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Israeli Startups’ Early Exits Yield Investment Opportunity

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Hezbollah and Hamas missiles pointed at virtually every square meter of the country has not kept tiny Israel, the size of New Jersey, from assuming a large profile in the world of investing.

Beating even Silicon Valley behemoth Google in its driverless car push, Israeli startup Mobileye (MBLY) went public in Israeli’s biggest ever New York Stock Exchange IPO in the middle of last summer’s war with Hamas, despite investment advice not to do so.

The advanced driver assistance systems company, founded in 1999 six years before Google’s driverless prototype, popped 50% on the first day of trading, and its stock is up 25% from its debut last August.

But that’s just one company. Israeli IPOs went from a total value of $1.2 billion in 2013 to $9.8 billion last year—again a year in which the country was at war.

By now everybody has heard of Israel as a startup nation. What a panel of experts at the Milken Institute Global Conference had to say on Wednesday, the gathering’s final day, was that Israel is no longer a mere startup but is now moving into a mid-tier phase as funding sources grow more accessible.

“We’ve moved beyond doing the R&D in Israel, and the marketing elsewhere,” said Glenn Yago, the Milken Institute fellow who moderated the panel.

“We’re beyond a startup nation… technology is now a significant part of the growth of GDP of the nation,” added panelist Orna Berry, formerly director of Israel’s Office of the Chief Scientist and currently a senior executive at EMC Corporation; the U.S. multinational computer storage company has so far gobbled up 12 Israeli startups.

Based on her varied roles in government, venture capital and the corporate sector, Berry, who describes herself as a “citizen of knowledge between companies and countries,” concludes that human capital is key to rapid economic growth, since the output of a high-tech economy depends on the input of an educated workforce.

Despite Israel’s high-tech prowess, the Middle Eastern nation has so far produced just one Fortune 500 company, pharmaceutical giant Teva, Tel Aviv Stock Exchange CEO Yossi Beinart said.

That may be because until very recently, Israeli entrepreneurs have generally taken early exits. Beinart cited the experience of a health-care software firm that faced too much difficulty in building revenue and customers, and so sold itself to its distributor.

Selling for that reason makes sense. “But if the reason [for selling] is that capital markets are not providing [sufficient] capital, then we’re failing…Companies that need financing should find it,” Beinart said.

Finding that capital, at least at the early stage, is a part of the mission of a unique equity crowdfunding company called OurCrowd, which allows accredited international investors to participate in Israeli starts-ups.

“We allow people to—for a minimum $10,000 investment—not get a T-shirt but get equity in a company,” said OurCrowd CEO Jonathan Medved, whose online platform brought on its 68th company this week and whose seed capital has already seen 35 companies to follow-on financing rounds.

Medved says the average exit size of Israeli startups continues to increase annually. Google picked up Israel-developed GPS navigation app Waze, for example, for over a billion dollars—“and that’s without having sold a dollar of anything to anybody,” Medved says.

Waze was one of 10 Israeli startups with billion-dollar-plus exits, cloud storage company Wix.com and photovoltaic power optimizer SolarEdge being two others.

Medved says U.S. tech giant Cisco has scooped up 13 Israeli startups, and co-panelist Berry chimed in that Intel derives close to 50% of its profits from Israel.

“Silicon Valley thinks Israel is a great value in buying good companies cheaply,” says Medved. That value though is increasing, he adds, since many of the startups are founded by serial entrepreneurs who are at it again a second or even third time.

“When [CheckPoint Software Technologies founder] Shlomo Kramer shows up in your office and you don’t invest, something’s wrong with you,” the OurCrowd CEO quips.

The latest check writers, he says, are coming from Asia.

“Samsung, the Chinese are coming in droves, investing quite prolifically,” he says, adding that Hong Kong-based VC firm Horizons Ventures has invested in 22 Israeli startups in such areas as cyber-security and drone technology.

OurCrowd’s raison d’etre is to enable investors who are not billionaires like Horizons principal Li Ka-shing participate in these ground-floor stories by enabling accredited investors with at least $10,000 to acquire equity in Israeli startups.

In a brief hallway encounter, Medved told ThinkAdvisor his new target is the U.S. RIA community.

“A lot of people have discovered Israel, read the book “startup Nation” and say, ‘I want to play; but if you’re not an angel investor, you don’t. We research the best deals [and provide access] for our 8,000-plus members,” he says.

Even the public sector is tapping into Israeli technological innovation, albeit for public purposes.

The U.S. National Institutes of Health (NIH) wants to promote the development of cures for rare and neglected diseases of the sort that big pharma companies might view as not commercially viable.

Nora Yang, director of NIH’s National Center for Advancing Translational Sciences, told conference attendees of her work developing a funding mechanism tapping both public and private investment to potentially deliver a 21% investment return and 14 to 15% return on equity to investors in these orphan drugs.

And UCLA engineering professor Yoram Cohen discussed Israel’s approach to water technology, of particular interest to water-thirsty California, where the conference was held.

Cohen noted that although California is a wealthy state in a wealthy nation, with a state economy that would rank No. 8 in the world, nevertheless there are 2,600 community water systems in California that rely on groundwater as the primary source of drinking water, with 700 community systems whose groundwater is contaminated.

The professor said Israel has led the way in reclaiming and desalinizing water, in using lesser quality water for agricultural and industrial uses, and in using its water efficiently through drip irrigation and water meters, detailing ways California might get more out of its own scarce resources.