PROFESSIONAL PRACTICE PORTFOLIO PERFORMANCE STARtups of David WHY HAS ISRAEL BECOME A KEY MARKET FOR EARLY-STAGE INNOVATION? By Sherree DeCovny Israel has produced so many successful technology start- Forces (IDF), which happens to be a surprising advantage ups that Tel Aviv is now considered the Silicon Valley of the for some entrepreneurs. The military is the great leveler: Middle East. Venture capital funds from around the world No one cares about your socioeconomic background, and are flocking to the country in search of the next big inno- everyone has an opportunity to build a network of talented vation. Several companies have been bought out by global friends and acquaintances. The IDF is also a technology- giants, and scores of Israeli companies are listed on major intensive organization, providing a pathway for Israelis to foreign exchanges. So what is Israel’s secret? develop skills in such key areas as cybersecurity. Israel is a small country A case in point is serial entrepreneur Ariel Maislos. Fol- with hostile neighbors and lowing a 10-year stint in the IDF, Maislos began developing Israel attracts more ven- limited natural resources, so technology for Israel’s equivalent of the US National Secu- tures per capita than any Israelis are creative at find- rity Agency. In 2001, he founded Passave, which offered other country, and 85% of ing workarounds and ways fiber-to-the-home broadband communication technology. the funding for Israeli high to scale globally. Out-of-the- Passave was sold to PMC-Sierra in 2006, which was then tech comes from abroad. box thinking is so ingrained acquired by Microsemi in 2016. KEY POINTS in the culture that Israelis Next, Maislos founded Anobit, a flash storage company. Cultural characteristics have an almost manic need to After Anobit was acquired by Apple in 2012, he established (such as high tolerance for innovate. They are constantly and ran Apple’s engineering center in Israel. At the time, failure) and national circum- looking to break molds and this was one of Apple’s largest acquisitions, as well as its stances (such as manda- stretch boundaries. first engineering center outside the United States. tory military service) help “People in Israel don’t “In both cases, we ended up with very successful finan- give Israeli entrepreneurs stand in line,” Gadi Toren, cial outcomes for the founding team, employees, and inves- an edge. an investment partner at tors,” says Maislos. “The acquired companies were success- Although a “cultural trans- Robert Bosch Venture Capital ful in leveraging the technology and the team for ongoing plant” is virtually impos- (RBVC) in Tel Aviv, says half- innovation. Anobit had about 200 employees in Israel when sible, other countries can jokingly. “It’s the same cul- Apple acquired it, and the staff was expanded to 800.” learn from key aspects of tural characteristic that also In 2013, he founded Stratoscale, which is now develop- Israel’s example, such as makes people find more effi- ing tools to enable companies to leverage cloud technology. the way Israel’s government cient ways of doing things and The undertaking is not only broad in scope but also requires promotes and supports challenge conventions. Even innovation in many fields. Maislos attracted top investors to innovation and risk taking. if people tell you it’s impossi- back the idea. He got Stratoscale off the ground by teaming ble, you still want to check it.” up with Battery Ventures, which was also the seed investor Importantly, Israelis have in Anobit. Then he attracted other investors, including Besse- a high tolerance for failure, and new startups are often born mer Venture Partners, Intel Capital, Cisco Systems, SanDisk out of collapses. Modu, a telecommunications company, is a (recently acquired by Western Digital), and Leslie Ventures. case in point. The company’s founder, Dov Moran, invented the Maislos hopes to start marketing the technology later in 2016. USB flash drive and sold his company, M-Systems, to SanDisk for $1.6 billion in one of Israel’s largest transactions. He then MULTINATIONAL VENTURE CAPITAL started Modu in 2007 and developed a very small and light Multinational firms’ investment arms in Israel serve as a modular smartphone. Moran recruited an excellent manage- window to the global markets. Venture capital firms have ment team and board, raising $120 million from investors, but offices there so they can be close to early-stage innovation three years later the company shut down because its smart- and provide mentorship and funding. Successful Israeli phone could not compete with Apple’s iPhone, which was entrepreneurs are also investing back into the ecosystem. much larger and consolidated apps onto one device. Modu’s “About 85% of the funding in Israeli high tech originates IP portfolio was sold to Google, and it formed the basis for from abroad,” says Inbal Arieli, vice president of strategic the Google modular phone. Additionally, many former Modu partnerships at Start-Up Nation Central in Tel Aviv. “That employees have started their own companies. figure has been stable for many years now, which speaks for the talent that exists here.” A MILITARY SECRET MS Ventures, the corporate venture arm of Merck in All able-bodied Israelis must serve in the Israel Defense Germany, has committed to invest up to about €10 million 32 CFA Institute Magazine September 2016 in early-stage opportunities through its Israel Bioincuba- it supports startups by helping to devise strategies that will tor Fund. It has invested in Metabomed, a company focus- make money and result in a successful exit. It also facili- ing on the discovery and development of potential small- tates relations with Bosch in various forms, including joint molecule drugs directed against novel targets in the field development, managing the customer–supplier relationship, of cancer metabolism. Based on its proprietary interdisci- and distribution, all the way up to the point of acquisition. plinary target identification platform, Metabomed’s unique The startup is not obliged to do anything with Bosch, approach to discovery allows it to potentially identify new however, and Bosch is not obliged to do anything with the targets that form a synthetic lethal gene pair with metabolic startup. RBVC takes a large minority position, normally genes inactivated in cancer cells. By inhibiting these targets, between 10% and 25%. It’s flexible in terms of its position Metabomed intends to develop more-selective anti-cancer in the investment rounds and willing to syndicate and invest drugs that could be highly targeted, sparing normal cells. alongside other investors. Metabomed recently completed an extension of its Series A round from current and new investors, bringing the total REPLICATING SUCCESS to $18 million. Other investors include Boehringer Ingelheim Israel attracts more venture capital per capita than any Venture Fund, Pontifax Venture Capital, the Technion Research other country. It has the highest density of startups in the & Development Foundation, Pfizer, and Arkin Holdings. Meta- world, and it ranks third in the world in innovation accord- bomed will continue gathering data and experimenting to prove ing to the World Economic Forum’s Global Competitiveness its hypothesis. If the work is successful, either a partner will Report 2015–2016. Generally, investors perceive it as being provide additional funding or the company will be acquired. an island of stability in the region. According to Deloitte’s Merck plans to build on its presence in Israel to create “2015 Global Venture Capital Confidence Survey,” for the companies from scratch, as it did with Metabomed. More- last five years global investor confidence in Israel has been over, its commitment has formed a bridge for other inves- second only to that in the United States. tors from the pharmaceutical industry. Novartis has invested According to Arieli, valuations of Israeli companies are in an incubator company called BioLineRx, which it plans slightly lower on average than those of Silicon Valley com- to use as a scouting branch to look for other early-stage panies, but they are higher than those in Europe. However, investments in Israel. Furthermore, Johnson & Johnson competition has increased over the past decade as more joined forces with Takeda Pharmaceutical Company’s ven- countries recognize that innovation, technology, and entre- ture group, the Office of the Chief Scientist in Israel, and preneurship are sources of economic strength. OrbiMed Israel Partners in an incubator called FutuRx. “All those numbers are great, but there’s potential for “You now have a paradigm for large pharma to optimize the so much more,” she says. “We need to increase the pool of way they’re going to access Israeli technology,” says Simone talent that’s involved in high tech and involve larger por- Botti, former head of MS Ventures Israel Bioincubator Fund tions of the workforce in this sector, which is a growth and now CEO of Metabomed. “You have different models. engine of the economy.” Each one is finding the best formula for accessing innovation.” The Israeli government has been proactive in policymak- Founded in 2008, RBVC is the corporate venture com- ing and risk taking to support innovation. Israel’s Office of pany of the Bosch Group, a global supplier of mobility solu- the Chief Scientist, which is being renamed the Israel Inno- tions, industrial technology, consumer goods, and energy vation Authority, has contributed significant funding for and building technology. RBVC opened its Israel office in loans that startup companies must repay only if they are 2009, and its structure is similar to private venture part- successful. Applicants must submit an R&D plan and budget, nerships. There is an operational wall between RBVC and and they need to report to the Innovation Authority and be Bosch’s other business units.