The fact that Israel is blessed with brains and start-up entrepreneurs is known to everyone, but what they dream about after founding their companies, or even beforehand, is less clear.
There has been a flood of sales of small start-ups to big corporations, which has strengthened the assumption that this is a pretty good vision between the sale of Waze Ltd. to Google Inc. (Nasdaq: GOOG) for $1 billion and the sale of Intucell Ltd. to Cisco Systems Inc. (Nasdaq: CSCO) for $475 million, numerous deals were signed, giving the impression that this is the fantasy of every courageous but young Israeli entrepreneur. Nonetheless, it is impossible not to wonder if an opportunity has been missed. With all due respect to the huge sums of money, would it not be better to wait patiently, grow, and develop into a big company that will create jobs, contribute to the Israeli economy, and achieve - I apologize for the expression - the Zionist dream?
"The macro and micro levels should be disaggregated in this dilemma," says Chief Scientist Avi Hasson. "From my place, I'd like to see both exits and growing companies. there are thousands of public start-ups and there are companies, which have been sold for hundreds of millions of dollars. Companies like Mellanox Technologies Ltd. (Nasdaq:MLNX) and Given Imaging Ltd. before it was sold to Covidien plc (NYSE: COV), for example. The more companies we have, the more we strive for, and we see a goal for the next 20 years.
"But at the micro level, that does not happen. Not every company has potential. Every big company was once small, but the opposite does not happen. We would like to provide a toolkit for financing, human capital, and so on, for anyone who wants to grow."
"Globes": Is it a problem that there are companies that dream of a short life and an exit?
Hasson: "The ability to control that is limited. There was a record number of exits in 2013, part of a global trend. There are fewer mid-sized companies, and more big companies with a lot of money. When multinationals, such as Apple Inc. (Nasdaq: AAPL) or Intel Corporation (Nasdaq: INTC) seek companies, Israel is one of the search options, which is why we see exits. We also consider it as the maturing of the Israeli market."
Nonetheless, isn't it a pity that a company that has started to grow is sold to a foreign company?
"There are several options on the day after the sale. In the case of Indigo, which was sold to Hewlett Packard Co. (NYSE: HPQ), actually increased its jobs in Israel after the exit. When that happened, I don’t care if the shareholder is Israeli or American; what is important to me is that the activity stays in the country. All babies are beautiful, but realizing the dream depends on a great many factors. 85% of the Chief Scientist's budget is allotted to small and mid-sized enterprises. If there are companies that we know will employ five people at best, we probably won't give it a grant. Not because it is disqualified, but because the competition is tough.
Israel is not Korea
Hasson emphasizes that in addition to the global trend, there is also a cultural aspect to Israel, "the start-up nation". "We're a society suitable for start-ups but not big companies. Israel isn't Korea. When an Israeli entrepreneur sells a company, he'll go on to found another company, not play golf. In any case, we're in the midst of a process of creating companies. It's hard to know how it will end."
eBay Israel Innovation Center director Ron Gura also believes that there is no single answer, and he speaks from experience. In 2011, he sold The Gifts Project to eBay Inc. (Nasdaq: EBAY), and now works at the buyer.
"My personal experience is limited, so it is hard to generalize and determine which is preferable," says Gura. "The real question is: What are the entrepreneurs' aspirations? I don’t agree with the assumption that entrepreneurs plan an exit from the outset. The concept of someone who says that this is entrepreneurship is divorced from reality. In our case, there was a quick acquisition. We were sold to eBay a year and ten months after we were founded, but that was a decision that had to take the risks into consideration and carefully review the scenarios, just like any decision in game theory."
Gura distinguishes between entrepreneurs, saying, "Someone who has already built his home, who has already founded ventures has different parameters from a young and maybe hungry entrepreneur who wants to see the first money."
That's exactly what you did.
"We sold for a reported $25 million, but no one knows what our fate would have been had we not sold. It's true that there are a lot of successes, but in this business, we hear about the successes and less about the companies that failed, and there are many entrepreneurs who paid a heavy price."
Media glorifies exits
Bottom line, Gura refuses to generalize and say that Israeli entrepreneurs are in a hurry to sell companies. He thinks that even if this seems to be the case, this is how the industry feeds itself and grows. "Let's assume that entrepreneurs sell too soon," he says. "Let's assume that they want to sell to make a lot of money, which only means that they won't do that in the next venture. Many private investors are people who made money and now drive the new industry one way or another. This is positive evolution. Even if there is a scenario in which companies are sold even though they could become a Check Point Software Technologies Ltd. (Nasdaq: CHKP), they will create more supporters, investors, and angels who will do what the banks are in no hurry to do."
When did you realize that selling was the right step for you?
"From the beginning, I knew that the size of our market was unsuitable; it's not like the US. You have to examine the potential size. Let's assume that we had a turnover of $1 million, and someone offers a multiple of 25 - that's a good price. If someone offers a multiple of 1.5 - that is more characteristic of a grocery store."
Did you hesitate before selling to eBay?
"Absolutely. We weren't dreaming of an exit. That is fed by the media, which glorifies exits, instead of being interested in captains of industry like it used to. This is incentivized by the fact that Israel has a relatively very large number of entrepreneurs.
"However, as I said before, real entrepreneurs do not found a company in order to sell it. They have a passion, and one day they want to make their mark. Today, everything is measured in money, but in practice, money isn't the motive, at least not among my acquaintances. A real entrepreneur isn't interested in money, but dreams of creating a product and vision."
Who will win smartup2?
"Globes", in collaboration with Bank Hapoalim (TASE: POLI) is launching the second annual SmartUp competition for Israeli start-ups. As part of the project, "Globes" correspondents will track three start-ups, which receive assistance from incubator experts and Bank Hapoalim advisers, based on the understanding that many companies with good groundbreaking ideas get stuck at the start because of difficulties that prevent them from achieving their potential.
The project is designed for Israeli companies that have raised at least NIS 250,000 in seed funding. Each company selected for the program will receive over three months advice from the high tech and business world on a range of topics relevant for early-stage start-ups, such as marketing, financing, human resources, and heading overseas. All they have to do is to register at smartup2 page (in Hebrew), and tell us why your start-up should participate. Participating companies will receive a start-up package from Bank Hapoalim, including a high-tech account at preferred terms and a NIS 20,000 grant.
The three winners will receive assistance from leading Israeli incubators and accelerators Explore.Dream.Discover, 8200 EISP, and Nielsen Innovate.
Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2014
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