Startup Nation is growing up, but it’s not maturing with the years; The giant exits of 2013 don’t mean that Israeli high-tech is creating many jobs, benefiting local investors or generating much added value for the economy

Startup Nation is growing up, but it’s not maturing with the years

The giant exits of 2013 don’t mean that Israeli high-tech is creating many jobs, benefiting local investors or generating much added value for the economy.

By David Rosenberg | Aug. 23, 2013 | 2:44 AM

Another round of backslapping and hardy handshakes accompanied last week’s sale of the Israeli startup Trusteer to IBM for a reported $900 million. Websites and newspapers were full of pictures of smiling employees, who might now finally be able to afford to buy a home with their share of the payout. Venture capital funds were counting up their double-digit returns. Meanwhile, industry executives were explaining how the giant buyout – coming weeks after Google paid more than $1 billion for the navigation app startup Waze – marked a new phase for Startup Nation: Entrepreneurs and investors are more mature, they are ready to build businesses and think long-term, rather than look for a quick and easy exit.It is true that 2013 is shaping up to be the year of the big deal. According to IVC Research, only nine Israeli startups were sold for an excess of $400 million in the years 2003 through 2011. But in 2012 alone there were nine sales of $400 million or more. And this year, with more than four months left to spare, the number has already reached six.

Setting the bar at a lower but still formidable $100 million, the number of mergers and acquisitions so far this year has reached 10, versus 13 last year. Besides the instantly mythic Waze deal, the feathers in Startup Nation’s cap for the year include Prolor Biotech ($480 million), Intucell ($475 million), Adapt.tv ($405 million), CyOptics ($400 million), ScaleIO ($250 million), dbMotion ($235 million), Alma Lasers ($221 million) and ChooChee ($100 million).

But let’s remove three of these immediately. Adapt.tv, CyOptics and ChooChee have some weak Israeli links, but for all intents and purposes they are American companies. Adapt.tv was started by Israeli Amir Ashkenazi and its investors include Gemini Israel Ventures, but it has no presence in Israel and only three of its eight top executives are Israeli. CyOptics was founded in Israel in 1999, but it left for Pennsylvania years ago. Its CEO was an American and none of its employees were Israeli. ChooChee is likewise based in America and counts Israelis as only three of its top six managers. There were certainly some Israeli brains behind these companies, but hardly enough to qualify them as three of our own.

As for the rest, they don’t testify to any real change in the take-the-money-and-run philosophy that has characterized Startup Nation for the past decade.

The valuations of companies have certainly grown and their founders are often prepared to take them a step or two further in developing into full-fledged businesses, but basically Israeli startups rarely go far beyond the R&D stage.

Their payrolls testify to that: Waze employed just over 100 people when it was sold, Intucell 80, ScaleIO 20 and dbMotion 110. (CyOptics, the American company, had 900.) Moreover, the checks being written out to buy these companies continue to be mailed mostly abroad. And when the sale is complete, the acquired startup becomes the local R&D center for the multinational that bought it, meaning whatever innovations emerge will belong to the multinational that bought the startup.

Waze to go

Waze, which has now become the poster boy for the new Startup Nation, is a case in point. The company has tens of millions of users but it didn’t begin to start trying to make any money from them until the final months of 2012; its revenues when Google’s $1 billion offer came in were likely in the single-digit millions. Waze’s navigation app was yet another example of Israeli ingenuity but its sale to Google was also an example of Startup Nation’s aversion to creating actual businesses.

Then there are the profits from the deal. While the three founders – Noam Bardin, Ehud Shabtai and Amir Shinhar, plus others – are reportedly making about $150 million, the rest is going to an assortment of foreign investors, among them the Hong Kong billionaire Li Ka-shing, the U.S. venture capital funds Blue Run Ventures and Kleiner Perkins, and the American tech companies Microsoft and Qualcomm. Two Israeli funds are also among Waze’s backers, but, of course, most Israeli venture capital is raised abroad, so their share of the Waze deal will also ultimately go overseas.

Finally, Waze negotiated to keep its identity and employees here in Israel for the next three years – and the founders should be given all due credit for their Zionism – but in the end Waze will share the same fate as scores of other Israeli startups and become an R&D center for Google.

The other big exits this year have pretty much followed the same pattern. Prolor Biotech is an R&D company with no revenues, although the Israeli public owns three quarters of the company because it is traded on the Tel Aviv Stock Exchange. Intucell started generating revenues only in 2011. Its founders and employees will enjoy a $125 million payout from its sale to Cisco, with the rest going to venture capital funds, including the U.S.’s Bessemer Partners. ScaleIO, which was sold to EMC, was backed by Norwest and Greylock Partners, two U.S. venture funds.

To be sure, not all the M&A deals of 2013 fit this pattern. Trusteer is a real company, which made about $100 million in revenues last year and has 400 employees. Although one overseas VC fund invested in the company, the payout is going mostly to founders Shlomo Kramer and Micky Boodaei, and to employees. But Trusteer, like other startups, is being turned into an R&D center by IBM, so that marks the end of Trusteer as a business.

Meanwhile, Wix is planning an initial public offering, which means it plans to stay independent. Babylon and Conduit are acquiring startups themselves, rather than being acquired.

It is not at all clear whether this marks a new countertrend or a few exceptions to business as usual. But it’s probably the latter. An initial public offering – the Plan B most high-tech entrepreneurs have after an M&A deal – is difficult to make these days because there isn’t much appetite for risk in the stock market. Stiffer regulatory requirements make the job of running a publicly traded company unattractive. The $100 million-plus buyouts are having the perverse effect of tilting the risk-reward ratio of IPO versus M&A toward the latter.

Apart from feel-good headlines, Startup Nation isn’t producing the goods that the economy needs. It’s not creating many jobs, it’s not profiting local investors and it’s not generating much value-added. And what it does produce is essentially shipped abroad every time a company is sold. Technology is supposed to be Israel’s business, but we have yet to make it into one.

 

Israeli startups discover another America

Latin America, Brazil in particular, offers enticing opportunities for Internet and mobile companies: fast-growing economies, less competition and a friendly business environment.

By Orr Hirschauge | Aug. 1, 2013 | 5:08 AM

“In Brazil we’re growing faster than Instagram,” beams Moshe Hogeg, founder and CEO of cellular photo and video-sharing social network Mobli, a rival of the hugely popular online photo- and video-sharing service and proud host to 10 million users. The company’s user base of 2 million in Brazil ranks second only to its numbers in the United States, but it is expanding in Brazil at a much more rapid pace.

“Israeli Internet and mobile companies deal obsessively with the U.S. market,” says Hogeg. “We don’t concentrate only on the U.S. market. The U.S. has 300 million inhabitants, Russia has 150 million and Brazil has 200 million. We don’t need to only target American Instagram users: It’s a big, diversified world. Instagram isn’t the leader in every market.”

As an example of Mobli’s strength in Brazil, Hogeg points out that at the end of the television program Panico, the Brazilian equivalent of the Israeli political satire show Eretz Nehederet, viewers are referred to the program’s channel on Mobli. About half the players on Brazil’s national soccer team have Mobli accounts, and the company fields requests on a weekly basis for interviews in Brazil’s media. “We didn’t invest in marketing in Brazil — it just happened,” says Hogeg.

Other Israeli Internet and mobile companies, like La-Mark Vision, Viber, Wix and Waze – the last having been recently bought by Google – all have seen Brazil become one of their key markets. The U.S. may be the world’s largest Internet and mobile market, but it is also the most saturated and doesn’t necessarily reflect what is happening in the rest of the world. Like China, where homegrown companies offer parallel services to those of Google, eBay and Facebook, populous countries like Russia, India, Brazil and Japan constitute enormous markets where Israeli Internet companies have room to grow.

Tough competition from U.S. companies, particularly in new media, is one of the reasons why the founders of Israeli media company FTBpro decided to create a website focusing on soccer. “Soccer is a popular sport everywhere in the world but not very American,” explains CEO Asaf Peleg. “This makes it one of the only areas that allows for growth of large non-American global media companies.”

The company, which raised $5.8 million in financing two months ago, is also active in Spain, Britain and Italy, but will deploy its new capital to reach into additional countries, including Brazil. Another Israeli start-up in sports, 365scores, which developed an application for presenting sports results in real time, recently became the most frequently downloaded sports app in Brazil.

During the second half of the 2000s, the Israeli Internet and mobile industry began making a serious effort at penetrating the Far Eastern and Indian markets. Countries that were previously visited frequently by hardware, computer security and management-software companies became popular destinations for much smaller companies looking for new markets. Despite the economic slowdown in Brazil, the rise of the middle class and the country’s rapid rate of smart phones take-up has turned South America’s largest economy into another destination – and often the preferred choice over Asian markets.

“We’ve been working hard in Asia for six years to compensate for the situation in Europe,” says Eyal Reshef, founder and CEO of the Israel Mobile and Media Association. “But in the last four years we also began to concentrate efforts on South America, with emphasis on Brazil and Mexico.” Reshef returned early this week from a visit to those two countries accompanied by the managers of six Israeli startups. “For anyone accustomed to competing in Asia, Brazil is a paradise,” he says. “There is less competition compared to Asia and it’s easier to work with the distribution chains.”

The strong growth of Brazil’s economy, the seventh largest in the world, has declined sharply this year as it prepares to host the 2014 World Cup and the 2016 Summer Olympics in Rio de Janeiro, which has caused investment to be redirected to improving infrastructure and building sports facilities.

But there has been a silver lining to the slowdown for Israeli companies. The transfer of spending to the World Cup led millions of Brazilians to take to the streets at the end of June to protest the high cost of living and poor social services. Directed at President Dilma Rousseff, the demonstrations were carried over social media, with many of the images provided through Mobli. “In the course of the July demonstrations, thousands of photos direct from the protests were uploaded to Mobli,” says Hogeg.

During the first half of 2012 smartphones comprised 36% of all cell phones in Brazil, according to market research firm ACNeilsen – about the same as the 37% in Russia and way ahead of India’s 9%, but lagging far behind the 66% rate in China. The large gap with China, along with Brazil’s economic growth, points to huge growth potential over the next few years. ABI Research forecasts that by 2018 the BRIC countries (Brazil, Russia, India and China) will surpass the U.S., Western Europe and Japan to become the world’s largest smartphone markets.

“The protests point to the awakening of the middle class,” says Reshef. “For high-tech players the narrowing of gaps – the movement of wealth from the top 1% to the middle class – is a fundamental event. Brazil is currently one of the three fastest growing markets, along with China and India. It has urban populations in large cities like Sao Paulo, Rio de Janeiro, Belo Horizonte, and Curitiba with advanced infrastructures. For Israeli start-ups in the mobile fields, Brazil is much more relevant than China. Sales in Brazil are much easier and involve less business risk. There is less domestic competition and good profit margins. Most start-ups can’t weather the long running-in period needed to succeed in China. In addition, the Brazilian audience is a heavy consumer of content and music, and this is very helpful for Internet and mobile companies.”

The mobile companies targeting audiences of end-users aren’t the only Israeli Internet companies operating in Brazil. Matomy, IronSource and Idomoo, which target businesses and organizations, also have extensive operations in the country. Idomoo, which developed a platform to turn documents such as invoices issued by cellular companies into personalized video clips. Among its customers are two of Brazil’s largest cellular operators, GVT and TIM Brasil, and the country has become Idomoo’s third-largest market in terms of revenues after the U.S. and Western Europe.

Brazil’s business culture makes it easy for Israeli companies to work there, according to Idomoo CEO and co-founder Yaron Kalish. “Brazil is open to innovation and business processes there are fast. It’s easy to set up initial meetings with the relevant people,” he says. “Unlike in India and China, decision-making in Brazil is similar to what we’re familiar with in the U.S. and Western Europe, and even quicker. The selling process is shorter than what we’ve experienced.”

“Brazil is very interesting but isn’t easy from a business perspective,” says Roi Carthy, one of the founders of venture capital firm Initial Capital, which focuses its investments on Israeli and Brazilian companies. “Our strategy in Brazil is investing in companies that target the local market. Many early-stage Israeli companies approaching us want to turn Brazil into their main target market, but we don’t recommend this. From a bureaucratic and language perspective it’s not an ideal market for an Israeli company just setting out, certainly not as an initial target market.”

Despite the economic slowdown in Brazil, the rise of the middle class and the country’s rapid rate of smart phones take-up has turned South America’s largest economy into another destination for Israeli companies – and often the preferred choice over Asian markets.

For WIx, a company that helps people build websites on their own, Brazil is the second-largest market after the United States: SIx milion of its 36 milion users come from the country and since 2011 it has offered its platform in Portuguese. “This led to a big jump in users from Brazil,” says Omer Shai, its vice president for marketing. “Every month we’re adding 200,000 Brazilians to our service.” But the company is still grappling with how to monetize its platform. Shai says that for every user who pays for Wix’s premium services, two others do not because they don’t have an international credit card. “It’s not every country where international credit cards are so widely dispersed as they are in Israel,” he explains.