Had we sought a figure whose life story could serve as the basis for a movie script about the history of Israel's high tech industry, Dr. Giora Yaron could have been the ideal candidate. In the late 1970s, he established for America’s National Semiconductor Corporation its first semiconductor Fab outside the US - National Migdal Ha’Emek - which would go on to become Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), which today markets as TowerJazz.
In the 1990s, Dr. Yaron managed Indigo NV, which was later sold to Hewlett Packard Inc. In the 2000s, he was Mercury Interactive Corp. chairman following the backdating scandal that resulted in its sale for $4.5 billion. In between, he was and still is involved - as an entrepreneur and investor - in numerous startups, which enjoyed handsome exits, such as PentaCom and P-Cube, (which were sold to Cisco Systems for $118 million and $200 million, respectively), as well as Qumranet (sold to Red Hat for $115 million), and Exanet, which was liquidated (and for which he still grieves).
“I was a party in many exits,” says Yaron, who is currently chairman of the Executive Council of Tel Aviv University, in an interview with "Globes" G Magazine. “$100 million here, $200 million there - nice amounts, I don’t take that lightly. But were we to look what this does to us as a country, it polarizes between the beneficiaries of this wealth and those who do not benefit from it, and this polarization is not good.
“The solution to social polarization is not the style of MK Shelly Yachimovich [Zionist Camp] or the Histadrut [General Federation of Labor in Israel]. Although I was born to socialism (in Kibbutz Manara), but it simply doesn’t work, taking a small pie and cutting it differently. The right way to go is to bring more people into the game and increase the pie, instead of slicing it into smaller pieces.”
Globes: How do you grow the pie if you sell companies?
“That’s true and not true. First of all, startups are not the ones who create jobs. I am a director at Amdocs, which has 26,000-27,000 employees worldwide, including 6,000-7,000 in Israel. The entire startup industry taken together has fewer workers. Big companies are the ones that create jobs.”
Since you’ve mentioned Amdocs, it is actually exporting jobs to India, which worries many of its employees here.
“I constantly have that conversation with my wife, Zila. After all, we were both raised in Hashomer Hatzair [a socialist youth movement], and she always asks me, ‘Why don’t you pay more for labor?’ (and keep jobs in Israel). True, it’s possible to artificially be nice and pay higher salaries in Israel, but then someone else will go to India. The company needs to be profitable and there must be a delicate balance here. You have to do the right thing.
“So, at Amdocs, the smart things, which justify high payment, we do in Israel. That is also a strategic decision, and we don’t want it to slip between our fingers. But the simpler work - it’s better to do in India. Otherwise, at some point, the company will close and what have you gained?”
So, in order to create jobs, more big companies are needed. Where does the government come in?
“If the government wants to encourage companies to grow, it must motivate them to do so. I’ll tell you the story of a company I invested in, Hyperwise Security (a cyber security company which developed technology to identify intrusions into companies’ IT systems before any damage occurs; the company was sold in 2015 for a small amount, estimated at tens of millions of dollars).
“There were four of us who invested $2 million in the company: Mickey Boodaei, Shlomo Kramer, Rakesh Loonkar, and I. At some point, the company received an [acquisition] offer from Check Point. It was definitely not the right time to sell, and we investors were patient and wanted to build the company. But the founders were two guys, one of whom had just been discharged from the army, who are suddenly offered an eight-digit check in dollars. I took them to a restaurant and told them, in the end, we’ll do what you want, but I’ll put a sticker on your forehead saying, ‘I’m a screw up. I sold too early.’ They said to me, ‘Listen, Giora, it doesn’t make much of a difference to you, but this will completely change our lives.’ What could I say in response to that?”
And what can the government do to change such considerations by entrepreneurs?
“First of all, you need funds that invest in more mature companies, allowing the entrepreneurs to (partially) sell along the way. There are initial signs of such funds, but not enough, and the government can strengthen them in various ways; for example, match the fund’s investments, dollar for dollar. An entrepreneur could sell, say, 10% of his holdings and emerge from poverty and [pay] his mortgage, giving him peace of mind to continue growing the company. So, he won’t get a lump sum, but he’ll have the chance to build the dream, and the government can intervene in this.
“Another option is to lower taxes on profits from an exit if the entrepreneur keeps the company for ten years or longer. There are a lot more options, but they all need carrots rather than sticks. Levying higher taxes as a ‘penalty’ doesn’t work.
“This need, to create more significant companies, was also what drove me to the university, because there are many apps or features companies - which is insignificant. If you want to create companies like Mobileye (which was recently sold to Intel for more than $15 billion), or Indigo, which achieved a value of $3.3 billion, there must be tight cooperation between academia and the industry. The labs here (of Tel Aviv University) are chockfull of projects with potential like Mobileye, but they are diamonds which have to be taken, cleaned, polished, and allowed to grow.”
“Benny Landa called me”
Giora Yaron, 68, was born on Kibbutz Manara in the Galilee, “in the year when the country was founded. My father was of the generation that ate nails for breakfast.” His family moved to Rehovot when he was a child. “There was no high tech, but like any good Jewish family, the boy had to study, had to get a PhD. Fortunately, I was attracted to semiconductors, and within that world, to what is now called flash memory,” he says. Yaron’s PhD advisor was Dov Frohman, one of the founders of the Intel Israel R&D center and CEO of Intel Israel for many years.
In those days, flash memory was the big thing in the high-tech industry, making Yaron a very sought-after man in the industry. Pierre Lamond, a co-founder of National Semiconductor Corporation (and who would go on to found the venture capital fund Sequoia Capital), hired him. Yaron, “as a guy from a kibbutz who had to take care of everyone, I said, we’ll leverage that to create jobs. I was negotiating with the government and I was given a piece of land, which had nothing, in Migdal Ha’Emek. National Semiconductor gave me a $250 million check. I was like a 32-year old kid wearing sandals founding the first Fab (a semiconductor manufacturing plant) in the world outside the US.” An R&D center was also founded in Herzliya, where various applications were developed, such as VoIP (voice over internet protocol), which digitalizes voice, making it possible to transmit it online. Yaron says that the combination of the operations in Migdal Ha’Emek and Herzliya with the Intel Fab in Jerusalem played a significant role in the formation of the Israeli high-tech industry.
After 14 years at National Semiconductor, in 1992, Yaron moved to Indigo, Benny Landa’s printer manufacturer. “It was a longstanding company, 17 years on the road. It did everything, but did nothing perfectly. It worked on all kinds of products, but completely lacked focus. There was a lot of R&D, but no asset or product which could really be built. Before my arrival, money invested in Indigo was at a company value of $40 million.”
How did you get to Indigo?
“Benny Landa called me. He knew what he didn’t know. He was a good marketer, a champion in the world of ink, but he was no manager.”
You had a difficult romance.
The first thing I did there was to kill projects, and to focus the company. That created a lot of tension with Benny. He had been working there for 17 years, and here comes the new guy and shuts things down. But that made it possible to bring in an investor like George Soros, at a valuation ten times higher (Soros acquired 14% of Indigo for about $50 million, i.e., at a company value of $400 million). It was also necessary to stabilize the product, because, until then, it was something that printed four pages at 4 am on Monday, before jamming.
“But we succeeded, and that allowed us to float the company, raising $100 million at a $1 billion market cap. That was one of the hottest issues on Wall Street (in 1994), and for me personally, created the money that later enabled me to do what I did - invest in companies - because I came from a family of ex-kibbutzniks, and once upon a time, when a person left the kibbutz he was given a broom and was looked upon as an enemy of the Israel.”
Landa later sold Indigo to HP and continued with printing. What do you think about the nanographic ink revolution that he is now working on at Landa Labs?
“Regardless of whether or not it succeeds technically - and I think that more money may be needed for that to happen - it will succeed. The question is whether it’s the right thing to do - to put such amounts in the printing industry, which is in global decline. The market is moving on. Benny is a world champion in the field of ink, but it’s hard to move into new territories with ink.”
“You have to keep changing"
With the money he made at Indigo, Yaron began investing in companies and simultaneously serving as a director in Israeli software company Mercury Interactive, which was traded in the US. In 2005, the option backdating scandal erupted at the company (the same trick that forced Comverse’s Kobi Alexander to flee to Namibia for a decade, and recently returning to the US to serve a 30-month sentence). In the eye of the storm, Mercury Interactive chairman Amnon Landan was forced to step down, and Yaron succeeded him. Shortly afterwards, in 2006, the company was sold to HP for $4.5 billion.
A nice price tag, but maybe the company could have stayed independent were it not for the backdating?
“Some foolish things were done there, and as a director living in Israel, how could you know about it? These things were done over there. But the legislature was right: as a director, you are responsible, and you should find out such things. However, it wasn’t the backdating that drove the sale of Mercury, but rather the market.
“Mercury’s technology was Business Technology Optimization (BTO); i.e. we were the plumbers. We opened blocked pipes, expanded them. To use an analogy from another industry, we worked under the hood, and what the customer who bought from us saw wasn’t pipes, but a screen with an HP or IBM product that managed everything that went on beneath, and there were a lot of bugs in the interface between these products. Customers were going to HP and saying, ‘We’re serving as lab rats for the interface between products of different companies. Do us a favor and buy Mercury.’
“It’s true that the backdating created a complicated situation that made everything more difficult, but if there is something I am blessed with, it’s that in nine out of ten cases, I work with outstanding people. I had an amazing board of directors, because in such moments when they’re shooting at you and there is tension, everyone is suspicious of everyone else, even within the board.
That’s stressful.
“In American terms, it’s a crime scene, where everyone is a suspect until proven otherwise. Nonetheless, my board had balls, and when HP came with an offer the first time and the second time, we said, ‘no thank you.’ Only when they offered what we wanted did we say yes.”
Did you feel any bitterness about selling such a company, which was a success story?
“I don’t believe that if you sell a company, you’re missing out on something. There are good companies, but they will not become Ciscos, and the right thing to do is to integrate them with a bigger company. Indigo would never have become what it is without the backing and support arms of HP, and Mercury had, at its peak, 600-700 employees here, and HP has increased that figure to several thousand.”
But late last year, HP made a business change and hundreds of former Mercury employees were sent home. It is not clear what will happen to the rest.
“In such companies, you must constantly change in real time. If you don’t fall off this bridge, you’re liable to fall off the next one. It never ends.
Do you follow what happens to a company after its sale?
“Very much, but I’m a bit of the emotional type, so the moment it is sold, I sever contact.”
“I chose the wrong partner”
As mentioned, Yaron is a serial investor, but he has a rule: he takes care not to invest more than $5 million in a company. The investments, for their part, have mostly been good for him in terms of exits, but there is one that left him disappointed and scarred. In 2000, he founded Exanet Technologies, a company which developed a server-based data storage solution. Fellow investors were Eitan Wertheimer, who held most of the shares, and Evergreen Venture Partners. Later, in 2010, Exanet was liquidated and sold to Dell for a fairly low $12 million.
“This was an amazing company with amazing technology,” reminisces Yaron. “But there was a problem between the shareholders. Things were not dignified, not nice. I told you that I have been blessed in nine cases out of ten to work with amazing people? This was the case where I did not succeed. The shareholders took a bad hit, financially. We already had closed a cooperation deal with Dell when everything blew up (the reference is to the dispute that broke out between Yaron and Wertheimer).
“There are mistakes you deserve because you misread the market or because the product did not work. But at Exant, everything was great. As I see it, this was like burning a Torah scroll in the town square - a scandal, heartbreaking. I can only blame myself for choosing the wrong partner.”
Yaron now finds consolation in other startups, such as Qwilt, which enjoys a series of well-known investors such as Eric Schmidt, Cisco Systems, Bessemer Venture Partners, and Tal Barnoach’s Disruptive. It is engaged in streaming load, and its product allows automatic identification of the content that the user wants to download, store popular content for that moment and area somewhere en route, thereby facilitating the load that is liable to be created on the net. According to Yaron, content giants, such as Disney and Hulu, as well as Cisco, Verizon Communications and others, have adopted - with small changes - Qwilt’s standard and a big contract has been signed “to pave the US with our boxes.” (since nothing about the deal has been published, Yaron cannot disclose further details).
Qwilt’s founders, Dan Sahar and Alon Maor, have been joined by Yaron and Yuval Shachar, who regularly stars in Yaron’s companies, alongside Benny Schneider and others. “I try to work with the same guys,” says Yaron. “What happens is that every time I sell a company, I am the first one thrown overboard because I am the chairman, but Yuval has been ‘stuck’ for a time at Cisco, as is Benny (acquisition agreements usually include a clause requiring the entrepreneurs/managers to stay for a set period of time at the company). So when Benny was ‘captive’, I founded Qwilt with Yuval, and when Yuval was captive and Benny was released, we founded Qumranet.” (Qumranet developed a virtualization technology for IT data centers and was sold to Red Hat).
As someone who breathes Israeli high tech and for whom the industry’s progress is important, is this economic engine in jeopardy?
“In my opinion, the show will go on, but what scares me isn’t that we will go backwards, but that others will go forward. A lot of competitive areas are emerging in the world. Korea has appointed a Minister of Innovation, India is developing competitive zones, and so are many more places in the world. In the past, we were unparalleled pioneers, but today, there are many smart people. That is why we must invest in higher education and in schools.
“What I regret is what I am hearing from young people, including my grandchildren, that they don’t want to study. The young generation is starting to get it all wrong. They have heard about Mark Zuckerberg, who quit Harvard and founded Facebook, or about Bill Gates, who left Harvard without completing his studies. But they forget that they studied enough to be accepted by Harvard.”
It seems that you are advocating matriculation majors in mathematics, exact sciences, and so forth.
“Absolutely, with an exclamation mark! If someone is talented in exact sciences, it is a missed chance not to go for it. On the other hand, it’s true that everyone expects me to say that the young generation should be prepared for high tech, but that must not come at the expense of learning about Zionism and Judaism. After all, a man like me, and many others like me, could easily live in Silicon Valley, and you have to explain to the young generation why we are here.”
Itamar Medical “I’ve made mistakes in life, but the probability of a mistake here is not high”
Alongside investing in high tech with his regular entrepreneurs, Yaron’s portfolio includes one company in an industry he has never invested in: medical devices. The company is Itamar Medical, named for Yaron’s brother, Itamar, who was killed in the Yom Kippur War. “One bullet in the aorta, in the battle for Mount Hermon, right on the border, in the final hours of the battle,” says Yaron.
Itamar Medical is a veteran company (marking its 20th anniversary), which started out as a manufacturer of a heart attack detection test (using a finger clip attached to a finger during sleep) with a famous cardiologist surgeon, the late Danny Gur (“he was a man with a huge heart, but impossible to work with, and when we were forced to fire him, it exploded like a nuclear bomb.”) Afterwards, the company added a product, in fact changing its focus to testing sleep disorders (using the same finger clip). The sales graph is showing growth, but no takeoff yet.
So, for you, Itamar Medical is not just another company, but carries emotional baggage.
“It’s ultra emotional,” says Yaron, understanding the subtext of the question. “But I don’t stick to a company at all costs. If the company needs to be cut off, I’ll do it. But this is not the case here. Itamar Medical is doing very well these days. We’re not yet seeing the results, because we’re changing the business model from product sales to the sale of a service; in other words, payment per test. When you start out that way, the amounts you receive are $60-80 per test, it will take time to see the numbers.”
In any case, it’s taking you a very long time.
“There is a message here for the med-tech industry. After all, you have to start in the American market, which is the largest. Once, the hard part was obtaining FDA (US Food and Drug Administration) approval. Today, that’s the easy part. The problem is how to get the medical code.” (i.e., having your product or test included in the basket of healthcare services approved by the insurance companies so doctors can prescribe it to patients).
“Our test simplifies the procedure. You can do it at home, which ought to be the consumer’s preference. But the problem is that in medicine, the consumer isn’t the buyer. To get the code, you have to work with the American Medical Association (AMA), which sends it to the relevant committee. Anyone who sits on the sleep apnea committee could have a conflict of interests, because these are doctors with businesses in the field or who are affiliated with sleep labs.”
So what can you do about it?
“We’ve reached a situation in which we’ve hired lawyers and organized rules to play this game, which state that we have time to respond to objections before we file an application for a code. Nonetheless, 48 hours before the application was due for discussion, I got a phone call from our lawyer, Paul Rudolf, who told me, ‘Giora, the AMA has just filed an objection to the application.
“That’s where the combat soldier in me went into action. I said, ‘I’ve had it. You are now going to call the committee chairman and tell him that I won’t stop until he goes to sleep in a sleeping bag in a tent and rides a bicycle. This is breach of agreement, not with the company, but with me personally, the shareholder who has brought a lot of money from friends who trust him. I will make him homeless. What do you think happened? We got the code.”
So Itamar Medical is now on the high road?
“I believe so. It is a company that has been selected by the Cleveland Clinic medical centers chain as one of the ten companies that will change the face of medical treatment. I’ve made mistakes in life, but the probability of a mistake here is not high.”
Response time “Wealthy individuals realize they must adapt to the changing reality”
Dr. Giora Yaron lectured on his path in Israeli high tech and on the significance of investing in this industry at the Thoughts Worth Sharing conference organized by UBS Wealth Management earlier this month at Tel Aviv University. Speakers at the conference, besides Yaron, included Dr. Shlomo Markel and Associate Professor Gal Markel, Vibe Israel Founder and CEO Joanna Landau, Wekudo Founder Lee Rubin, Innovesta Technologies Founder and CEO Yali Harari, 24me founder Liat Mordechay Hertanu.
The conference discussed the change underway in the investment world, with respect to the values that investors attribute to their wealth. Today, according to the conference organizers, capital is not just the ability to achieve excess yield, but also the ability to invest according to the investor's values and even to try to make a change. Millennials are rewriting and redesigning economic and business rules, and contemporary capital management is increasingly driven by investments which impact the world, especially ones that affect the environment and improve access to education and health alongside strong yields. These have become capital’s new growth engines and the trend is expected to accelerate.
The new world and the change in investors’ values are setting new challenges for the financial world: how to allocate resources from the $250 trillion of global household capital for the $6 trillion a year needed to defeat poverty and hunger, promote gender equality, high quality education, and so forth? In addition, women, who hold about 30% of the world’s private capital and who invest their money, are seen as more idealistic and promote social causes; for this reason, wealth managers must offer services adapted to women, increase their financial security and empower them.
Dr. Udi Dahan, General Manager, UBS Wealth Management Israel says, “Wealthy individuals and investment managers realize that they must adapt to the changing reality. We therefore chose to create a direct link between our clients and industry leaders.”
The tribal campfire “What happens to the Bedouins is a classic example of terrible distortion”
One of the areas in which Yaron is active is bringing high tech to broader swathes of Israeli society. One of them is the Bedouin community, where he co-founded with Bedouin partners such as Prof. Jihad al-Sana, the Head of the Department of Computer Science at Ben-Gurion University of the Negev, Siraj Ltd., which only employs Bedouins and is currently subcontracting high-tech projects. “We brought it General Electric’s first Internet of Things (IoT) project. GE was incredibly generous with us in payment terms,” says Yaron.
“What is happening to the Bedouins is a classic example of terrible distortion. The number of kilometers I walked as an IDF combat soldier with Bedouins to open roads is more than the number of hairs on my head. But I ended up with my nice home in Caesarea and they have not ended up with much. I have a moral and conscientious duty toward them, and this is precisely where I could leverage my connections.”
Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2017
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