. Corporate Partners

benefit by expanding their innovation pipeline via exposure to academic

research while reducing their risk through strategic allocation of their

resources.

16 Ramot- Tel Aviv University's Technology Transfer Company:


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The Technology Innovation Momentum Fund

Ramot is currently raising its second dedicated technology

development fund. Known as the “Momentum Fund” its core objective is

to generate more partnership-ready technologies and accelerate the

translation of promising new discoveries and inventions into significant

commercial applications with the potential to positively impact society.

Investment in the $20 million Fund, a portion of which has already been

raised, will enjoy special tax exemptions, as ruled by the Israeli tax

authorities. Investment will be in TAU clean-tech, life sciences and

medicine, engineering and communications, medical devices, and cyber-

security discoveries and inventions at advanced stages of development.

The Colton Family Next Generation Technologies

Institute

Based on a donation from the Colton family, with partial matching

funds from Johnson & Johnson (J&J), this plan has funded nine projects to

date, with additional projects under funding consideration.

The Miles Nadal Institute for Technological

Entrepreneurship

This new fund will support promising research that holds the

potential for discovering novel processes or technologies that can lead to

valuable, marketable products.

Tel Aviv University Future Technology Partnership

(TAU-TECH)

Initiated in 2003 with $8.5 M invested in pre-selected technologies,

this is a first-of-its-kind partnership between a major Israeli university

and global private equity investors. To date seven technologies in the

biotechnology, medical device, and energy domains have been funded

and three license agreements have been executed with additional

agreements in process.

Tel Aviv University Fund for Applied Research

Based on a philanthropic donation, this plan was set up for a six

year period and has funded 43 projects. Thу selected projects have great

potential with regard to their intellectual property position and

commercialization paths, as well as well-defined development plans. To


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date, these highly promising projects have achieved the prototype stage

or proof-of-concept stage at a standard acceptable by the industry. Some

of these projects have already been partnered, while others form a

significant part of Ramot’s commercialization pipeline.

Success story – SanDisk:

SanDisk pioneered the removable flash memory storage industry

since the company's inception in 1988. The company continues to lead

the industry with advancements in MLC and controller technology with the

development of 2-bit, 3-bit and 4-bit-per-cell and 3D technologies.

Tel Aviv University (TAU) had provided a significant contribution to

the X4 advanced error correcting and digital signal processing technology,

which was licensed exclusively to SanDisk by Ramot at Tel Aviv University

Ltd., TAU's technology transfer company. "X4 took five years of

development at SanDisk, and the finished product is a testament to the

hard work and collaboration of the parties involved," said Dr. Ze'ev

Weinfeld, Ramot's CEO. "Once we created the basic approach, SanDisk

brought this to fruition by developing its advanced X4 controller and

matching it with its advanced 43nm, 64 GB X 4 memory thus making full

X4 product implementation possible. This highlights the benefit

commercial companies may gain from cooperation with TAU, building on

our pool of talent and expertise17.

"T3" - Technion Research and Development Foundation

T3 is the commercialization arm of the Technion Research and

Development Foundation, T3 has vast expertise in IP development rights,

patenting and licensing inventions, as well as forming win-win business

agreements, bringing together ground-breaking ideas with investors and

entrepreneurs.

Success story – Azilect:

Parkinson’s disease is characterized by the death of cells that use

dopamine to transmit their signals. By inhibiting the breakdown of

dopamine in the synapse, rasagiline permits the signalling neurons to

17 http://www.sandisk.com/about-sandisk/press-room/press-releases/2009/2009-10-13-sandisk-

ships-world%E2%80%99s-first-flash-memory-cards-with-64-gigabit-x4-(4-bits-per-cell)-nand-flash-technology/:

http://yedarnd.com/Dynamic-Text.aspx?m=ss&id=44http://yedarnd.com/Dynamic-Text.aspx?m=ss&id=44


21

reabsorb more of it for reuse later, somewhat compensating for the death

of cells.

R&D centres of leading technology

companies

It is difficult to exaggerate the importance of multinational

technology companies, including giants like Intel, Google, Apple and

Microsoft, to the Israeli economy. These companies operate over 250

Israeli development centres and employ altogether about 24 thousand18

employees. Their development centres are scattered throughout the

entire country: many of them are located in the central part of the

country, but they have representation in the periphery (which are often

poorer and less developed areas of Israel) - in Kiryat Gat, Beer Sheva,

Ness Ziona, Ehud, Yokneam, Haifa, Carmiel and Tirat Ha Carmel. These

centres are usually leaded by Israeli managers, who in most cases gained

their experience in corporate's headquarters overseas. The map below

demonstrates the number and geographic spread of development centres

and speaks for itself. It also shows in the colour codes the segments of

high technology that are presented there.

How it all started?

An important aspect of Israel's integration into the world economy

has been increasing foreign investment, particularly in the high-tech

industry. Companies like Cisco Systems, Motorola, Intel, IBM, Nortel,

Microsoft, Mitsubishi, Deutsche Telekom, aviation and space companies,

to mention just a few, have recognised that Israel is a fount of high-tech

innovation they cannot afford to ignore. They have set up subsidiaries and

research centres here, invested in Israeli companies, technology

incubators, and venture capital funds, or have found Israeli strategic

partners.

Annual foreign investment in Israel grew from $400 million in 1992,

to peak at $5.0 billion in 2000. Since then foreign investment has

18 Orpaz I. “6 Reasons to Love the Multinational Hi - Tech Companies”, The marker, 6.3.2013.


22

subsequently contracted, due to the high-tech crisis, the global economic

slowdown and political tensions in the Middle East, but is still substantial.

Foreign venture capital investment grew apace, rising from $587 million

in 1998, peaking at $3.1 billion in 2000, before falling to $982 million in

2002, still higher than the level of five years before. Investment by Israeli

venture capital funds followed the same pattern: peaking at $1.27 billion

in 2000, but totaling only $481 million in 2002, including $62 million in

foreign companies. (Sources: Money Tree and IVC). The Bank of Israel

reported that total foreign investment in Israel amounted to $2.6 billion in

2002, including $1.2 billion in direct foreign investment19.

The contribution of the foreign sector development centres can be

described using macroeconomic indicators: in 2009 the multinational

companies accounted for 63% of expenditure on R&D of the civil-business

of Israel - according to CBS data. Total R&D expenditure of these firms in

the same year (primarily the cost of employing workers) was 12.4 billion.

Total exports of civil R&D of foreign-controlled companies in 2007 was

10.5 billion - 86% of the total R&D Export from Israel that year, according

to the CBS. In 2007 development centres of international companies in

Israel employed about 27 thousand employees, about 45% of total R&D

workers in Israel.

In 2012 Intel, the largest employer and the largest private investor

in Israeli high tech, recruited 760 employees, with total number of Intel

employees in Israel amounting to 8,500 people. That year Intel exported

$ 4.6 billion - about 10% of total Israel's exports and 20% of high-tech

exports - and has reciprocal procurement from local suppliers for about

737 million. During all years of its presence in Israel, Intel has invested $

10.5 billion in local activities, especially in setting up manufacturing plants

and upgrading them ($ 3.1 billion of this amount was given by

government grants). Intel's procurement in Israel in 2006-2012

amounted to $ 5.2 billion20.

Although Israel is often described as a global leader in sophisticated

technologies, there are areas of technological activity requiring resources

19 “How Israeli High-Tech Happened”, Globes Online, 2012:

20

“How Israeli High-Tech Happened”, Globes Online, 2012:


23

that just aren't available for the local companies. The great advantage of

multinational companies is their immunity to the business cycles of local

economy.

Chart 3. Number of R&D employees in Israel

In the bottom line, in spite all the innovation happening here,

formally Israel is an importer of R&D, because so much of it done in

companies headquartered in the US and other countries (as it can be seen

in the chart below prepared by Booz Hamilton).


24

Also, the presence of multinational companies in Israel brings

advantage for local workers. Once multinational companies are present in

the market, workers have some safety net. If some company needs to

decrease their staff, strong multinational company may be willing to

recruit these employees.

This was especially relevant last year in the chip companies. AMD

absorbed employees laid off from Freescale, Apple absorbed workers from

Texas Instruments and Huawei those from LSI Logic. Each of the

companies had large scale layoffs resulting from the decisions of the joint

chiefs of global strategies that didn't concern Israel directly, but did affect

Israeli workers.

Employees moving from one work place to another have an

environmental influences. They create a flow of information to

surrounding organizations – knowledge spill-over. This knowledge stays in

Israel and contributes also to start-ups and patents, and eventually new

jobs are created. Intel Israel is a great example of this: since its

establishment in 1974, with an initial staff of five employees, more than

10,000 employees have left the firm about 300 people a year on average,

who then moved to other place of work (according to an internal study

made in the company)21.



25

Chart 4. The world of R&D


26

Since 2006, on average, 30 new companies have been established

every year by former Intel workers. These companies annually produce

about 250 new jobs. These companies raised $ 700 million since 2006.

Some of the companies were sold and became development centres for

other multinational companies like Broadcom. Mellanox – one of the few

major Israeli companies established in Israel in the last decade, was also

established by former Intel employees.

Most foreign development centres in Israel were established on the

basis of local start-ups purchased by foreign companies. And then their

operations were expanded. It is, in fact, the most popular exit route in

Israeli high tech.

The contribution of foreign companies is also evident in the Israeli

management and organizational culture. The Israelis are considered to be

very good at creative work, thinking outside the box and not being afraid

of failure, however, in all process related activities, the Israelis are much

weaker. Multinational firms enable their employees to learn how to

manage things across different environments. The experience acquired in

multinational companies by executives is sprouting new generation of

managers who have capabilities in areas traditionally not associated with

Israel (such as a marketing and sales).

As of 2010, more than 35,000 professionals are employed in

multinationals' R&D centres in Israel. Some of the most notable are:

(*) Please note that the numbers employees given in this chapter might

be quite different from those on the map on page 23 because of the different

measurement methodologies.

http://en.wikipedia.org/wiki/Israel

Sorces of Israeli innovation

27

Table 2. A brief review of R&D centres in Israel (of large

multinational companies)

Company

Year

established

in Israel

No of

employees

in Israel

Major acquisitions in Israel

IBM 1949 2,000

Ubique, I-Logix, XIV, Guardium,

Diligent Technologies, Storwize,

Worklight

Motorola 1964 1,500 Terayon, Bitband

Intel 1974 7,200 DSPC Envara, Comsys, InVision

Biometrics, Telmap

Microsoft 1989 750

Maximal,Peach Networks,Whale

Communications, Gteko,YaData,3DV

Systems

Applied

Materials 1991 1,200

Orbot Instruments, Opal

Technologies, Oramir Semiconductor

Cisco

Systems 1997 1,500

CLASS Data

Systems, HyNEX, Seagull

Semiconductor, PentaCom, P-

Cube,Riverhead

Networks, Intucel, Sheer

Networks, NDS_Group

Hewlett-

Packard 1998 6,000

Indigo Digital Press, Scitex Vision,

Nur Macroprints, Mercury Interactive

SAP AG 1998 800 OFEK-Tech, TopTier Software,

TopManage, A2i

Alcatel

Lucent 1998 250

LANNET, Chromatis

Networks, Mobilitec

GE

Healthcare 1998 400

Nuclear and MR businesses

of Elscint, Diasonics Vingmed

BMC

Software 1999 450

New Dimension Software, Identify

Software

CA

Technologies 1999 300 Security-7, Abirnet, XOSoft, Oblicore

Philips

Electronics 1999 700 Elscint, Veon, CDP Medical


28

Company

Year

established

in Israel

No of

employees

in Israel

Major acquisitions in Israel

Broadcom 2000 500

VisionTech, M-Stream, Siliquent

Technologies, Dune Networks,

Percello, Provigent, SC Square

Marvell

Technology

Group

2000 1,600 Galileo Technology

Siemens 2000 900 eship-4u, Tecnomatix

Technologies, Solel Solar Systems

EMC

Corporation 2004 1,000

Kashya, nLayers, proActivity,

Illuminator, ZettaPoint, Cyota,

XtremIO

eBay 2005 400 Shopping.com, Fraud Sciences, The

Gift Project

SanDisk 2006 650 M-Systems

Google 2006 350 LabPixies, Quiksee, modu (patents

only)

VMware 2008 200 B-Hive networks, nlayers, Digital

Fuel, Wanova

Micron

Technology 2010 1,300

Acquired Numonyx, a joint venture

by Intel

Corporation andSTMicroelectronics

Apple Inc. 2012 250 Anobit

Covidien 2012 300 Oridion Systems, superDimension,

PolyTouch


29

Defence Forces

Intro

For most part of its short history, Israel has been devoting a large

share of its resources to defence purposes, putting a high priority on the

development of modern armed forces with sophisticated military

technologies and equipment. Various political influences (for example

French embargo on shipment of weapons to Israel in 1968) proved again

and again that the emphasis should be on the ability to develop and

supply these capabilities by its own means. Nowadays, Israel is

considered as a major worldwide player in some areas of the defence

industry. When viewed in historical perspective, there can be little doubt

that the defence sector in Israel had a fundamental impact on the

development of this country’s technological and industrial capabilities. ('2)

The defence industries in Israel led its industrial sector in R&D and

high tech intensity through most of the first 4 decades of its existence. It

was estimated that during the 80’s, 65% of the national expenditure on

R&D were defence related, while only 13% were oriented towards civilian

industries22.

According to some measures, Israel stands out in its emphasis on

defence related R&D, which consumed 3.1% of GDP in the 80s, versus

0.84% of GDP in the US, 0.58% in Britain, and 0.43% in France.

Beyond preparing the ground for the growth of civilian R&D

industry and developing substantial cadre of qualified engineers and

technicians, Israeli defence industries are major exporter and employer.

(see chart below). Army is also playing crucial role by feeding the high

tech industry every year with thousands highly qualified employees

discharged from the active military service.



30

Workforce

The army plays critical role in supplying fresh and well trained

workforce for the industry. Through their army service, young people

getting exposed to high end technology and using the knowledge they

obtained in the army in their civilian employment.

Chart 5. Trend in Israel’s defense exports sales

The problem-solving and improvising nature of addressing urgent

military needs has produced a workforce with valuable qualifications.

Many scientists and engineers served as army officers and are used to

real-time decision making under pressure, team coordination and

flexible thinking.

Large number of “graduates” of elite technological units in the IDF

has been recruited by and/or initiated many technological start-ups in

Israel.

36% of respondents who work in start-ups indicated that they

served in a technological unit, 10% were from "Unit 8200" (it is an

Israeli Intelligence Corps unit responsible for collecting signal

intelligence and code decryption)23. This unit got especially famous for

23 Hirschauge O. “A profile of the Israeli Hi-Tech worker: University graduate, who served in combat

or a technology army unit”, The Marker, 10.3.2013:


31

“producing” such graduates”. Numerous corporations such as Verint and

Nice and start-ups like Mintigo and Aqwise were started by people who

previously served in 8200. It is difficult to estimate exactly how many

start-ups were created by unit 8200 "graduates", but it seems there are

hundreds if not thousands.

The initial screening and recruitment process in these units are

considered to be challenging and very competitive. These units are top

target for many new recruits and candidates for the army service. As a

result the army gets the very best talent, and later industry benefits

from the experience accumulated in the IDF and the IDF classification

system.

IDF screening and recruitment

Potential recruits are identified prior to reporting for national

service at age of 18, based on factors such as high grades in school and

social status (the army gets access to all the high school students in the

country). Subsequently, physical condition, analytical capabilities and

high technical aptitude are tested. Those who meet these and other

criteria are invited to participate in different types of screening tests.

The selection phase includes physical, mental, and social challenges,

interviews and others tests (such as math exams, programming etc).

Recruits are evaluated based not only on their ability to perform the

tasks assigned, but on their attitude while performing them: such as

how well they take hardships and unexpected difficulties, how well they

work in groups and how they approach problem solving and disaster

management situations. Eventually, only the most qualified are chosen

to the "elite" units according to the military's priorities.

The Army has unprecedented access to the details of all the 15-

year-olds in the country and the ability to cherry pick the best

candidates from hundreds of thousands through sophisticated screening

scheme. This arrangement works well because all involved are

benefiting from it: the Army gets the best people, new recruits are

happy to jump through all the hoops to make it to the top units,

because they know that after they finish the service, headhunters will

< http://www.themarker.com/1.1959126>


32

be waiting near the army base gate with fat offers (it actually happens)

and finally, the country is benefiting twice, first time by receiving good

security (product delivered by the army) and second time when these

people enter the job market and start to pay high taxes on high salaries

from day one of their civilian life, releasing the state from the duty to

find them jobs or to spend a penny on them.

Cooperation between Russian and

Israeli companies

Introduction

The cooperation between Russian and Israeli companies is an

existing reality. The world is becoming more global and the integration

between the two economies follows the same route, but alongside the

global trend, there are several unique features.

Immigrants from the former Soviet Union became one of the

leading forces in Israeli tech industry and this alone creates fertile ground

for cooperation. This cooperation is based on not only “cultural proximity”

and lack of language barriers but also on mutual understanding of each

party strengths and weaknesses. Not everything is working smoothly in

this cooperation as can be seen in one of the following stories however

there is a big potential for further increase of volume and quality of

cooperation in tech sector. The following case studies are based on

interviews with senior Israeli executives who were directly engaged in day

to day interaction with Russian technology companies. Some important

lessons and examples of successful cooperation hopefully will help others

to cooperate successfully.

Case Study: Joint Product

development and marketing to Western European and American

markets

RIT Technologies LTD (NASDAQ RITT) is a leading provider of

intelligent infrastructure solutions for data centers and enterprise

Cooperation between Russian and Israeli companies

33

environment. The company was founded in 1989 and went public on

Nasdaq in 1997. RIT has its headquarters in Tel-Aviv and representative

offices around the globe: Russia, USA, China, UK, Italy, India, South

Africa, Brazil. The majority of shares belongs to Russian IT group Stins

Coman, one of the veterans of Russian IT scene. RIT is focused on

providing big organizations with tools for infrastructure management. The

company serves big organizations with complex networks architecture and

high demand for reliability. Their clients are big banks and financial

institutions (e.g. Standard Bank, Old Mutual, Bank of Russia, Reuters) big

multinational enterprises like Daewoo, O2, Fujitsu and international and

government organizations like Interpol or the US Army.

Alongside with these very stable and solid solutions, the company

all the time develops and searches for new growth directions, builds

impressive pipeline of innovation products and makes use of its great IP

resources.

One of these products presents great example of Russian–Israeli

cooperation and can be used as a successful model for additional projects.

Acculize – Advanced speed enforcement camera. Speed deterrence has

always been one of the top priorities of any police force but also very time

consuming and cumbersome. Especially when the drivers manage to call

in question the proper functioning of the camera in the court of law. There

is an obvious need for trustworthy and reliable instrument with superior

measurement and recording capabilities.

Acculize core technology was developed in Russia, based on a mill

standard technology and it presents superior performance comparing to

existing solution. It can measure and video record the traffic violations

from the distance of 700 meters and to provide clear license plate reading

from the distance of 250 meters. Despite very solid and impressive core

technology, when RIT received the device from the Russian partners,

some crucial elements were missing. The packaging, user interfaces,

management software and the general design, all required an upgrade.

RIT engaged with the Russian team, and both sides provided their

expertise. The result was a great looking device with unique technical

features:

▪ No moving parts ▪ Based on laser beam technology and able to pick a specific vehicle from

multi-lane traffic

▪ Flexible in terms of power feeding and management (one device can be used by a number of officers and keep the results separately)


34

▪ User friendly interface ▪ Complaint with all the international standards

In addition to real engineering challenges that brings the

development of such a complex new device, the chances of the Russian

company to successfully present this product to the police force in

Western Europe were slim. Since Israel is well known supplier of military

and law enforcement technology in Western Europe (4th globally by

military related export) it was only natural that after fixing all the

interface, software and manufacturability issues, RIT took responsibility

for marketing and presented the device as RIT’s product. As of today the

device is being successfully tested by number of law enforcement

agencies in the West.

Case Study: Ray Q and Bee Pitron cooperating on Global defence and

aviation market

Ray Q was established in 1969. The partnership with the customers

in the design and supply of high Quality electrical interconnect solutions

has earned the company a leading status in the industry with its military,

aerospace and other high reliability products. Ray Q was incorporated in

2000, as a representative, consultant and distributor of Tyco Electronics,

Raychem Division, on the territory of Israel, Turkey, Eastern & parts

of Central Europe, and India. Over last 30+ years Ray Q has worked with

the leading manufactures in the Aerospace, Military Marine, Military

Ground vehicle & medical and industrial fields or practically everybody

▪ Reliable supply of components, from either local inventory or directly from the manufacturer


35

▪ Electrical Harnesses testing & qualification facilities ▪ Electronic quoting and ordering ▪ Extensive inventory and distribution facilities ▪ On site Customer training and installations ▪ Prototype assembly line ▪ Design and documentation services, electrical wiring and harnessing

Bee Pitron is one of the oldest companies in Engineering and

technology field in Russia. It was one of the first companies that started

to import, install and support modern manufacturing software systems

(PDM/CAD/CAE/CAM). In 1995 the company entered into importing

electro technical components and in 2000 it started to design and produce

electro technical components of its own. The combination of good

understanding of local market and its needs and rich experience in

implementation and adjustment of imported solutions provided Вee Pitron

with unique competitive advantage and allowed to take on board the most

challenging projects. Joint projects between Bee Pitron and Ray Q led to

closer cooperation and eventually to partnership where RayQ became a

shareholder of Bee Pitron. The companies are now cooperating on many

levels both on domestic markets and abroad. One of the most interesting

examples that can be a model for future cooperation is the example

where the partnership between Russian and Israeli company has helped

the Russian company to maintain and develop their sales in India.

As it was previously described, Bee Pitron has developed significant

expertise in complicated electric systems. These sophisticated electric

systems are widely used in aviation and defence industries. Among other

things, Bee Pitron supplies on board cabling systems for Su-30 (Sukhoi

multirole fighter jet). India is one of the countries that purchases Su-30,

and traditionally, as in many other countries, local MOD (Ministry of

defence) requires that the defence systems include a local element –

certain proportion of the cost of the purchased product should be coming

from a purchasing country side.

This policy is widely used by many purchasing organizations (MOD)

and represents constant challenge for defence products suppliers. One of

the ways to deal with the “Indian component” requirement is to establish

some local production for bits and pieces of the relevant equipment.

However, in case of such a complicated product as a new jet, some

sophisticated solutions are required. Since Ray Q has its own production

facility and an operating company in India, it was able to produce some

parts of the Bee Pitron’s on board cable systems there, and helped Bee

Pitron’s Su-30 to qualify for supply to Indian Air force.


36

This case is not an esoteric example. India holds huge amount of

old Soviet military equipment and local content requirement will be

applied to it as well. By being able to produce locally (in its multiple

branches worldwide) Ray Q can successfully meet the requirements of the

most strict clients. The companies are currently considering implementing

this business model on additional markets.

Case Study: Israeli high tech

company performing a multimillion

project in Russia

(*) The story is real, some circumstances and details have been changed

in order to protect the identity of the person who disclosed the information.

Despite doing so, we believe that this case study can delivers useful insights and

conclusions to our readers.

In the following case study we will analyze a real engineering

project performed by a Russian Technological Company (“RTC”) for an

Israeli Technological Company (“ITC”). The project’s result can be

described as partially successful, a working system was delivered to the

client and installed by the RTC and related companies. However ITC

seems to be reluctant to renew the contract with RTC and will seek for a

different contractor for its future projects.

Industry Dynamics

There are several factors characterizing the industry and reviewing

them will provide the reader with better understanding of our case study.

The Industry is very concentrated with a limited number of very large

players and big visibility of every commercial contract. One of the main

features of this specific industry is that access to market is crucial. It

means that cost and quality of the system are not the only factors that

determine the choice of partner. What is also important is his ability to

deliver and install the system. Price, not only for the system but also for

an installation is a very important factor as well.


37

Initial Engagement

ITC was looking for access to a new market. Russian companies

had traditional access to it and for a long while have been considered

leaders both in a specific technology and on the market in general.

Although since then, Russian companies have become less prominent in

the specific technological area and significant competition has emerged,

Russian companies managed to preserve their leadership in installation of

the systems on the target market having their experienced “boots on the

ground”. RTC was introduced to ITC by a reputable market participant

and was presented as able to provide access to the market. The parties

met and discussed a joint project where the Russian company would build

the equipment and perform the installation, while Israeli company would

operate and maintain the equipment over long period of time. ITC was

concerned with RTC’s lack of experience in certain areas. Last time RTC

built a similar system for a foreign client 14 years ago. ITC found out

that the equipment built by RTC had substantially shorter life span than

similar systems built by Western competitors but RTC’s ability to market

access and offered price played an important role in choosing RTC as a

supplier.

Project Execution

ITC built a strong project team in order to cooperate with RTC. The

team was 24 people strong and included a Russian speaking head of the

project, system engineer, and permanent representative that was in

charge of resolving issues on the spot and facilitating the process in

Russia. The main issues started to arise on this stage. The issues can be

divided into two major groups, technical/professional and cultural. Both

kinds are not unique to RTC and exist in many companies. The technical

issues were:

▪ Lack of knowledge in electronics and insistence on producing everything in house. For example, PCBs were manufactured in house

which affected the quality and the timeline. Nobody in the world is

producing their PCBs in house

▪ Lack of quality control. In place on paper only, in fact quality control was completely missing

▪ Lack of system engineering. In such a complex project, the role of a system engineer who is able to have a whole picture and to coordinate

properly between different functional teams is crucial. The situations

when two different teams were working on interconnected parts

without being coordinated were a commonplace.


38

Even more challenging were the cultural issues that the project’s

team was facing. The most serious were:

▪ Transparency, people were lying about test results and when there was a failure, people were afraid to report to their superiors. Sometimes,

the Israelis knew about the problem, while some bosses were not

aware. The failure in engineering work should be used to learn and

analyze, but not blamed on a specific employee. If it does, he or she

will be hiding next failures and the result can be disastrous.

▪ No open discussion. One of the key elements of R&D type engineering process (and building a sophisticated system should be considered as

R&D work) is the ability to have open discussion when people are not

afraid to voice their views, even if they contradict the opinions of their

superiors. This approach helps to raise and reveal issues and allows for

unrestricted info flow.

▪ Head of the project. In matrix system, the heads of various units who were more senior than the head of the project did not take him

seriously. The teams should be guided professionally by their units’

managers and managed by the head of the project. It is hard to define

if it was personal or structural problem. The head of the project was

not shown any respect from the units’ managers and eventually was

reassigned due to their personal attitude or the lack of experience in

project environment.

The Results

The project was accomplished by RTC within 36 month, instead of

originally planned 24. The budget turned out to be substantially higher

and tens of millions of dollars were paid as fines according to the original

agreement between the companies. The system was built and installed

and as of today is in full operation by ITC. While it is quite common for

the projects of such a large scale to exceed the time line and the budget,

not only in Russia but elsewhere, some of the issues outlined above,

especially the technical ones can be easily resolved. The cultural issues of

a similar nature can be seen in every big organization. Great example can

be found in Harvard business school case study on Columbia space shuttle

disaster in 2003 (Columbia's Final Mission, Harvard Business School 2004)

where lack of ability of junior team members to openly raise their

concerns lead to space shuttle disaster.


39

Case Study: Israeli software

developers outsourcing software production to Ukraine

Introduction

Software industry is one of the most mobile and flexible industries.

The very nature of it dictates this. No infrastructure beyond basic

electricity and internet connection is required, developers from all over

the world are able to communicate on professional subjects using basic

English and professional jargon, teams can cooperate distantly and the

skill set is standard and universal. That’s why the software development is

spearheading other high technology entries in every emerging (or re-

emerging in our case) technology market. There are plenty successful

software companies in Russia and many of them are off shore subsidiaries

of international companies. The purpose of this case study is to review the

dynamics of emergence of an IT cluster for outsourcing software

development companies and to review the factors that supported the

process. Though it happened spontaneously, we believe this process,

however, can be initiated and replicated.

Company development

Nowadays Web technologies (the real name is changed on request

of the company’s owner), like many other companies in software segment

started as a technological start-up in 2006. The company started to build

a system for web advertising optimization and management. This

business idea failed, however, the developed technology proved very

successful in a completely different field – bank trading systems. The

company built and installed trading systems for leading Israeli banks.

Meanwhile, the founder was mentoring two start-ups that were engaged

in games development. At some point, all the 3 areas of activity were

gathered under single roof of Web Technologies. The company employed

7 software developers and very quickly, new orders overgrew the

capacity. The company found itself on a strategic crossroad. The owners

made a decision to check a possibility of outsourcing the development

abroad due to very high level of software developer’s salary in Israel

(Please see the chart below).


40

Chart 6. Average salaries of programmers in Israel24

Chart 7. Average salaries of programmers in Russia25

24 AllJobs.co.il:

25 “Salary Survey of Java / C + + / C # / Delphi Programmers”, habrahabr.ru, July 16, 2012:

http://habrahabr.ru/company/it_dominanta/blog/147866/

Dollars

(U

SD

) D

ollars

(U

SD

)

http://www.alljobs.co.il/SalarySurvey.aspx#Softwarehttp://habrahabr.ru/company/it_dominanta/blog/147866/


41

Chart 8. Average salaries of programmers in Ukraine26:

26 Karpenko O. “How much earn Ukrainian programmers- Data for December”, 01.02.2013:

Dollars

(U

SD

) D

ollars

(U

SD

)


42

Choosing the destination

There is a solid empiric support to the view that cultural proximity

(language as a first and dominant factor) matters when a decision where

to outsource is made. It’s enough just to compare the prominence of

software development outsourcing businesses in China and in India in

order to see that due to the English language skills, the Western world

largely preferred India for this purpose. Since the founder of Nowadays

Web technologies was born in the Soviet Union (Leningrad), and spoke

Russian, his natural inclination was towards doing the outsourcing in CIS.

Quick study of levels of salary supported the view. After learning the

environment, the salary levels, the accessibility and other factors the

following criteria were developed:

1. It should be a provincial town – the salaries were at least 30% percent

higher in major cities (Moscow, St. Petersburg, Kiev)

2. It still should be a relatively big town in order to have critical mass of

people with suitable skills

3. It should have a fair amount of Universities or similar educational

institutions – once again to ensure availability of skilled workforce

Suitable Location

A friend invited him to Dnepropetrovsk, and Dnepropetrovsk

matched the profile. Dnepropetrovsk (formerly Yekaterinoslav) is the

Ukraine's fourth largest city, with population of about one million people

(and about 1,360,000 people in Dnepropetrovsk Metropolitan area). It is

located to the Southeast of the Ukraine's capital Kiev on the Dnieper

River, in the south-central part of the country.

A vital industrial centre of Ukraine, Dnepropetrovsk was one of the

key centres of the nuclear, arms, and space industries of the former

Soviet Union. In particular, it is home to Yuzhmash, a major space and

ballistic missile design bureau and manufacturer. Because of its military

industry, Dnepropetrovsk was a “closed” city up until the 1990s.

Dnepropetrovsk is a major educational centre in Ukraine and is

home to two of the Ukraine's Top-10 universities: the Dnepropetrovsk

National University and the National Mining University. Dnepropetrovsk

currently has 14 state-run higher educational institutions, and a large

number of private institutions.


43

The list below is a list of all current state-organized higher

educational institutions (subsidiaries of not Dnepropetrovsk

headquartered universities are excluded)

▪ Dnepropetrovsk National University ▪ Dnepropetrovsk State Institute of Physical Culture and Sport ▪ National Mining University of Ukraine ▪ National Metallurgical Academy of Ukraine ▪ Ukrainian State Chemical-Technological University ▪ Dnepropetrovsk State University of Internal Affairs ▪ Prydniprovska State Academy of Civil Engineering and Architecture ▪ Dnepropetrovsk National University of Rail Transport ▪ Dnepropetrovsk Agricultural University ▪ Dnepropetrovsk Academy of Finance ▪ Alfred Nobel University of Economics and Law ▪ Academy of the Customs Service of Ukraine ▪ Dnepropetrovsk Medical Academy ▪ Dnepropetrovsk Institute of the Inter-regional Academy for Human

Resources

▪ Dnepropetrovsk regional institute of the Presidential Civil Service Academy of Ukraine

▪ Dnepropetrovsk Institute for the Preparation of Industrial Experts

Currently around 55, 000 students study in Dnepropetrovsk, a

significant number of whom are students from abroad.

Establishment of the off shore subsidiary

It took several weeks and 3 visits to Dnepropetrovsk to establish an

off shore subsidiary there. This demonstrates great mobility of software

industry and great opportunity it creates for attracting similar businesses

to Russia (more about it later in a business plan).

During the first visit, the friend of the entrepreneur introduced him

to a local lawyer and organized 3 interviews with headhunters for him. All

the meetings and the interviews took place in the coffee shop. On his

second visit, he already met with accountant and property agent in

addition to the interviews with several programmers scheduled by the

headhunted selected earlier. Property agent showed a few listings and on

the third visit all the meetings and interviews were held in the company’s

brand new Dnepropetrovsk office. The founder was giving instructions to


44

the local lawyer, property agent and headhunter by phone and managed

to establish a meaningful operation in no time. Currently the office

employs 70 programmers.

The office operates as a Ukrainian company fully owned by an

Israeli company. There is no special tax treatment for the software

developers and as everybody around, the company uses the methods of

legal tax optimization. All the employees have registered as private

entrepreneurs in order to reduce the tax burden of the company.

According to the entrepreneur if all the labour and social taxes were to be

paid, the attractiveness of this move would have become much lower.

The network effect or the power of the herd

As fascinating as this success story is, it’s far from creating any

significant volume of business activity that can be of interest to the policy

makers. However, as it often happens, the network effect kicked in. Other

Israeli software developers heard the story (small country, we said it

previously), learned how easy it can be done and in no time 10 software

development companies set their operation within couple of blocks away

from Web Technologies’ offices. Thus a cluster of software industry has

been created. It now has life of its own and is growing fast. One of the

companies that have settled there is going public on NASDAQ in

September and this will strengthen the cluster’s reputation even further.

It’s important to emphasize that all of it happened almost accidentally,

without any help or involvement of authorities.

Analysis of Israeli venture capital industry

45

Analysis of Israeli venture capital

industry

Sources of funding

Intro

Israel is a well-developed modern economy with significant role

played by technology intense industries. In 2010 Israel was reclassified

from Emerging to Developed market by MSCI, a move that from one side

confirmed the maturity of local economy but from the other side, as many

experts had predicted, negatively affected the trading volumes. When

Israel was classified as emerging market, it was very attractive

investment target for institutional investors with “Emerging markets”

mandate due to proper legal system and good investor protection

mechanisms (see chart below). Now local companies need to work harder

because they are compared with mature market multinationals. In 2010,

Israel also was admitted as a full member of OECD.

The big role that high-tech industry is playing in Israeli economy

has supported the development of vast VC industry (despite recent

decline Israel is still the leader by VC investment per capita) however big

reliance on international LP’s makes this industry sensitive to economic

cycles in US, EU and other places (although they do not affect Israeli

economy as hard as some other places).

In its annual “Doing Business” survey of 181 countries the World

Bank, ranks Israel the fifth, alongside the U.S., Canada, and Ireland and

outranking the United Kingdom in the area of investor protection.


46

Chart 9. World Bank “Doing Business” survey

Israel’s venture capital industry has approximately 70 active

venture capital funds, of which 14 are international VCs with offices in

Israel27. Between 2003 and 2012, Israel's venture capital funds attracted

$6.77 billion.

VC funds raised $607 million in 2012, following $796 raised in 2011

(2011 was the year when VC funds were back to raising capital, after two

very difficult years. No capital had been raised by Israeli funds in 2010,

and only $256 million had been raised in 2009, a 76% drop from 2008

level)28. See the chart below.

27, 31, 37, 38, 40, 46 Ministry of Economy State of Israel, “VENTURE CAPITAL IN ISRAEL”, 24.4.2013:

< http://www.investinisrael.gov.il/NR/exeres/A19A138D-87A7-416B-8D62-1C968E035E13.htm> 28

28, 32

IVC Research Center, Israeli Venture Capital Fund Raising - 2012 Summary, IVC-KPMG Survey: Israeli venture capital funds raised $607 million in 2012.


47

Chart 10. Total venture capital raised by Israeli VC

Funds by Vintage Year ($b) 2002-2012

The leading funds, Sequoia V, Pitango VI and Magma III, raised a

joined amount of $450 million, 74 percent of the total funds raised by all

Israeli VCs in 2012. Micro-VC funds continued to attract investments with

six micro funds raising a total of $83 million, nearly 14% of total capital

raised.

International Venture Capital Firms: Several leading U.S. and

European VC funds have Israeli branches, namely Alta Berkeley Venture

Partners, Battery Ventures, Bessemer Venture Partners (BVP), BlueRun

Ventures (BRV; formerly Nokia Venture Partners), Blumberg Capital,

Bridge Capital Fund (BCF) LP, Canaan Partners, Defta Partners,

Lightspeed Venture Partners, Partech International Inc., Susquehanna

Growth Equity (SGE) LLC, Venrock, YL Ventures, and Ziegler Meditech

Equity Partners (ZMEP) LP. Additionally, there are some 220 international

funds, including Polaris Venture Partners, Accel Partners and Greylock

Partners, that do not have offices in Israel, but actively invest in Israel

through an in-house specialist. The VC divisions of leading multinational

innovation ecosystem sources of israeli innovation of israel. … · 2015. 11. 4. · 2 table of...

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