Venture capital financing has been a major driver of Israel's high tech industry by providing funding to startups and helping them commercialize their products globally. The Israeli VC industry was established in 1993 through the Yozma program, which established 10 VC funds with mostly foreign investor capital. This program was highly successful and has led to over $17 billion being invested in Israeli high tech companies. Key factors that have contributed to Israel's success include a culture of entrepreneurship and innovation, top talent and universities, technology transfer from defense R&D, and business-friendly policies. As a result, Israel has become known as the "Startup Nation" with over 600 new startups founded each year in sectors like IT, life sciences,

1. Venture Capital Financing as a Driver of
Israel High Tech Industry
Presented
by
David Heller
Managing Partner, Vertex Venture Capital
Israeli-Hungarian Innovation Day, Budapest, October 2013

2. Venture Capital as a Bridge to the World
Export
Start-Up Companies
High Tech Products
Import
Venture
Capital
Funds
2
Capital
$€₤¥

3. Uniqueness of Israeli Venture Capital
 Capital for VC funds >90% foreign sources
 VC funds invest in high technology only
 VC managers are skilled in risk evaluation of early stage companies
 VC managers take an active role in assisting portfolio companies in business
development worldwide
 M&A is the main route to exit (although Israeli companies are #2 on NASDAQ
after China)
3

4. Capital Inflow
(Import)
4

5. History of the VC Industry in Israel
• One small venture capital fund of US$30 Million
Until 1993
1993:
VC Industry is
Established (Yozma)
Post-Yozma
• Technology R&D was conducted in a few large local
companies
• Israeli government established Yozma Fund of Funds
• Yozma’s objective was to encourage foreign investors
to invest with local partners to establish VC funds in
Israel
• Large industry of independent venture capital funds
(without government money) raised more than
US$17 Billion
• Technology R&D is conducted in many small
companies (start-ups)
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6. Principles of the Yozma Fund
 Government Fund of Funds with
budget of US $100 million
 Yozma invested in 10 VC funds,
US $10M in each fund
Foreign
Investor
Origin
Israeli Fund
Jerusalem
Pacific
Ventures
USA
Polaris
 Cash invested in each VC fund:
40% Yozma; 60% foreign investors
Europe
 Sources of capital: USA, Europe & Asia
 Option for investors to buy Yozma’s
shares from the government at a fixed
price (cost + interest)
Asia
To date, Israeli VC Funds raised approximately US $17 Billion
170X on the Government investment
6

7. Israel: The Start Up Nation
The Economist, January 21, 2012
Venture Capital investment (in USD) per person, selected countries
0
25
50
75
100
125
150
175
Israel
United States
Norway
Sweden
Switzerland
Finland
Denmark
• Eco-system of VCs, dozens of incubators and
accelerators and repeat entrepreneurs
France
• Over 4800 active startup companies
Britain
• Over 600 new start ups created every year
Ireland
• $1-2B VC investment in high tech companies annually
Netherlands
Belgium
Austria
7
Sources: National Venture Association; European Private Equity and Venture Capital Association; Israel Venture
Capital Research Center; UN

8. Innovative Technology Outflow
(Export)
8

9. Necessity Drives Innovation & Globalization
No Natural
Resources
Economy based on human capital, innovation and knowledge
Scarce Water
& Land
Development of water and agriculture technologies
No Energy
Resources
Development of solar energy and other alternative energy
Security
Needs
No Domestic
Market
9
Development of defense
technologies
Commercialization of
technologies
Companies target foreign markets from Day One

10. Israeli Start-Up Landscape
 Every year, ~600 new high tech start-ups are established in Israel
 Venture capital funds are the main source of capital for high tech start-up
companies
 Most high tech R&D is done in small companies (10s-100s employees)
 Manufacturing capabilities in Israel are relatively limited, therefore, many
companies manufacture their products overseas
 All high tech companies export their products overseas
 Many Israeli companies are being acquired by foreign companies mainly from
the USA
10

11. High Tech Start-Up Industry Sectors in Israel
Communication
7%
12%
IT & Software
18%
Semiconductors
16%
Life Sciences - Medical
Devices and
Biotechnology
Cleantech
9%
Internet
21%
18%
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Other

12. Multinational Corporations Establish R&D Centers in Israel
Build
R&D
Center
Acquire Israeli
Company (M&A)
Over 100 Fortune 500 multinational corporations identified Israel as an
innovation center and have established local operations and/or have presence
through acquisition of Israeli companies
12

13. +250 R&D Centers of Multinational Corporations in Israel (partial list)
Vast majority started through acquisitions of local companies
13

14. Israeli Companies Were Acquired for Over US $66B (1997-2013)
14
Partial list of M&As. Source: IVC Online

15. Israel’s Technology Success in NASDAQ Listings
140
Non-US NASDAQ Listings
120
100
80
60
40
20
0
China
Israel
Canada
Hong Kong
France
Japan
UK
Israel has the largest number of companies traded on the NASDAQ
after the USA and China, many of which are venture-backed
Israeli companies headquartered in Israel but incorporated in the US (for tax and other reasons)
Source: www.globes.co.il; www.nasdaq.com, January, 2012
15

16. Why Is Israel Different?
16

17. Healthy Ecosystem for Entrepreneurship & Innovation




Culture of Entrepreneurship
Culture of Innovation
Highly Educated
Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
17





Extensive Corporate and Public R&D
Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

18. Healthy Ecosystem for Entrepreneurship & Innovation
 Culture of Entrepreneurship
 Culture of Innovation
 Highly Educated
 Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
18





Extensive Corporate and Public R&D
Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

19. Culture of Entrepreneurship
Entrepreneurial Culture: Israelis tend to prefer creating their own companies
instead of working as an employee; They prefer to be their own boss…
Values that support entrepreneurial culture:
 Individualism & Differentiation vs. Collectivism & Homogeny: Israelis tend to
prefer to emphasize their own individual differences from the other rather than
being “part of the group”
 Error is forgivable: In school, Israelis are educated not to be ashamed to make
mistakes, so long as one learns from his mistakes and fixes them
 Failure in business is recoverable: Entrepreneur who failed once can recover
from failure and start new company (e.g., he may get investment from investors
who believe that he learnt the lesson from his failure and will be successful in
his new venture)
 Risk taking is encouraged: Entrepreneurs are willing to take risk because failure
will not diminish their chances to do business in the future
19

20. Healthy Ecosystem for Entrepreneurship & Innovation
 Culture of Entrepreneurship
 Culture of Innovation
 Highly Educated
 Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
20





Extensive Corporate and Public R&D
Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

21. Culture of Innovation
Innovation Culture: At school, in university, in military service, in business, etc. Israeli
society encourages individuals to create new ideas and materialize them
Values that support the innovation culture:
 Informality vs. Hierarchy: Israelis tend to behave and speak in an informal manner
with seniors the same way they do with their peers and with their subordinates;
criticizing the boss is OK…
 Directness vs. Harmony: Israelis speak most of the time directly, sometimes too
direct … Israelis believe that open discussion brings better results than a discussion
without disclosing the real opinions
 Flexibility vs. “Working According to the Rules”: Israelis tend to “bypass” the rules
when they think that the rules are wrong and that working against the rules will
bring better results. Israeli believes that rules are negotiable…
21

22. Healthy Ecosystem for Entrepreneurship & Innovation
 Culture of Entrepreneurship
 Culture of Innovation
 Highly Educated
 Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
22





Extensive Corporate and Public R&D
Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

23. Engineers per 10,000 Workers
#1 in Engineers and Scientists per Capita
140
120
100
80
60
40
20
0
Israel
USA
Japan
Germany Canada
UK
Source: Ministry of Industry & Trade
Israel has the highest number of engineers per capita in the world
23

24. Healthy Ecosystem for Entrepreneurship & Innovation




Culture of Entrepreneurship
Culture of Innovation
Highly Educated
Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
24
 Extensive Corporate and Public R&D




Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

25. #1 in Technology R&D Expenditure as Percentage of GDP
R&D as % of GDP
5%
4%
3%
2%
1%
0%
Israel
Japan Germany
USA
France
UK
Source: Ministry of Industry & Trade
Israel’s ratio of national expenditure on R&D to Gross National Product is
the highest in the world
25

26. Healthy Ecosystem for Entrepreneurship & Innovation




Culture of Entrepreneurship
Culture of Innovation
Highly Educated
Inflow of Talented Immigrants
Talented
Professionals
Support
Infrastructure
Capital
Availability
 Experienced VC Community
 Government Financial Support
26
 Extensive Corporate and Public R&D




Defense Technology Transfer
Top Universities and Research Institutions
Technology Incubators
Business Friendly Corporate & Tax Laws

27. Defense Needs As a Driver of Israeli High Tech
Military R&D Technology Engineers
Defense Technology
27
Civilian Entrepreneur
Commercial Products

28. Vertex Israel: Top Ranking Israeli Investment Firm
 Investing in Israeli hi-tech companies
 Established in 1997 within the Yozma
Program - investment from the Israeli
government and Asian investors
Longest history
with Asian
investors
Largest number
of investors &
capital from
Asia
 Funds of US$600M under management;
over 100 portfolio companies
 Investors from US, Europe, Israel
Vertex Asian
investors enjoy
access to Israeli
cutting-edge
technology
 Main investor base is from Asia:
~30 investors from Japan, China,
Singapore, Hong Kong, Taiwan
Unique focus on
bridging Israeli
technology
companies with
Asian strategic
network
28

29. Asia Access Contributes to Vertex Funds’ Financial Returns
 Vertex is the “fund-of-choice” for Israeli companies targeting Asian markets
 Vertex’s Asian network assists portfolio companies in Asian markets
increase companies’ revenues
Quality
Israeli
Portfolio
profitable exits
Added
Value in
Asia
• Technological innovation
• Entrepreneurship
l
• Manufacturing
• International experience
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• Markets
• Capital
Profitable
Exits

30. Successful Exits
June 2013
Shares sold to:
Acquired by:
Acquired by:
Acquired by:
$141,000,000
$98,000,000
2005
2005
(London Stock
Exchange: BET)
$2,000,000,000
(NASDAQ: SHOP)
$634,000,000
2010
Acquired by:
Acquired by:
(London Stock
Exchange: WLF)
$225,000,000
$150,000,000
2004
30
$550,000,000
2003
February 2003
2004

31. Vertex Most Recent Exit
 Community based real time traffic and navigation
mobile application
 2008 initial investment
 12% ownership at exit
 Invested a total of $6M and realized $127M
 Return multiple of 21x and IRR of 120%
 This transaction is the world’s largest mobile
application acquisition ever
 4th largest acquisition of Google to date (among
June 2013
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>240 acquisitions)

32. 1 Ha’Shikma Street
P.O. Box 89
Savyon 56530 Israel
Main: +972 3 737 8888
Fax: +972 3 737 8889
david@VertexVC.com
www.VertexVC.com
Köszönöm
David Heller: david@VertexVC.com
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