Internet | Telecom
Beyond the Israeli model
Auteur : ivc
Du : 04/10/2006
There's changes in the traditional model used by Israeli technology companies to penetrate overseas markets, says this IVCJ article. The piece explains how the model is evolving and pinpoints areas of attractive investment in today’s environment.
Israeli scientists and engineers are recognized the world over for creating ground-breaking technologies. Israeli entrepreneurs are as well known for identifying ideas with potential and bringing them to market. Investors who have worked with Israeli management teams rank them among the finest, and Israeli technology – particularly in the areas of networks, security and telecommunications – can hold its own against the best any market can produce.
Israel does not, however, provide a sufficiently large domestic market for home-grown companies to really expand. A business focused purely on sales in Israel is likely to be of limited interest to foreign investors, unless it has unique technologies that a larger business could exploit. For Israeli companies to reach their full potential, they must look overseas, particularly to North America.
The result has been the so-called Israeli Model. Companies with attractive technologies and good management, and with potential for rapid growth, would sign up one or two lead customers, and quickly establish a sales office in the US – typically on the West Coast. These companies, in effect, became US businesses with an Israeli back-end. A listing on a US stock exchange, usually Nasdaq, would cement the company’s position in North America and the world.
The model has been so successful that a number of companies founded by Israeli technologists and entrepreneurs are widely viewed as international, if not US, businesses. Check Point, Comverse and Amdocs are perhaps the bestknown examples. Amdocs and Comverse have achieved revenues of over $1 billion and Check Point, over $500 million. Other, smaller companies have been successful in their fields as well. But the nature of the global market for high technology is changing, with the focus moving east rather than west. China is the market most technology companies are looking to for growth. In 2005, China became the world’s fourth largest economy. With US companies and investors looking eastward, the US West coast may no longer be the automatic choice for Israeli companies with global ambitions to establish their headquarters or sales offices.
Changes in the regulatory regimes in the United States, especially the Sarbanes Oxley Act, have increased the cost of financing on US markets. ANasdaq listing, once the obvious choice for investors wanting to realize their investment in technology companies, is a more expensive proposition than it was during the technology boom of the late 1990s. Companies that want to go to Nasdaq have to do so later in their development cycle. Higher costs have driven up the effective minimum size of a viable Nasdaq IPO to beyond the reach of many good venture-backed businesses.
Nasdaq, however, is not the only global financial market available to Israeli entrepreneurs and investors; and New York is not the only source of equity finance. London remains a powerful global financial hub, with its junior market, the Alternative Investment Market (AIM), offering lower listing costs than the US markets, but still giving access to global financial markets. In time, AIM also offers companies the prospect of progression to a full listing on the London Stock Exchange.
As a global investment house, 3i has a strong track record of taking its investee companies to AIM as well as to the US and other European markets. 3i is itself the largest European private equity company listed in the FTSE100 of the London Stock Exchange (LSE) and has access to capital on a global basis. Importantly, it has the network of offices and expertise around the world to help companies raise capital and strike deals in the most attractive markets, whether they are in Asia, North America, Europe or elsewhere. Not every company will want to seek a public listing, however, and not every investor will want to take paper as part of its exit strategy. An IPO, in particular, might not give the management team the latitude they need to realize their investment in a business.
In some areas of business, a ‘trade sale’ is seen as a poor second best to an IPO, and even something of a failure. Our experience at 3i tells us that that is far from the case.
Although there are businesses that benefit greatly from an IPO and many investors who are happy to convert their venture funding into a shareholding, there are numerous occasions where a direct sale, often to a large player in the industry, can make better sense for all involved. A trade sale to a major corporation can recompense investors and management alike, either in cash or in blue chip shares, while the business itself enjoys benefits, such as immediate access to a bigger, richer customer base, that a newly listed company might take years more to acquire.
Regardless of the eventual exit strategy, the type of business 3i is looking to invest in is one that has shown it has the capacity to scale. We, at 3i, actively look to make selective late stage investments in Israeli companies. As an investor, however, 3i is very quality conscious and looks at investment opportunities where there is a good local venture capital partner working with the business. We prefer to work with local resources to help the investee company move towards its next stage of development. However, these businesses need to have a sales pipeline – ideally one that is predictable.
With a real and growing sales pipeline, it is fairly straightforward for a good entrepreneur to raise money, almost regardless of whether the sector is in vogue. 3i seeks to take companies that have proven that they can handle the demands of large customers to the next stage, where they can take on global markets.
It goes without saying that 3i looks for a world-class management team to back this up. Investments made by 3i have been as large as $40 million-$50 million, although investment targets for late stage funding in Israel are likely to be in the $10 million-$20 million range. There are, though, some “hot sectors” where 3i is willing and ready to take smaller stakes, perhaps as low as $1 million to $2 million. In these cases, 3i is making early stage investments based not just on the quality of the company itself, but on the prospects for its marketplace.
Hot sectors again include companies with Internet business models, and not merely revamped dot-com business plans. This time around, there are real companies with tangible prospects. There is no doubt that the Internet, as a place to do business, is back with a vengeance. Other areas where 3i is particularly active include semiconductors, medical devices and software companies with business models that have the potential to disrupt the status quo. We at 3i also look carefully at open source software and at the application service provider market, where we believe there are still strong opportunities. Telecommunications, including mobile telecoms and Internet-based services such as IP telephony, have also attracted investment from 3i, and will continue to form an important part of its portfolio.
3i has a strong track record in helping companies with world-class technologies, but relatively small domestic markets, grow beyond their borders – a situation applicable to many Israeli businesses with the potential to expand. In the Nordic region, for example, 3i invested in locationbased services companies NordNav and HotSip, which are working in the area of Internet-based telecommunications. Both are based in Sweden. Another 3i investment, CPS, is a UK-based mobile location technology company that is winning business on a global basis.
In each of these cases, 3i has worked closely with local venture capitalists to help the companies raise the finance they need for expansion and to branch out into global markets. As an investor committed to Israel, 3i is keen to help Israeli companies do likewise. Changes in the technology market and the investment landscape do not necessarily mean the end for the “Israeli Model,” but it will continue to evolve and grow in different directions. 3i is determined to be an active partner in that evolution.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry.
Israeli scientists and engineers are recognized the world over for creating ground-breaking technologies. Israeli entrepreneurs are as well known for identifying ideas with potential and bringing them to market. Investors who have worked with Israeli management teams rank them among the finest, and Israeli technology – particularly in the areas of networks, security and telecommunications – can hold its own against the best any market can produce.
Israel does not, however, provide a sufficiently large domestic market for home-grown companies to really expand. A business focused purely on sales in Israel is likely to be of limited interest to foreign investors, unless it has unique technologies that a larger business could exploit. For Israeli companies to reach their full potential, they must look overseas, particularly to North America.
The result has been the so-called Israeli Model. Companies with attractive technologies and good management, and with potential for rapid growth, would sign up one or two lead customers, and quickly establish a sales office in the US – typically on the West Coast. These companies, in effect, became US businesses with an Israeli back-end. A listing on a US stock exchange, usually Nasdaq, would cement the company’s position in North America and the world.
The model has been so successful that a number of companies founded by Israeli technologists and entrepreneurs are widely viewed as international, if not US, businesses. Check Point, Comverse and Amdocs are perhaps the bestknown examples. Amdocs and Comverse have achieved revenues of over $1 billion and Check Point, over $500 million. Other, smaller companies have been successful in their fields as well. But the nature of the global market for high technology is changing, with the focus moving east rather than west. China is the market most technology companies are looking to for growth. In 2005, China became the world’s fourth largest economy. With US companies and investors looking eastward, the US West coast may no longer be the automatic choice for Israeli companies with global ambitions to establish their headquarters or sales offices.
Changes in the regulatory regimes in the United States, especially the Sarbanes Oxley Act, have increased the cost of financing on US markets. ANasdaq listing, once the obvious choice for investors wanting to realize their investment in technology companies, is a more expensive proposition than it was during the technology boom of the late 1990s. Companies that want to go to Nasdaq have to do so later in their development cycle. Higher costs have driven up the effective minimum size of a viable Nasdaq IPO to beyond the reach of many good venture-backed businesses.
Nasdaq, however, is not the only global financial market available to Israeli entrepreneurs and investors; and New York is not the only source of equity finance. London remains a powerful global financial hub, with its junior market, the Alternative Investment Market (AIM), offering lower listing costs than the US markets, but still giving access to global financial markets. In time, AIM also offers companies the prospect of progression to a full listing on the London Stock Exchange.
As a global investment house, 3i has a strong track record of taking its investee companies to AIM as well as to the US and other European markets. 3i is itself the largest European private equity company listed in the FTSE100 of the London Stock Exchange (LSE) and has access to capital on a global basis. Importantly, it has the network of offices and expertise around the world to help companies raise capital and strike deals in the most attractive markets, whether they are in Asia, North America, Europe or elsewhere. Not every company will want to seek a public listing, however, and not every investor will want to take paper as part of its exit strategy. An IPO, in particular, might not give the management team the latitude they need to realize their investment in a business.
In some areas of business, a ‘trade sale’ is seen as a poor second best to an IPO, and even something of a failure. Our experience at 3i tells us that that is far from the case.
Although there are businesses that benefit greatly from an IPO and many investors who are happy to convert their venture funding into a shareholding, there are numerous occasions where a direct sale, often to a large player in the industry, can make better sense for all involved. A trade sale to a major corporation can recompense investors and management alike, either in cash or in blue chip shares, while the business itself enjoys benefits, such as immediate access to a bigger, richer customer base, that a newly listed company might take years more to acquire.
Regardless of the eventual exit strategy, the type of business 3i is looking to invest in is one that has shown it has the capacity to scale. We, at 3i, actively look to make selective late stage investments in Israeli companies. As an investor, however, 3i is very quality conscious and looks at investment opportunities where there is a good local venture capital partner working with the business. We prefer to work with local resources to help the investee company move towards its next stage of development. However, these businesses need to have a sales pipeline – ideally one that is predictable.
With a real and growing sales pipeline, it is fairly straightforward for a good entrepreneur to raise money, almost regardless of whether the sector is in vogue. 3i seeks to take companies that have proven that they can handle the demands of large customers to the next stage, where they can take on global markets.
It goes without saying that 3i looks for a world-class management team to back this up. Investments made by 3i have been as large as $40 million-$50 million, although investment targets for late stage funding in Israel are likely to be in the $10 million-$20 million range. There are, though, some “hot sectors” where 3i is willing and ready to take smaller stakes, perhaps as low as $1 million to $2 million. In these cases, 3i is making early stage investments based not just on the quality of the company itself, but on the prospects for its marketplace.
Hot sectors again include companies with Internet business models, and not merely revamped dot-com business plans. This time around, there are real companies with tangible prospects. There is no doubt that the Internet, as a place to do business, is back with a vengeance. Other areas where 3i is particularly active include semiconductors, medical devices and software companies with business models that have the potential to disrupt the status quo. We at 3i also look carefully at open source software and at the application service provider market, where we believe there are still strong opportunities. Telecommunications, including mobile telecoms and Internet-based services such as IP telephony, have also attracted investment from 3i, and will continue to form an important part of its portfolio.
3i has a strong track record in helping companies with world-class technologies, but relatively small domestic markets, grow beyond their borders – a situation applicable to many Israeli businesses with the potential to expand. In the Nordic region, for example, 3i invested in locationbased services companies NordNav and HotSip, which are working in the area of Internet-based telecommunications. Both are based in Sweden. Another 3i investment, CPS, is a UK-based mobile location technology company that is winning business on a global basis.
In each of these cases, 3i has worked closely with local venture capitalists to help the companies raise the finance they need for expansion and to branch out into global markets. As an investor committed to Israel, 3i is keen to help Israeli companies do likewise. Changes in the technology market and the investment landscape do not necessarily mean the end for the “Israeli Model,” but it will continue to evolve and grow in different directions. 3i is determined to be an active partner in that evolution.
This article appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry.