Hanoch Barkat, joint general manager of the Apax Leumi fund, which manages some $140 million, is positive that the focus is on the Internet. Contrary to prevailing opinion, however, he believes in Israel's capability of providing services to end customers. "CommTouch is a classic example. It gains a million new users for its service every month. This is the only purely Israeli service company that has gone public. The argument does not hold water - apart, that is, from the second part of the argument, that it is difficult to develop consumer-based business models without a US presence. For this reason, we encourage our companies to maintain a substantial representation in the US. Out of fifteen companies in which we have invested, thirteen maintain an office or management in the US".
So you are going in for the Internet, too?
"Today, our emphasis is on the Internet field. Starting from the very first, idea stages, and underlining businesses possessing a technology that provides a relative advantage, and an original business model that opens up interesting network opportunities. We recently started raising the Apax Israel 2 fund. It will amount to tens of millions of dollars and will engage in investment in accordance with the needs of Apax, but a substantial part of it will be invested in Internet companies.
"I think that, in terms of Israeli industry, 2000 investments will focus on innovative Internet services, the most material feature of which is that they make things convenient for the user and improve the Internet experience".
Tell me, have companies been urged to move to the US?
"I think the model employed by the funds is moving increasingly in the direction of decentralised activity, in which Israel is a technology centre while marketing is concentrated in the United States and Europe. This is a steadily deepening trend. If, five years ago, the word was that we needed something in the US, today the word is that we need strong marketing activity there, and that that is what determines the company's development".
Meaning that the US is the direction to move in.
"The United States is a large market, but the relative advantage of Israeli companies is that they operate, from their first day, on a global level. This gives them an edge over US companies, which start out exclusively in their domestic market. Companies that are organised for working vis-a-vis overseas markets - these are our relative edge. But I would not recommend that companies relocate to the US. Activity in Israel is not only a technological asset, it is also a business model. For example, part of the Israeli company's advantage lies in the entrepreneurial character of the Israeli. This is lost when companies relocate to the United States.
"It is no coincidence that there is another new trend which will be reinforced in 2000. This is the issuance of Israeli companies on European stock exchanges. There will be a material increase in the number of companies whose main market is Europe rather than the US. Some of our companies are exploring this possibility. Three different elements contribute to this: European stock exchanges have opened up to promising young high-tech companies, there is a general liking there for Israeli companies, based on what became of them on the NASDAQ, and Israeli companies have a relative edge from the viewpoint of European investors. Europe has become an Israeli companies' market. And an Israeli company whose customers are German finds it easier to issue in Europe. In all, Israel can compete very honourably with any European country in terms of number of start-ups".
So what fields will the good start-up focus on in 2000?
"On the Internet, without a doubt. To use the example given by Geoffrey Moore, one of the founders of Intel, in his book "Inside the Tornado", the Internet is at its tornado stage. The most material change has already taken place and the question is not whether it exists, but to what extent. It happened with the personal computer, with the cellular telephone, and today we are at the heart of the Internet tornado.
"It's a tornado that is gathering strength thanks to broadband communications services, which are the second field that will be interesting this year - in fact, anything connected with innovative infrastructure development technology and good services.
What is the difference between the two fields from the investor's point of view?
"In Internet, the next stage after the model-proving stage is that of raising money. In communications, after you have proved technological feasibility, the company is sold. This is true of the US too, not only Israel. We, as investors, proceed on the assumption that both being floated and being sold are viable options for the company, especially when you invest in a new company, when it is very difficult to know how the exit will be made in two or five years.
"Something else that is going to develop in Israel in 2000 is investment in bio-medical fields. In Europe, too, the biotechnology markets have woken up in the past year. The combination of biotechnology and software is a deadly one, and one that is going to surge into prominence in 2000".
Published by Israel's Business Arena September 30, 1999