The Investor's Guide to the Israel Enterprise Software Industry


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Israel is a great destination for investing in startups.

Nowhere is that better demonstrated than in the case study of the enterprise software industry -- where many of Israel's fabled success stories of IPOs and large mergers and acquisitions.

Included in the presentation are companies like Amdox (DOX), Comverse, and Mercury Interactive.

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The Investor's Guide to the Israel Enterprise Software Industry

  1. 1. Israel’s Enterprise Software Ecosystem – Big Results Start-Up Nation’s Enterprise Software Impact Jon Medved January 2014 Israeli Enterprise Software Impact January 2014 1
  2. 2. 1) Israel The Economic Success Story Israeli Enterprise Software Impact January 2014 2
  3. 3. “Israel: the power to astonish” Emerging Market Growth, Developed Market Stability GDP Growth by Year • The Start-up Nation is not a one-trick pony. • Early rumors of a VC bubble have died out as Israel has shown its economic vitality through good times and bad. • 5.50% Since 2004 Israel has outpaced other advanced economies’ growth by a significant margin. 3.50% 1.50% -0.50% 2005 2006 2007 -2.50% OECD 2008 2009 2010 2011 2012 Israel -4.50% Sources: The World Bank Group. "World Development Indicators." Israeli Enterprise Software Impact January 2014 3
  4. 4. Israel beats all comers in job creation A combination of fast population growth, robust exports, and sound monetary policy has allowed Israel to create jobs faster than the U.S., the EU, Poland, and even Brazil. Israeli Enterprise Software Impact January 2014 4
  5. 5. The Israeli Economic Success Story “For a country with so many wars, Israel still has an economy with the power to astonish” - The Economist, April 2008 Until 2009, Israel had more US listed companies (currently 90+) than any other country, when only China surpassed it Per capita VC funds raised in 2000: “Within the 6 years after the tech bubble – Israel: $600 per capita – Europe: $30 per capita The world's highest per capita count of engineers The highest density of high-tech startups – Nearly 4,000 in a country of eight million people. Exports represent nearly 40% of Israel’s economy: burst in 2000, Israel suffered one of its worst periods of terrorist attacks and fought a 2nd Lebanon war; and yet, its share of the global venture capital market did not drop—it doubled from 15% to 31%” Dan Senor and Saul Singer The Start-up Nation – $9B of annual life science exports – Intel: “We accounted for 10% of Israel’s 2012 exports” S&P raised Israel’s credit rating in September 2011, lifting the country to A+ Israel’s Unemployment down to 5.6% -- near 20 year low. Israeli Enterprise Software Impact January 2014 5
  6. 6. Knowledge based, tech oriented R&D capital of the world The Israeli economy is defined by its world-class capacity for innovation and its focus on R&D. Industry-geared research institutions and military training foster a highly educated and motivated population. “Israel does spectacularly well on those indicators that capture technology innovation, education, human capital and this accounts for the very rapid movement of the Israeli Economy.” Augusto Lopez–Claros,Chief Economist, World Economic Forum, December 2009 Civilian R&D Expenditure as % of GDP1 Israel Japan Taiwan Germany USA OECD 0 1 2 Quality of Scientific Research Institutions – ranking of 143 Countries2 Israel Switzerland United Kingdom Sweden Belgium Qatar 1 2 3 4 5 6 3 4 5 Innovative Capacity Score, Ranking of 53 Top Countries3 USA 1 8.24 Israel 2 8.00 Switzerland 3 7.88 Germany 4 7.60 Sweden 5 7.52 Taiwan 6 7.30 Sources: 1 Central Bureau of Statistics Press Release, Aug 2011, 2&5 World Economic Forum, Global, Competitiveness Report 2011-2012, 3 IMD, World Competitiveness Yearbook 2011, 4 OECD, Education at a Glance 2011 6 Israeli Enterprise Software Impact January 2014
  7. 7. Knowledge based, tech oriented Competitive on the global arena Israel is poised to remain the world’s startup capital. Israel’s Competitive Edge1 Country Rank  2nd 3rd 4th Total Expenditure on R&D Finland Sweden Japan Flexibility & Adaptability Hong Kong Australia Brazil Entrepreneurship of Managers Malaysia Colombia Taiwan Availability of Scientists and Engineers Japan USA India Hong Kong Taiwan Denmark Sweden Venture Capital Availability Info Technology Skills 1st USA Iceland A highly educated workforce, smart governance, and continued international investment opportunities provides Israel with a serious competitive edge in start-up creation over other developed countries. Israel Ranks: • 1st in the world in Medical Device patents per capita • 1st in the world in quality of scientific research institutions • 3rd in the world for total patents per capita • 3rd most scientific papers per capita in the world • 2nd in the world in public expenditure on education Sources: 1 IMF World Competitiveness Yearbook 2011, , WEF – Global Competitiveness Report 2011 7 Israeli Enterprise Software Impact January 2014
  8. 8. What has changed? Quite a lot! Skyline Capital availability – twenty years ago it was difficult even for Teva or Checkpoint to raise funds The Perception: “Start-Up Nation” is a Positive Brand . . .but we still have work to do on this front . .. Companies have grown up; management teams have improved with global experience; serial entrepreneurs abound And finally… natural resources Israeli Enterprise Software Impact January 2014 8
  9. 9. 2) Serious Results Start-Up Nation’s impact Israeli Enterprise Software Impact January 2014 9
  10. 10. Israeli High Tech Investment 2013 figures only encompass Q1-3. Given quarterly average, 2013 expected to top out at ~$2.2B A great decade gets even better 25 Israeli high-tech capital raising Hundreds of Millions of $ 20 Israeli VC Share Other Investors 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013** Source: IVC Quarterly Survey, Q3 2013, IVC Research Surveys 2010-2012 Israeli Enterprise Software Impact January 2014 10
  11. 11. Israeli High Tech Investment 7 Israeli high-tech capital raising Israeli VC Share Other Investors Hundreds of Millions of $ 6 5 4 3 Q3 of 2013 is the best quarter on record since 2000, and is a 35% increase from Q3 of 2012. 2 1 0 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Source: IVC Quarterly Survey, Q3 2013 Israeli Enterprise Software Impact January 2014 11
  12. 12. The Israeli Economic Success Story Between 2005 and 2012, these companies all bought at least one Israeli start-up. Israeli Enterprise Software Impact January 2014 12
  13. 13. Trends: Israeli M&A 16.4 Volume 93 16 $ Billions 14 12 88 79 63 60 10 # Deals 90 84 80 73 70 63 10 62 100 50 58 8 5 6 4 2 25 0.5 2 1.1 1.9 2.7 3.5 2.7 2.6 5.6 60 50 40 # of Deals 18 M&A of Israeli firms 30 23 1.2 20 10 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IVC M&A Survey, 2012 Israeli Enterprise Software Impact January 2014 13
  14. 14. Trends: Israeli M&A Average M&A size increasing 120 Millions of $ 100 60 $51M “Recently, we are seeing Israeli companies grow, and become world leaders in their areas. We are seeing companies with revenues of over $100 million. We did not see these in the past. They were being sold much earlier, often pre-revenue.” Rubi Suliman PwC High-Tech Partner $35M $32M 20 0 2008 2009 2010 “…the average deal size has grown nearly 3½ times, from $32 million in 2008.” Wall Street Journal Israeli 2012 Tech Exits Top $5.5B Jan 7th, 2013 $81M 80 40 $111M Average M&A price by year 2011 2012 Source: PWC Israeli Exit Report 2012 Israeli Enterprise Software Impact January 2014 14
  15. 15. Israeli Companies are Leaders in Profit Driving Innovation Israeli companies developed many of the technologies we all use  Use a PC . . . . The Intel MMX, Pentium-4 & Centrino chips were designed, developed, and produced in Israel  Make some calls . . . IP telephony was invented by VocalTec and AudioCodes; Cordless phones powered by DSPG  Leave Voicemail . . . . Comverse Technology is the world leader in VoiceMail and SMS systems  Use a Disk On Key . . . Disk-on-Key was invented and first sold by M-Systems (now part of Sandisk)  Try to Hack Into a Computer . . . CheckPoint is by far the world leader (and the inventor of) Firewall Software  Call into a call Center . . . . Two companies (NICE and Verint) are world leaders in monitoring and Recording Systems  Get Wiretapped (huh?). . . . Verint is a global leader in digital audio and video surveillance analytic tools  Use a Cell-Phone. . . . . Original cellphone technology was developd and continues to be produced in Israel  Watch a Flat Panel TV . . . . Orbotech sells critical inspection equipment which is used by virtually all TV manufacturers  Get some help on the Internet . . . LivePerson sells the software than enables live-chat for leading Internet retailers  Send an Instant Message ICQ (now AOL Instant Messanger) was invented in Israel Israeli Enterprise Software Impact January 2014 15
  16. 16. World class companies with a global footprint Teva Pharmaceuticals (TEVA – Mkt. Cap. = $40bn; TASE & NASDAQ Listed) • • Teva is the world’s largest generic drug manufacturer; 1 out of every 13 prescriptions filled in the US is for a TEVA product. Has made numerous multi-billion $ acquisitions over the past few years Perrigo (PRGO – Mkt. Cap. = $9bn; TASE and NASDAQ Listed) • • Perrigo is the world’s largest over-the-counter generic drug manufacturer; the largest supplier to OTC drug store branded mkt Expanded into the prescription generic market through ‘05 acquisition of Agis Check Point Software (CHKP – Mkt Cap = $12bn; Listed on Nasdaq) • • Worldwide leader in internet and network data security; pioneered Firewall technology in 1994 Serves 98% of the Fortune 500 and more than 100,000 customers worldwide; subsidiaries in over 40 countries Israeli Enterprise Software Impact January 2014 16
  17. 17. World class companies with a global footprint Amdocs (DOX—Mkt Cap = $7bn; Listed on NASDAQ) • • The worlds leading provider of billing and customer care software and services to global telecom carriers A very high % of global tier-1 carriers use Amdocs software Israel Chemical (ICL – Mkt Cap = $13bn; Listed on TASE) • • One of the largest producers of Potash, and other Agrochemical products in the world Unique production and distribution advantages given location and access to Dead Sea Given Imaging (GIVN – Mkt Cap = $700mm; Listed on TASE and NASDAQ) • • Invented a “pill-camera” for diagnostic purposes in gastro-intestinal procedures; technology emerged from missile imaging technology Has developed from a “sci-fi” type start-up to a company selling around $200mm; they have sold well over 1mm pills Israeli Enterprise Software Impact January 2014 17
  18. 18. 3) Enterprise Software Activity Acquisitions in Israel Israeli Enterprise Software Impact January 2014 18
  19. 19. Enterprise software powerhouse • Established in the ’80s, Comverse, Mercury Interactive and Amdocs were considered top-tier competition, especially in niche markets, to multinationals like SAP and Oracle. • Seeded a whole ecosystem of enterprise-focused software startups that sprung up in the late 1990s through today. • These players set the tone across Israeli high-tech and are a major reason Israel is such a enterprise software powerhouse. Israeli enterprise SW giants “CEOs of Israeli startups routinely name Mercury as the Israeli company they most admire... For the next generations of Israeli software firms, these three have written the rulebook” Susanna Khavul in Silicon Wadi – The Rise of the Software Industry in Israel Israeli Enterprise Software Impact January 2014 19
  20. 20. 2006-10: Oracle’s activity Convergin – brokering platform for telecom service providers 2010 Oracle acquisition for $90M Primavera Software – enterprise project management software using real-time data Oracle acquires and expands the Jerusalem R&D Center, its second in Israel. 2008 Oracle acquisition $45M Demantra – demand forecasting services for sales planning 2006 Oracle acquisition for $41M Israeli Enterprise Software Impact January 2014 20
  21. 21. 1998: SAP’s first Israel venture SAP Labs Israel SAP’s new activity starting with their Labs opening in 1998 in Herzliya helped spawn a series of investments from SAP Ventures. Acquisition of OFEK-Tech birthed SAP’s “Labs Israel” – spawning a number of investments across the country. • • • SAP acquisition $200M SAP labs employed 40 people in 2001 and is now operating across Israel with nearly 1000 researchers. • • • Top Manage – 2002 acquisition (undisclosed $) Virtual Locality – 2005 acquisition $500K Interwise – 2000 series C $30M from GE and SAP Ventures, later bought by AT&T for $121M Zend Technologies – 2005 investment (undisclosed $) A2i – 2004 acquisition for $20M … and more Israeli Enterprise Software Impact January 2014 21
  22. 22. 2001: SAP/TopTier An acquisition that leads to more TopTier was at the vanguard of helping businesses entering the information age deal with the overflow of data. An all-cash acquisition this size was unheard of for SAP at the time – but Oracle was also eyeing the deal. SAP today announced its intention of setting up a new subsidiary, named SAP Portals, to focus on the management and development of portals and business sector products, which will be based on TopTier’s technology. The company is planning to employ 700 people, who will be managed by TopTier president and CEO Agassi. The subsidiary will operate in California, with development centers in Germany and Ra’anana. – Globes April 2001 SAP acquisition $400M. Israeli Enterprise Software Impact January 2014 22
  23. 23. 2006: EMC/nLayers and Kashya Database management software mapping the applications running on top of enterprise infrastructure for more efficient allocation EMC acquisition $50M Continuous data protection adapted to heterogeneous networks for disaster recovery – EMC’s clients’ networks largely fragmented and therefore vulnerable. Evolved into “RecoverPoint” EMC acquisition $150M Israeli Enterprise Software Impact January 2014 23
  24. 24. 2006-11: EMC Serial Activity 2006: Proactive Solutions EMC acquisition - $30M Inaugurating EMC’s Center of Excellence - 2011 2007: Illuminator Illuminator EMC acquisition - $10M 2011: Zettapoint Database optimization EMC acquisition - $10M EMC’s serial activity is expected to stem from its new nerve center in Israel, the CoE in Herzliya. Focused on cloudsoftware development, the Center is also tasked with coordinating the recently acquired companies to work with EMC’s larger global strategy. Israeli Enterprise Software Impact January 2014 24
  25. 25. 2012-3: EMC/XtremIO … EMC/ScaleIO EMC’s growing presence in Israel Both ScaleIO and XtremIO offer solutions for datacenters needing to scale both their storage and computational capacities. EMC’s “sister acquisitions” help maintain its position as market leader as datacenters begin to adopt both multi-medium and flash-only storage products. XtremIO 2012 acquisition for $430M ScaleIO 2013 acquisition for $200$300M “EMC has 1,000 employees in Israel, mostly at its center of excellence, run by Dr. Orna Berry. It seems that after the acquisition of five Israeli companies, on top of organic growth, EMC is now a serial buyer. "I am sure that we will make more acquisitions in Israel, just as I'm sure as I am sitting here," Tucci [EMC CEO] says.” - Globes, 2011 Israeli Enterprise Software Impact January 2014 25
  26. 26. 2008: IBM/I-Logix and IMB/Guardium 2008: I-Logix, model driven development behind IBM’s “Rational Rhapsody” product IBM acquisition: $140M 2008: Guardium, real-time database security and monitoring, plus enterprise database regulatory compliance management IBM acquisition: $225M 2008 also saw IBM acquire XIV Software, FileX, and Diligent Technologies… Israeli Enterprise Software Impact January 2014 26
  27. 27. 2010-2012: IBM activity 2010: StorWize Real time compression to boost networked storage performance IBM acquisition: $140M 2012: Worklight Mobile application development platform – speeding time to market for complex enterprise applications for mobile IBM acquisition: $60M 2012: Red Bend Mobile business asset management software behind IBM’s PureFlex system IBM acquisition reportedly $250M Israeli Enterprise Software Impact January 2014 27
  28. 28. 2013: IBM/Trusteer and IBM/CSL Trusteer currently protecting millions of end users (PCs, smartphones, anyone using an ATM or accessing sensitive files on corporate networks) CSL International provides virtualization management across enterprises, now integrated into IBM’s zEnterprise systems IBM acquisition for undisclosed $$ IBM acquisition ~$1B. Israeli Enterprise Software Impact January 2014 28
  29. 29. Other transactions Onavo helps solve the impending cellular spectrum crunch by reducing the amount of data you need to do what you want on your smartphone. Facebook acquisition $120M. Software for supply chain analysis and optimization, applied primarily to retail and distributors of B2C NCR Corp. acquisition ~$800M Protection for high-value data; enterprise and financial datacenter management. A Shlomo Kramer company. IPO on Nasdaq 2011 ~$1B Israeli Enterprise Software Impact January 2014 29
  30. 30. Multinationals’ “boots on the ground” in Israel IBM R&D Center Haifa SAP R&D Center Herzliya Since 1927, cooperative research with top Israeli universities. SAP CEO Hagemann: This center is “a front line where new ideas are turned into technologies… and is succeeding well.” IBM Innovation Center TA SAP R&D Centers Herzliya & Karmiel Center of excellence & training facility for corporations looking for guidance implementing IBM Israel software in their business IBM Cyber-security Labs Ramat Gan Opening 2014, leveraging the 200+ employees at Trusteer to develop the next generation of cybersecurity software Israeli Enterprise Software Impact January 2014 30
  31. 31. Multinationals’ “boots on the ground” in Israel Tel Aviv – Center of Excellence in cooperation with Matrix Israel Herzliya – Center of Excellence and coordination hub for EMC’s Israeli assets Tel Aviv – EMC Labs Israel, focusing on machine learning OurCrowd partnership – A new approach to accessing early stage technologies – coinvesting agreement with Israel’s OurCrowd Beer Sheva – R&D Center working with Ben Gurion University on virtualization and cloud management Israeli Enterprise Software Impact January 2014 31
  32. 32. 5) Causes Why Israel? Israeli Enterprise Software Impact January 2014 32
  33. 33. Why? The Key Ingredients Which Have Lead to Success • Culture • Human resources . . . It’s all about the people • Army training, development and experience • Gov’t Support • Required resources available: academia, brain power, funding Israeli Enterprise Software Impact January 2014 33
  34. 34. Why? The Key Ingredients Which Have Lead to Success It’s the Culture • • • • • • • • • Small geographical entity -- 2 hour drive to anywhere (like Silicon Valley?) Risk taking is endemic; Its OK to fail (life and failure are in perspective) Everyone questions authority Informality is a way of life (Bibi, Dudu, Chemi, Bogi), flat social organization Immigrants and immigration are accepted and encouraged International networks and experience Going global from day 1 Pioneering ethos; the “whole country” was startup New cultural icons – startups as the national sport Israeli Enterprise Software Impact January 2014 34
  35. 35. Why? The Key Ingredients Which Have Lead to Success The IDF – Israel’s not-so-secret weapon • • • • • • • Elite technical units are a key (and cost effective) training ground Technology/intel units have the latest tech and “toys” Best and brightest work as teams, take risks, and lead Learn how to innovate and build products fast and cheap Meet/bond with friends and partners for life Cutting edge technologies in software, communications, security, optics, video, networking, etc. Military technologies applied to unlikely areas… Plus, it puts risk taking in perspective! Israeli Enterprise Software Impact January 2014 35