startup intelligence -- israel

Sample Country Report | Israel

Summary

Business Opportunities »

Roadblocks »

Introduction »Investment Scene »

Trends »

Startups to look out for »

»

STARTUP INTELLIGENCE REGIONAL REPORT | Israel

Copyright 2011 Startup Intelligence. Intended for Citi Private Bank only. If you would like to share this document please get in touch with [email protected] or +442032397847 ©

Israel’s hi-tech industry rivals that of Silicon Val-ley and is home to thousands of startups as well as major transnational companies. The coun-

try’s unique entrepreneurial approach stems from a number of social, economic and geographic factors.

The venture capital industry is ma-ture, with particular focus on life sci-ences, clean technology, IT, com-

munications hardware and software.

I srael leads the world in government ini-tiatives and incentives to promote in-vestment in the hi-tech industry.

Obstacles to the growth of the indus-try include: declining education stand-ards at secondary level, increased

competition from Asian offshoring, political tensions, and the trend towards a quick exit.

Summary

Summary

Right: Bill Gates in Israel-Microsoft and other major US tech companies have design centres in Israel

22

mailto:[email protected]



After the US, Israel has the second larg-est absolute number of startups world-wide, with estimates pointing to 3500

early-stage companies. It is home to major transnational design centres - such as Micro-soft, Intel, IBM, HP, Motorola, Google, Sie-mens, and Cisco – which often establish their presence through the buy-out of a startup, and use Israel as a bridgehead in the Middle East.

I srael rose to become a hi-tech powerhouse in the last thirty years despite social, po-litical, geographic and economic obstacles.

Today Herzliya, Tel Aviv, Netanya and Haifa are the hi-tech urban hubs of this ‘Startup Na-tion’. Global media reporting about Israel focus-es on conflict rather than tech innovation, but this is an environment that rivals Silicon Val-ley in terms of affordable, highly skilled labour.

I srael’s hi-tech entrepreneurial success is at-tributed to a range of factors, including a seasoned venture capital and incubation in-

dustry, the wave of skilled ex-Soviet immigrants in the 1990s and government initiatives that push investment in innovation. In addition, Is-rael’s geopolitical situation means that the mili-tary invests heavily in the specialist training of individuals who go on to design groundbreaking biomedical, cleantech and industrial technologies.

I n terms of patents, Israel is more innovative per capita than any G7 country. In 2010 only, there were 7,249 patent applications , com-

pared to 11 986 in the UK (where the popula-tion is eight times larger). The Economist rates Israel ninth on its Global Innovation Index, ahead of Denmark, France, Singapore and Australia . A number of breakthrough technologies have come from Israeli companies, including ICQ – the first instant messaging application bought by AOL; In-tel’s Core 2 Duo, Centrino and Pentium 4 micro-processors; M System’s flash drive; Voice Over IP; zip compression; the PillCam; and Better Place’s charging stations for battery-powered cars.

IntroductionIntroduction

33

Public Investment



How did such a small and young country achieve so much amidst all the political turmoil? Social factors play a significant

part in it. All entrepreneurs unanimously point out the role of the Military in fostering innovation.

I sraeli men and women have to attend the military for up to three years at the age of 18. They learn specific tech skills and find a

fast lane to the national technological elite. Many innovations developed in the military were later on commercialised and turned into major com-panies, such as ClickSoftware or Checkpoint.

More than the R&D investment and hard skills learnt, entrepreneurs high-light the social and moral lessons they

bring from their service. Hierarchy is not as im-portant as in other armies and soldiers are encour-aged to question and challenge their superiors. They learn the importance of team work and how to accomplish specific goals with little resources.

I mmigration is another crucial factor in the en-trepreneurial fabric of the country. The wave of immigrants from the Soviet Union in the nine-

ties brought in skilled labour (particularly scien-tists) that fed local innova-tion. Israel’s p o p u l a t i o n is multicul-tural, with more than 70 na t iona l i t i e s with sizable minority pop-ulations in the country. The country’s open immi-gration policy (for citizens with Jewish ancestry) still

attracts talented resources, providing subsidies and support to those who want to relocate.

Culturally EntrepreneurialCulturally Entrepreneurial

Below: Military training gives some valuable skills in leadership and development

44

Public Investment



The 2010 IMD Report ranks Is-rael first in terms of business expenditure and total expendi-

ture on R&D. The country also has one of the highest ratios of R&D per GDP (4.4% in 2010). Last year £6.2 mil-

lion were spent in R&D, with 80% coming now from the private sector.

Outside of Silicon Valley, Isra-el has the highest concentra-tion of venture capital activity

worldwide. 2008 was the vintage year, when hi-tech companies raised over $2bil-lion in venture capital. These figures took a dramatic tumble in 2009 as a re-sult of the global credit crisis, but early figures show that it is again on the up.

Not surprisingly, private equity firms, or hybrid private equity/venture

capital firms, have been taking an interest in Israel, with funds such as Silverlake and The Blackstone Group targeting later-stage financing.

I n 2010, Life Sciences startups saw the largest portion of total for-eign and local VC investment in

hi-tech. Cleantech is also being tout-ed as Israel’s next big export market, and startups in this sector are seeing high venture capital interest. Internet, IT, Communications and Semicon-ductor sectors are Israel’s traditional growth areas – with much R&D ac-tivity evident in mobile telephony and 4G networking infrastructure.

E stablished in the 1990s, Is-rael’s VC model was unique in terms of the government’s

involvement: specifically, the crea-

Investment SceneInvestment Scene

ISRAEL’S ‘ANGELS LAW’ GIVES TAX BENEFITS TO INDIVIDUALS INVESTING IN

R&D COMPANIES

55

Cultural blend



tion of state-financed venture capital funds and technology in-cubators. While most of these incubators are now privatised, the government still supports up to 85% of the incubator’s fund.

Haim Shani, former CEO of hi-tech firm NICE Systems, is now the

General Manager of the Finance Ministry. Shani’s 2011-2012 budget proposals include a billion shekels ($288m) towards supporting the hi-tech industry over two years.

I n January 2011 the Knesset (parliament) passed an amendment

to income tax legislation,

known as the ‘Angel’s Law’, which offers a substan-tial tax benefit to individuals investing in qualified, private Israeli R&D companies until 31 December 2015. Despite strict conditions, the major benefit is that the angel investor will not need to wait in order to offset the cost of a future capital gain.

There are also corporate tax incentives for hi-tech companies to set up shop along the periphery of the country to develop the in-

dustry in areas such as Nazareth. (See ‘Roadblocks’).

Investment SceneInvestment Scene

Above: The Knesset in session

66

Cultural blend



Israelis are early adopters of mobile technology, personal computers and tablets, even if they are slow to adopt other

internet innovations (such as e-banking and e-com-merce). Israeli companies’ outlooks are in every instance business-oriented and glob-ally focused. Its 7.4 million population and the animos-ity of neighboring countries means that consumer-focused products will always strug-gle to find a broad market.

A lmost half of Israeli exports come from the hi-tech industry,

totalling 15% of its GDP . Israel’s strengths have been middleware and patented software that is usually inte-grated in broader technolo-

gies. The chip and semiconductor industry is very strong. Intel’s Pentium 3, 4 and Centrino chips

were invented in Israel where the company has a $4 billion semiconductor plant . Defense and

security are also traditionally strong in the local economy due to the military heritage.

Within the B2B mar-ket, trends tend to follow Israel’s tra-

ditional strongholds, like secu-rity. There is also a clear con-nection with the US startup scene, particularly New York, due to the size of the local Jew-ish community and to the in-vestment ties (The US takes the largest slice of Foreign Di-rect Investment in Israel ). This is a cultural and economic rela-tionship that Israeli entrepre-neurs can take advantage of, using the US as a base point for their exports.

Business OpportunitiesBusiness Opportunities

Above: Israelis are early adopters of mobile tech

77

Entrepreneurial



Companies going soCial

Israeli startups have been traditionally strong on Enterprise Software and have been moving towards Software-as-a-Service

(SaaS) and Infrastructure-as-a-Service (IaaS).

F ollowing a global trend, local entrepreneurs have focused on making enterprises more integrated with web 2.0 networks, provid-

ing innovative solutions for companies, online re-tailers and other corporates who need to integrate these features. Leading company Magento is a good example along with Conduit. Up and coming start-ups like Zibaba and Yotpo are following the trend.

The online retail market is estimated to grow at a 10% rate in the European and American market, reaching €134 billion

and $279 billion respectively by 2015. Within this, social commerce (in platforms like Facebook) is estimated to grow to $30 billion. Social com-merce startup The GiftsProject was recently ac-quired by eBay, which will integrate the company’s product in its service for collective gift purchasing.

Cloud management

Israeli entrepreneurs have recently specialised in Cloud management. Cloud expert Ofir Nachmani says that local ventures have built

on their enterprise software strengths by moving companies to the cloud. Companies like Green SQL, Host Dynamics or Xeround are good examples of recently successful Israeli startups in this area.

F ollowing the success of recently-acquired local companies like Checkpoint, startups like Dome9 or Seculert have been very ac-

tive at developing security solutions for the cloud.

McAfee, a company owned by the Intel group (which has a strong presence in Israel) has recently acquired Sen-

trigo, an Israeli security software company. Other acquisitions in the Cloud Management field in-

clude IBM’s purchase of Israeli startup Storwize.

Business analytiCs

Mining the web and digesting the huge loads of available data has been a pri-ority across the most sophisticated

startup hubs in the world. Israel’s highly skilled workforce won’t miss this opportunity. Local en-trepreneurs have an advantage in this field since they are used to deal with complex data sets and al-gorithms due to their military background. Click-Software for example, which floated on the Nas-daq in June 2000 was built around a set of logistics algorithms designed by co-founder Ami Shpiro when he worked as a government scientist. The algorithms were subsequently licensed for private use under very generous terms from the military.

Mintigo is an example of a company using analytics to engage and retain custom-ers. Other companies in this field in-

clude Gsoft and Zramim. Small World Analytics is another Israeli company dealing with the challeng-es of analysing unstructured data in real-time.

TrendsTrends

LOCAL TECH ENTREPRENEURS SOMETIMES HAVE EXPERIENCE DEALING WITH LARGE DATASETS IN A LOGISTICS

ENVIRONMENT

88

Entrepreneurial



off shoring

While Israeli hi-tech products and ser-vices are not necessarily price sensi-tive, salaries are reaching similar lev-

els to those paid to US engineers. International design centres are outsourcing work to technicians and engineers in East Asia, especially to India and China where labour remains relatively cheap compared with the US and Israel.

I srael is now attempting to make use of its alternative to India and China’s cheap talent: well-educat-

ed and highly skilled engineers from the Palestinian Territories and from Arab-Israeli communities within Is-rael itself. There have been a number of government incentives to invest in the Galilee region – traditionally home to most of Israel’s Arab community. Nazareth is the focal point of the re-gion, with the highest concentration of Arab-Israeli university graduates.

deClining eduCation standards

Standards of secondary education are de-creasing, especially within the grow-ing Arab-Israeli and ultra-Ortho-

dox communities, who are predicted to comprise over half of the population by 2025.

The private sector, NGO sector and to a certain extent the Israeli govern-ment are attempting to create voca-

tional programmes to combat this. Integrating these into the high-tech communities could en-sure Israel protects its most important exports.

The budget plan of Haim Sha-ni, General Manager of the Finance Ministry, includes

investment in hi-tech-specific educa-tion, through a programme that will place near-retirement age engineers in training and lecturing roles. So far approximately 800 engineers have expressed an interest in teaching.

politiCal tension

The Israeli military and the Palestinian leadership are in constant battle over rights

to land, and there is significant ten-sion between Israel and its neigh-

RoadblocksRoadblocks

99

Entrepreneurial



bours to the North - Syria and Lebanon. A change in political leadership in Egypt, as well as the Turk-ish flotilla debacle of 2010 has compromised Is-rael’s diplomatic relations with these two nations.

Naturally these tensions will inhibit some potential investors in Israeli hi-tech, but Israel’s track record of per-

forming beyond expectations, even during pe-riods of armed conflict, is well documented.

S ome Israeli and Palestinian executives be-lieve that bringing prosperity to the Oc-cupied Palestinian Territories through the

development of hi-tech is critical for further economic growth and for calming political ten-sions and bringing peace. Others believe that peace will have to come before any kind of eco-nomic union between Israel and the Territories.

the QuiCk exit

Many Israeli entrepreneurs have been ac-cused of looking for the quick exit when it comes to their businesses, and the

VC framework puts pressure on startups to make an IPO or sell to a larger company usually within six years. Therefore tech-nology development has traditionally been ‘quick and dirty’ - an attempt to get a product to mar-ket as fast as possible.

But this has in-creasingly come to the attention

of the industry and some VCs have begun to im-port management exper-tise from the US and Eu-rope to grow startups into medium sized companies

and to discourage buy-outs. A need for increased focus on international sales has also been identi-fied. In the 2011-2012 budget proposals, the Fi-nance Ministry proposed tax incentives for Israeli companies to merge with one another and discour-age buy-outs from internationally-owned firms.

RoadblocksRoadblocks

Above: Security is always in the background of any discussion about investment in Israel

1010

Entrepreneurial



Startups to look out forBILL GUARD

Bill Guard is a banking application that screens users’ transactions spotting unu-sual or potentially fraudulent activity.

The startup was founded by Yaron Samid and Raphael Ouzan in April 2010 and has offices in New York and Herzli-

ya and 12 staff. It received $3 million in fund-ing from a group of investors including Besse-mer Venture Partners and Founder Collective.

This free to use ‘people-powered antivirus for bills’, as the company calls it, uses data mining technology to digest users

complaints of suspicious charges. It then flags these transactions in order to draw users’ atten-tion for billing mistakes, hidden charges or scams. It claims to have saved users more than $250,000.

B ill Guard won the first prize at the Fino-vate 2011, an event for Financial startups in the US. It recieved O’Reilly Media’s

award of ‘2011 Big-Data Startup of the Year’ and TC Disrupt’s ‘2011 Top Startup Runner-Up.’

The startup faces competition from oth-er expenses manager programmes like Mint.com, although this does not fo-

cus specifically on unwanted transactions.

Above: The application interface

Companies to look out for

1111



Startups to look out forGREEN SQL

Green SQL is a security solution for SQL da-tabases. The company has SMEs and larg-er enterprises as their main target clients.

Their services come in one of four packages, depending on the sizes and needs of the company. The express edition is free but

companies have to pay between $60 and $180 (large enterprises get higher quotes).

Amir Sadeh (CEO) and David Maman (CTO) lead the team, based in Tel Aviv. The company was founded in 2009 and has

since then received two rounds of funding, totaling $7.4 million. Magma Venture Partners led the first round (in 2009) and were then joined by Rhodium, Cross Atlantic Capital Partners and 2B Angels.

D irect competitors include Dome9, while many other companies op-erate in the same cloud man-

agement space, such as Xeround.

Above: Green SQL banner


1212



Startups to look out forDOME9

Dome9 is a security SaaS for enter-prises and hosting providers. It tar-gets clients with dedicated servers

or cloud-based servers, providing them with automated firewall management software. Dhe startup was founded in Tel Aviv by

Zohar Alon and Roy Feintuch, who had previous experience in the internet

market (Alon was an employee of Checkpoint, one of the biggest software companies in Israel).

The company launched its product in May 2011, which is free for individual users. Small businesses pay between $15 and

$30 per month and larger enterprises and host-ing providers need to ask for a tailored quote.

Dome9 received funding from Califor-nia-based VC firm Opus Capital ear-lier this year. Cloud security is be-

coming one of the most productive sectors in Israel, with other companies like Green SQL and NewVem operating in the same space.

Above: Dome9 graphic


1313



Startups to look out forYOTPO

Yotpo is a public opinion aggregator. It trawls search engines, blogs and social networks and finds relevant opinions for

various websites, product and services. It uses a proprietary classification system to identify the ‘best quality opinions’ to create a type of search engine application. Reviews are weighted ac-cording to the user’s social graph, enabling one to find reviews from trusted or familiar sources.

Their target customers are mainly blog-gers and e-commerce sites, who can embed Yotpo’s tool on their website.

End customers use Yotpo to find more rel-evant info about specific products or services.

The Tel-Aviv based startup was found-ed by Tomer Tagrin, who was an ex-Intel employee, and Omri Cohen in

January 2011. Within three months of incep-tion, Yotpo raised $800,000 in seed funding from angel investors and a fund for new me-dia startups - 2B Angels and PLUS Ventures.

They face competition from oth-er review websites, such as Qype or Yelp or even Amazon and Ebay.

Below: Yotpo’s explanation of polling


1414




Startups to look out forZIBABA

This web application creates social com-merce solutions. Its name plays on the Hebrew word ‘Sababa’, which means

‘cool’ or ‘awesome’. Zibaba provides an appli-cation for Facebook’s shopfronts with an af-

filiate marketing solution based on the so-cial network’s affiliate programme. Retailers access Facebook’s analytics to assist their mar-keting function and manage their online shop.

S hoppers are able to ‘like’, ‘share’ and ‘rec-ommend’ stores to their social network. In the same vein as Groupon and oth-

er group discount marketing solutions, Zibaba boasts a Group Offer feature, encouraging shop-pers to use viral marketing to spread the word.

The e-marketing startup was formed in Tel-Aviv in 2008 by entrepreneurs Ron-en Shlomo and Arie Fishler, experts in

behavioural advertising and marketing. They have now offices in the UK and US and are Fa-cebook’s preferred developer consultants. Clients include Marks and Spencer, HMV and Dell UK.

Zibaba has recently signed a partnership with Shopify to bring more online re-tailers to Facebook. It faces competi-

tion from US based company 8th Bridge and from Gigya, which also has offices in Israel.Above: Zibaba’s Facebook Interface

1515

startup intelligence -- israel

Documents