Israel’s Success Story of the Tech-Industry

by Edouard Cukierman and Yair Shamir

Hong Kong, July 2015 Key Success Factors of Israel’s Technology Cluster

1. Education and Universities

7. Attractive Investment 2. Government Environment Support

Israel Cluster

3. Technology 6. Entrepreneurial Sector Expanding Spirit Globally

5. VC and Access to Global 4. Defense Financial Industry Markets

1- Education and Universities: brainpower that can be leveraged

. Largest number of academic degrees per capita (64 per 1000 people) (1) . Highest expenditure on education in the world (9.2% of GDP) (2) . 12 Israelis won the Nobel Prize, 8 within the last decade (3) . Israel invests more than 4% of its GDP in R&D, which is the highest ratio of any country in the world (1) . Israel is blessed with an exceptional entrepreneurial workforce, ranked 3rd in the world (4) . c.1 million people from the FSU emigrated to Israel since early 90s (20% of engineers and 3% of scientists), representing 16% of the economically active population(5)

(4) (1) Investment in Education % GDP Number of Engineers Per 10,000 Employees 9.2% 140 7.0% 6.4% 6.4% 6.2% 5.9% 85 5.7% 5.5% 5.3% 5.0% 4.7% 65 4.0% 53 38 35 35 34 28 25 22 19

Source: Ministry of Finance, Israel, 2013 (1) Source: Technion, Israel's Institute of Technology (2) Source: Worldbank Report 2012 (3) Central Bureau of Statistics, Israel, 2013 (4) Ministry of Absorption, Israel, 2012 (5) 1-1 Israeli Innovation Model: “The Tech Transfer” from University to Industry

Creation of institutionalized basis for scientific research Technology transfer: the secret engine • The tech transfer from universities to industries has created the institutionalized basis for scientific research Dr. Albert Einstein, on his visit to the Technion, 1923 • Israel is the world’s pioneer in tech transfer since 1959 • 2 of the world’s top 15 tech transfer companies • Yeda, Weizmann Institute of Science (1959)  7 out of the leading 25 world’s blockbuster drugs have been developed in the Weizman Institute  US$ 400M in 2013 in licensed product revenues • Yissum, Hebrew University of Jerusalem (1964)  $8 billion in licensed product sales  US$ hundreds of millions in tech transfer revenues  Dozens of spinoffs

Source: ITTN

2- Government Support in Israel

. Government spending on high-tech education one of the highest in the Technology world(1) Education . Highest spending on R&D as a percentage of GDP in the world (1) 4.5% . Military as Talent Incubator for young 4.0% entrepreneurs, engineers and 3.5% Military scientists 3.0% Budget . Managerial experience at young age fosters entrepreneurial culture 2.5% 2.0% 1.5% 1.0% Chief . Incubators Scientist . R&D grants 0.5% 0.0%

Co- Investment . Yozma VC Fund & Health Fund with VC Industry

. Jewish Agency Immigration . Gvahim Support . MASA . Nefesh B’Nefesh

(1) Source: WEF Global Competitiveness Report 2013-2014 Leading Global Innovative Enterprises

Decades of history producing robust and continuous flow of leading global innovative companies Company Sector Size Position Solar Energy Raised US$615m in equity; received Global leader in design and development of solar thermal US$1.2bn power technology with 1.8GW of power under contract with grant from US Dept of Energy California’s two largest utilities Security Software Market cap: US$9.6bn World leader in network security solutions. Pioneered industry with Firewall and inspection technology Medical Technology Market Cap. US$550mn Revolutionized GI imaging with invention of the PillCam, enabling a capsule-camera endoscopy Water: Desalination Estimated valuation c. US$1bn Leading global player in development, engineering, production & operation of advanced water desalination plants Industrial Technology / Acquired for US$5bn valuation by Warren Leading producer of cutting edge precision carbide metal Process Buffet cutting tools Agritech: Crop Acquired for US$2.4bn by ChemChina Leading worldwide manufacturer and distributor of crop- Protection protection solutions Digital Technology/ c.25% stake acquired at company value Manufacturer of anti-collision driver safety solutions that help Software of US$1.5bn by BlackRock, Fidelity, drivers avoid traffic risks Wellington, Sailing Capital, Enterprise Rent-A-Car Flash Memory Acquired for US$1.65 billion Invented USB Flash storage drives Agritech/ Water: Micro Acquired for c. US$900mn Leader in smart drip & micro-irrigation solutions irrigation Geothermal Energy Market cap. US$900mn Leading geothermal technology company globally

Pharmaceuticals Market Cap: US$40.6bn #1 global generics company specializing in generic and propriety branded pharmaceuticals Mobile Application Acquired for US$1.1 billion by Google World's fastest-growing community-based traffic & navigation app, pioneer of crowd sourced maps, traffic, road info 3 -The high-tech sector is the growth engine of the Israeli economy

• In 2014 Israel’s manufacturing exports represented 78.6% of total exports and amounted to US$ 45.8 billion (excluding diamonds), compared with US$ 7.7 billion in 1990 1990 Manufacturing Exports 2014 Manufacturing Exports • Israel’s High-Tech exports totaled US$ $7.7 billion $45.8 billion 21.5 billion in 2013, which is 47% of the total manufacturing exports and represent a significant increase compared to 1990 when the High- Low Tech amounted to US$ 2.31 billion Tech, Low Tech, 19% 5% • Israel’s economy keeps growing and continues to be a “safe haven” among High Tech, 30% the OECD markets Medium Low Medium Low Tech, Tech, 31% High Tech, → 45% of Israel’s growth comes from the 19% 47% high tech Industry

Medium High Tech, 32%

Medium High Tech, 17%

Source : The Central Bureau of Statistics, Israel 4 - Defense Industry

. Israel 2014 military budget is 56.9 bn NIS (≈ US$ 13.5 bn), approximately 5.2% of the GDP and 13.0% of the total budget . Israel is the 4th largest military equipment exporter after USA, Russia and Germany . Israel Aerospace Industry’s (IAI) 2014 sales grew by 5% and reached US$ 3.83bn

Military expenditure as percentage of GDP, 2014 (%)

5.2 4.5

3.5 2.6 2.2 2.06 1.4 1.2 “Many Israeli start-ups should pay royalties to the army. The military service Israel Russia US S.Korea UK China Brazil Germany deserves some of the credit. Israel's Source: SIPRI (sipri.org); 2014 army does not just train soldiers, it nurtures entrepreneurs”*. – Edouard Cukierman , interview with “The Economist”. 5 - VC and Access to Global Financial Markets

. Early stage investment by VC in Israel equals 50% of early stage investments for all of Europe . Israel has a prospering start-up & VC industry, 2nd largest in the world . Over the last decade, c. US$ 18 billion were raised by Israeli High-Tech companies, at the VC level

1600 VC Investments per Capita in 2014, US $ Foreign Direct Investment Per Capita by Nation 1400 (2014 in US$) 1200 1000

800

600

400

200

0 5-1 Israel’s IPOs in Europe & US

Israeli Equity Europe USA

Offerings  Portfolio companies of Catalyst, which went public on Number Capital Number of Capital NASDAQ: PowerDsine (PDSN), Scopus (SCOP), Omrix Year of Equity Raised Equity Raised ($M) (OMRI), Commtouch (CTCH), BOS (BOSC), Cyalume (CYLU), Offerings ($M) Offerings Dot Hill (Hill), Orckit (ORCT). Some portfolio companies like Up to 1997 9 78 60 2,398 MTI went public on AIM.  Cukierman & Co. (CIH) is the leading Investment House for 1998 5 122 14 871 IPOs of Israeli firms in Europe. Transactions of CIH include: Summit, Visonic and Metaltech in London, Astra and VCON 1999 12 446 20 3,375 in Paris, Wizcom, OTI and Electronics Line in Germany.  As of today, Israeli companies raised over $37B through 2000 7 353 33 2,806 foreign public equity offerings, in addition to over $46B in secondary sale on the market by shareholders. 2001-2003 1 118 12 2,806  With over 200 companies going public on American Stock 2004 5 150 12 1,117 Exchanges, Israel was ranked #3, after China and Canada, in terms of number of foreign companies (excl. North 2005 20 1,106 4 355 American companies) listed on NASDAQ.  With over 90 Israeli companies going public on European 2006 16 2,078 8 3,460 Stock Exchanges, Israel was ranked #2 in terms of number of foreign companies traded on European Exchanges. 2007-2009 8 2,339 19 1,628  CIH is the sole NYSE Euronext’s Israeli listing sponsor. 2010-2013 6 1,084 36 4,010

2014 8 2,100 29 3,900 Source: Capital IQ, Dec. 2014 Total 97 9,974 247 26,726 5-2 Israel the Blue Chip Supermarket

Blue Chip Acquirer Israel Acquisitions / Investments Total Invested DSPC*, Envara, Oplus, Comsys, Sentrigo, Telmap, 2 . $7.1bn Since 2000, approximately 1,000 Israeli companies Fabs were acquired by international corporations Indigo, Scitex*, Mercury*, Orana, NUR Macroprinters $6.1bn . Catalyst principals have been involved in over 140 Iscar $6.0bn completed transactions (including exits and investments in Israeli and related companies) Makhteshim Agan $2.4bn . Many global blue chip corporations have made $1.6bn M-Systems* significant acquisitions and / or multiple acquisitions P-Cube, Pentacom, Seagul, HyNex, InfoGear, Intucell $1.3bn in Israel . Many key strategic products or solutions of leading XIV Storage, Guardium, WorkLight, Trusteer $1.25bn blue chips were developed in Israel

MentorWave, LabPixies, Waze $1.2bn  Intel with 7,000 employees, 4 R&D centers, 2 Dune, Percello, Provigent , SC Square, Broadlight $869m manufacturing facilities developed the Pentium, Centrino and duo core chips in Israel , PrimeSense $845m  's most popular operating systems were Tecnomatix, Arava, Solel $703m developed primarily in Israel. Microsoft has had a strong presence in Israel for many years, and has 2 superDimension, Oridion Systems $622m R&D centers that employ 600 people. CEO Steve Omrix*, Given Imaging $488m Ballmer said that MSFT is as much Israeli as it is American Peach Networks, Maximal Innovative, Whale, Gteko, Secured Dimensions, YaData, MSN Israel, 3DV $460m  HP has made more than 5 significant investments Systems, Zoomix VideoSurf in Israel since 2000, investing more than US$6 bn Mobileye* $400m and obtaining many key technologies  Outside of high-tech, many life sciences, med-tech $325m Medingo and industrial companies are actively investing and Snaptu, Face.com, Onavo $300m acquiring Israeli companies Sightline*, Surpass Medical $285m Alma Lasers $240m

Attenti $230m

ELGEMS, Versamed, Lightech, Orbotech $100m * Transactions involving Catalyst Fund Principals Algotec Systems, OREX Computed Radiography* $94m 5-3 Emerging Markets Acquiring Israeli Companies

EM Acquirer Israel Acquisitions / Investments Total Invested . Over the last decade, new ChemChina (CN) Makhteshim Agan (2011) $3.7bn trend visible in Israel: formerly, Bright Food (CN) Tnuva (2014) $2.5bn majority of all acquisitions of Rakuten (JP) Viber (2014) $900m Israeli companies and Alma Laser (2013), Check-Cap (2014), Phoenix Insurance technologies were done by US Fosun Pharma (CN) $723m Company (2015) and European companies Access Industries Inc. Clal Industries (2012), GetTaxi (2012) $665m XIO Group Luminis (2015) $510m . Today, growing trend of SingTel (SN) Amobee (2012) $321m emerging market players Alibaba (CN) Tango (2014) $280m acquiring Israeli technologies from China, Russia, Japan and Kaiima, Waze, MCS Medial, Onavo, Tipa, Hola, Nipendo, other countries from Asia Horizon Ventures (Li Ka-Shing, CN) Cortica, Feex, Magisto, Ginger Software, Meteo Logic, $188.1m

everything.me, Wibbitz, Stevie Inc., Peen.me (2010-2014) . Bilateral trade between China Sichuan Hebang Corp. Stockton Israel Ltd. (2015) $176m and Israel increased : from Hutchison Whampoa (CN) Partner Communications, Orange, Kinrot (2012) $155m US$51 million in 1992 to Li Ka-Shing Foundation (CN) Technion – Institute of Technology (2014) $130m US$8.8 billion in 2014 Chabad 770 (RU) Z.B.I. Ltd. (2013) $100m Samsung (S-Korea) StoreDot (2014), Mantis Vision (2014) $100m . Today, China (including Hong Kong) is Israel’s second top China’s Sunpower Group (CN) Natali Seculife (2014) $70m export destination after the US Sailing Capital (CN) Mobileye (2013) $75m Yifang Digital (CN) Pegasus Technologies (2010) $60m Jain Irrigation Systems (IN) NaanDan Irrigation Systems (2012) $43m

Yandex (RU) KitLocate, Face.com, TimeBooker, Gbooking (2013) $30m

CITIC (CN) Bank Ha’Poalim $20m

Zhejiang Sanhua (CN) HelioFocus (2012) $10.5m Han’s Laser (CN) Nextec Technologies (2013) $10m Source: Baidu (CN) Pixellot (2014) $3M Israel Export & International Cooperation Institute, 2014 6 - Entrepreneurial Spirit

. Jewish Education Studies: Questioning and Challenging (Passover, Hagada)

. “The Israeli Chutzpah”: The absence of hierarchical barriers promotes innovation at all levels of a firm

. Reaction to isolation and lack of resources

. Democracy - Culture of Transparency

. Melting Pot: Israeli Immigrants from more than 90 countries

. Problem-solving approach starting in the army.

. “A network of startups in a Start-Up Nation”: Israel has the highest amount of start-ups per capita in the world

. R&D centers with world-wide recognition

. Israel is blessed with an exceptional entrepreneurial workforce, ranked 3rd in the world (IMD index)

. Ranked in 1st place for business entrepreneurship by IMD (2009) Attractive Israel Investment Environment

In light of recent developments in Israel and the current and expected market environment, there are and are expected to be very interesting opportunities for investors in the Israeli market over the number of years.

Government reforms & regulations on concentration of wealth and deleveraging

. Government reforms / regulations targeting local tycoons and holding companies with disproportional concentration of wealth and economic power . 10 largest groups own 41% of Israeli market cap, the highest in the OECD . New recommendations call for separation of large financial and non-financial holdings from single groups, weakening of holding company structure and stronger corporate governance . Holding companies and local tycoons which have traditionally been incumbent buyers of Israeli assets are no longer well positioned . Many are in deleveraging phase and are in fact the source of many of the assets hitting the market Upgrade to OECD and Exit of Emerging Market Funds Creates Vacuum

. Israel upgrade to OECD status in May 2010 has disqualified the core international institutional market investors . Developed market funds slow to enter market playing in large cap liquid shares

Development of emerging oil & gas industry to buoy Israeli economy for decades

. Two of the largest gas discoveries in the past decade globally (“Leviathan, Tamar” offshore Israel) expected to begin production in 2013 and 2017 . Estimated to generate USD$200+ billion in gas revenues for over the next 30 years starting in 2013 . Expected to act as momentous, long-term stimulus . Expected lower energy costs will improve profitability for Israeli industry Transparency of Governance . Investment in Israeli / or developed market entity provides a significantly superior investment vehicle in terms of transparency, corporate governance and overall legal environment

14 ISRAEL VALLEY

• The “Israel Valley: The Technological Shield of Innovation”, tells the story of Israel’s success in building the world’s leading High-Tech Industry

• The “Israel Valley” attempts to explain and analyze the Israeli experience, to illustrate it through numerous examples and stories

•Taking into account some of Israel’s characteristics, such as the role of education, the Jewish culture, and the army, the book highlights the main ingredients of Israel’s successful economy. The economy is intimately intertwined and connected with the High-Tech industry.

• The “Technological Shield of Innovation” model which originally was meant to protect the country, became the source of innovation: Israel is the second Silicon Valley of the world, with companies like Checkpoint, Netafim, Given Imagin and others that are all “made in Israel”. 谢谢 - תודה רבה – Merci – Thank you