Start-Up Nation Central CEO Prof. Eugene Kandel has been warning for several months that the addiction of the Israeli technology industry to foreign capital is liable to be to its detriment. "Why should pensioners from North Carolina benefit from Israeli technology instead of Israeli savers?" he asks.
Kandel also finds it hard to understand Israeli financial institutions - the investment houses and insurance companies that manage pension and provident funds. Had they invested in Israeli technology over the past decade, he says, they would have $50 billion more.
Kandel, head of the National Economic Council in the Prime Minister's Office in 2009-2015, says that since the outbreak of the coronavirus crisis, investment by Israeli financial institutions in Israeli technology has become a critical and obvious measure. Otherwise, he argues, there is very little chance of the Israeli ecosystem returning to what it was before the crisis.
Underlying Kandel's initiative to channel money from financial institutions to investments in Israeli technology lies another import strategic goal of keeping in Israel the companies responsible for half of Israeli exports. Their collapse or flight from Israel at the first opportunity during or after the crisis should be prevented.
"The domestic tech industry is like a hospital ward whose oxygen is outside the hospital," Kandel describes the state of the local ecosystem. "We've gotten used to the pipe providing the oxygen always being open and the oxygen always getting to where it is needed. We've gotten used to the door to Israel always being open, but the door is shut now, and so is the oxygen pipe, which is caught in the door. You can last a few minutes without oxygen, but if it continues, people will start choking, and we don't want that to happen," Kandel warns, and calls for quick action. "There's a need here for very, very urgent action by the government to reconnect the technology industry to the oxygen pipe."
"The opportunities in technology are bigger"
The question of tech investments by Israeli investment institutions has been a subject of debate for at least 20 years. The Israel Innovation Authority and the Israel Securities Authority recently made another effort in this direction by announcing a NIS 15 million investment in promoting investments by institutional corporations in Israeli technology.
Under the new plan, mutual funds, provident funds, pension funds, and insurance companies winning a competitive procedure will receive a grant of up to $1 million (NIS 3.7 million) over five years for establishing and expanding teams for investment in Israeli technology companies. The objective is to promote investment by institutions in advanced financing rounds, encourage them to participate in IPOs by technology companies, and encourage them to invest in venture capital funds.
Why should investment institutions start investing in technology now? Kandel's answer has two elements. The first is that the competitive situation has changed, he explains. "A month ago, you had to compete with the entire world in order to invest in technology, as we saw with the flow of money to Israel from overseas up until a month ago. The institutions are now the only player left, which means that all the investment opportunities will be channeled to them, and they should want to take advantage of the opportunities as long as they exist."
The second reason is the dismal state of the markets and the absence of alternatives following the crisis. "In the past, the investment institutions thought that as long as the market was growing by 10-12% a year, there was no need to look in other directions. Today, they realize that the market isn't going to grow in the medium term, and this situation could persist for another few months. Many of them are now fleeing to safe instruments, but these are also vanishing because of the near-zero interest rates," Kandel says.
According to Kandel, this means that for investments, "The alternative to the technology industry has taken a turn for the worse, while the opportunities in technology are growing by leaps and bounds."
Kandel does not expect investment institutions to make such an abrupt change during such as severe crisis in their investment policy, which has been formed and consolidated over the years. The investments are based on long-term analysis and research into companies and markets using analysts who spent years acquiring knowledge and experience, and who create relationships with the relevant industries.
"We saw last year that the institutions began investing in technology even without government support. Unless the government provides a serious push, however, it will be very hard for them now, during the crisis, to say that they are going to get into something that looks risky, even though in the long term, it won't be any riskier than other investments."
Things can be done even without a budget.
Kandel says that even in the absence of a budget, the government can take some fairly simple and inexpensive actions focused at critical points that can generate a big change. One way proposed by Kandel is government guarantees for tech investments. "We need Israeli money to make up a bigger percentage than it has until now. There's a two pronged effect here. On the one hand, you have to provide direct guarantees for institutions in exchange for new money that they're going to put in, for example by establishing funds of funds whose return will be guaranteed," he says. Such funds invest in other investment funds, meaning that they do not invest directly in companies. "We can guarantee that investment institutions won't lose for 7-8 years, and lower the risk for a government bond," he says.
Kandel also says, "Institutions should be helped in establishing expertise." One of the ways of doing this is by financing special tech analysts, who will cover the sector for the institutional companies. Behind the proposal to subsidise analysts lies the realization that for years, especially after the investment institutions were restricted in charging management fees, it was more worthwhile for institutions to employ analysts to analyze large deals outside the tech industry than to pay for a large number of analysts covering a large number of small tech deals.
Kandel therefore argues, "The Israel Innovation Authority's plan should be welcomed, and it's very worthwhile expanding it. They should either subsidize the costs of the analysts for the funds themselves, or through funds that invest in other funds. But they have to take the best analysts, and a lot of them, because there's a deal flow now in which it's worthwhile investing, and this shouldn't be missed."
Kandel and Start-Up National Central plan to push their proposal soon. "We'll try to explain our position, and hope that it will find a ready audience, and that it will start working on it soon," he says. Kandel's objective is to reach "a situation in which 20-30% of the new investments by institutions go to the technology industry."
According to Kandel, there are problems that have to be solved in order to encourage the institutions, for example the fact that an Israeli fund has an incentive to take foreign money, because Israelis pay more taxes.
"Companies don't have enough expertise in order to raise debt"
The third method suggested by Kandel, which is relevant to large companies, rather than to startups, is to allow large technology companies that already have revenue and profits, but which have gotten use to operating only on the stock market, to begin raising financing through debt. Kandel says that the challenge in this is that "these companies don't have enough expertise right now to deal with the debt market. Israel therefore has a big interest in their developing this expertise as fast as possible, even within a month or two, so that these companies will start raising debt in Israel from both the institutions and the banks. Here, too, the Innovation Authority is already promoting this matter, and it's very worthwhile to connect with what's already being done."
Kandel makes it clear that these are not measures are not aimed at cutting costs or improvement; they are measures that can be described as emergency measures. "You have to look at the crisis through two prisms: immediate rescue of the technology sector - not because it's forlorn and needs rescuing, but because if we don't rescue it, it won't be here, or companies will close down or develop somewhere else. This ecosystem creates added value for Israel, and if it suffers critical injury, it will be very difficult to recreate it. It will be very sad and risky for the Israeli economy to even entertain the thought that it will be all right. I realize that when the coronavirus is raging, people are all shook up about the disease, and don't want to think about what will happen tomorrow or six months from now, but it will come, and when we overcome the disease, and we will definitely overcome it in one way or another, we'll have to live and feed and protect the country."
Published by Globes, Israel business news - en.globes.co.il - on March 23, 2020
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