Behind the scenes of the impressive growth of Israel’s high-tech industry is an argument over the following question: should Israeli high tech be based on start-ups, which are sold at an early stage to foreign companies; or should it be based on the building of large companies? This question is tightly linked to question about the exit culture, either exits through the sale of a company to a large foreign company, or through an IPO on a stock exchange.
However, exits do not emerge from nowhere. The executives of growing private high-tech companies are pushed to make an early exit by investors, employees, and other managers within the start-up itself. But the routine debate about the place of exits and their timing refers to the pressures put on start-ups to make a fast exit as if it were a force of nature about which nothing can be done, similar to the atmospheric pressures on the weather.
In my opinion, the key to finding the right time and place for an exit in Israeli high tech is clear: it is necessary to find a way to ease the pressures. Managers of private high-tech companies need to make an IPO or sale of the company at the timing they think is right for the company, not in response to pressure by partners, employees, or investors.
In order to ensure technological, marketing, and business success, the CEO of a high-tech company must make sure that he creates synergy between three key factors: the start-up, as represented by its owners and managers, who are also supposed to reflect the interests of the customers; the company’s employees; and the company’s investors. The more these three links are kept satisfied, the less pressure is applied by a link to make a premature exit.
Take employees for example. Obviously, in order to hire, retain, and compensate the best talents in technology, sales, and marketing, a high-tech company must use the usual compensation mechanisms, such as salaries and bonuses, and combine them with a supportive work environment and activity that helps the company’s employees and enriches their lives. In addition, in the case of key personnel, the company seeks to compensate through shares and options in order to maximize their interest in the company’s success.
These measures are all very nice, but they do not ease pressures to make an early exit. The executives with company shares or options joined the start-up and agreed to invest a vast amount of time and effort in it in order to share in the exit celebration. When a company makes an exit through an IPO or sale, they will probably profit handsomely. But until this event, they not only deal with the daily difficulties of working at a start-up, but also face the acute and constant problem of the cost of living. These employees want to move ahead in their private lives too, and not just at the workplace. They are therefore likely to want to finance a large purchase, such as an apartment, a higher standard of living, or, alternatively, face a major expense, such as medical treatment for a family member. It is only natural that these shareholders frequently urge an early exit. In many cases, these important employees want most of all to continue working at the start-up, but its dwindling reserves do not allow them to finance their needs, and they leave the company, weakening it.
Despite the differences, the same logic driving employees to press for an exit operates among investors and partners in the company, its executives, and even on its CEO. They all own securities, they are all coping with financial pressures, and in the case of investors, they are dealing with pressures to show a handsome return on the investment. For all of them, it is natural to feel that the big money that they will get upon a sale of IPO will ease their financial pressures or even make them rich.
What can be done? Executives in high tech should encourage their employees to exercise their securities holdings before the exit, just has giants Facebook and Twitter did before their IPOs. The key to such a measure is found in mechanisms that turn the exit from a one-time event into a process, thereby easing the pressure by holders of securities to make a premature exit. The proposed area for the most efficient mechanism in this regard is the secondary market a meeting ground between holders of private companies’ securities. The sale of securities on a secondary market allows these holders of securities to make money before an exit. This is a growing and promising market: according to Setter Capital, transactions in secondary markets totaled $49.3 billion in 2014 alone.
The ability of shareholders in start-ups to make money before an exit is critical. This ability has many advantages, which strengthen the synergy between the companies, employees, and investors. I will mention only a few of them: potential investors can buy the securities of employees and other shareholders gain access to attractive companies before their value grows; companies can raise high-quality capital from investors worldwide, and hire, retain, and compensate the best workers; company owners and executives who sell securities maximize their ability to make an exit at the right time for the company, while obtaining a barometer of the company value on the basis of the actual amounts paid for their securities; and employees improve their financial condition, job satisfaction, and commitment to the start-up. In the way, the Israeli economy can improve both the ability to finance innovation by the Start-Up Nation and the possibility to building large, successful, and sustainable Israeli high-tech companies.
The author is the chairman of PrivatEquity.biz, an online trading arena, and a former director of the Government Companies Authority.
Published by Globes [online], Israel business news - www.globes-online.com - on June 17, 2015
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