Pitango Venture Capital cofounder and managing partner Chemi Peres has been nourished on the idea of a "start-up nation," a concept that describes how tiny Israel became a superpower of start-ups - the companies in which Pitango has already been investing for 21 years, helping them turn their vision into reality.
Pitango is one of Israel's oldest venture capital funds. The company has been investing in a variety of technology companies since 1993, and currently manages $1.6 billion through its various funds, invested in over 180 Israeli technology companies. Some of the companies have been sold, some have had IPOs, and some are still waiting for their ardently desired exit. Pitango's most recent fund, which has $270 million, is the largest fund raised in Israel in recent years.
Nevertheless, Peres prefers to play down the startup nation concept. "Startup nation is only a small part of Israel. The younger generation's way of creating new jobs is by building new industries and companies," he says.
"Globes": Not every start-up creates enough jobs. There are quite a few high-tech entrepreneurs who build a company for the sake of an exit, not because they want to supply jobs."
Chemi Peres: "That's right, but they don't represent the entire Israeli industry. Some of them, at least the majority of the ones I know, want to build large companies and generate an impact. Pitango considers investment in almost 1,000 companies every year, and invests in only 10 of them on the average, in other words only 1% of them, and most of the entrepreneurs in those companies want to build a large company."
So what happens to this wish along the way? There aren't many large companies here.
"It doesn't vanish along the way. The Israeli high-tech industry is relatively young - only 20 years old, more or less. There's no doubt that it's hard to build large companies in Israel, because it's a small country that doesn't have enough manpower. Secondly, there are a lot of obstacles to creating a large company, such as language and cultural differences and time differences. These gaps make it difficult to build a company quickly. Still, what you call a race to an exit belongs to the past."
It's logical for you to reach that conclusion, because when an entrepreneur wants to raise money from you, he will naturally tell you that he wants to build a large company, not get a quick exit. From his point of view, it looks the other way round.
"There's nothing wrong with making an exit, but an exit isn't the essence of the matter, because if it is, there won't be any real high-tech industry, there won't be any venture capital industry, and there won't be a healthy economy here.
"A lot of people have made an exit for the simple reason that they thought that an exit means success. They became heroes in the financial press, but that's a very superficial attitude. There's a whole lot of people in the high-tech industry who want to change the world, who want to go all the way to the end, and we can see this change taking place. When a big change like this happens, we don't always realize it."
Give us an example.
"Mobileye. I assume that its entrepreneurs could have sold it at some point, but they didn't. After 15 years, despite the ups and downs they've experienced along the way, they built a company that's now worth $11 billion. That's a real industry, an industry that's changing the auto world, and that's just one example. There are a whole lot of companies today building themselves in order to become big and significant."
Still, what proportion of the total is involved?
"A small proportion, because most companies are sold, and not just in Israel. 1,000 startups can't become 1,000 large companies. That won't happen. When an entrepreneur gets a good acquisition offer for a company he built, it's very hard for him and his investors to turn it down."
Why is it hard, if the desire to build a large company is as strong as you say?
"Because along with the vision, there are a lot of risks, and when an entrepreneur, for whom it's his first company, gets his first chance for some money, it's reasonable to assume that he'll take it."
And you as an investor? Do you also prefer to take it?
"I always go with the entrepreneurs, not against them. An entrepreneur who wants to sell his company in which I have invested, when I think differently than he does, will find me a partner in his path."
Have you ever had a dispute with an entrepreneur on this point?
"We don't get into disputes. We have a conversation. If the entrepreneur is determined to sell the company, we'll go with him, because the entrepreneur is the one at the steering wheel. We only sit at his side and believe that he can see ahead better than anyone else."
You only sit at his side? You financed him.
"So what? In startups, there are people who gave their best years and took a big chance. There are employees, customers, and strategic partners. It's an entire universe. When we invest in a company, we're investing in its entrepreneur, and he drives the car."
How many times in recent years has the opposite happened, when the entrepreneur gets an offer and turns it down?
"It happens more and more each year."
Because the entrepreneur wants to move the company forward, or because he's just waiting for a better offer?
"Because he wants to move the company forward and make it big, and I'm not making things prettier than they are. I'm not one of the advocates of quick exits, and I believe that there are entrepreneurs here who want to build large companies."
"The public doesn't understand how hard entrepreneurship is"
As an example, Peres sites former Israeli and SanDisk founder Dr. Eli Harari, who was recently awarded the National Medal of Technology and Innovation by Present Barack Obama. "It's exciting, and we need to look at Harari and say we need more people like him."
But SanDisk is not an Israeli company. Most of its employees do not work in Israel, and Harari himself left Israel for the US
"The way I look at it, he hasn't left Israel. He developed SanDisk in Israel, and he invested a lot in Israel. He's still an Israeli, even though he doesn't live here, and I want to invest in people like him."
But Israel gets nothing from people like him. It's a fact that he got the medal in the US, not in Israel.
"How many times have you seen a senior Israeli government official call a developer who built a large company and didn't sell it, and congratulate him on his achievement?"
Only when he makes a really big exit and pays tax to the state treasury.
"True. It was very important for the CEO of one of the companies we invested in, which had its IPO this year (Peres declines to mention its name) for someone in the Israeli government call him and say, 'Well done.' If it's important for Israel to have large companies here, it's right to make a gesture like that."
Is that what it takes to motivate an entrepreneur? For Minister of Finance Yair Lapid, for example, to pat him on the back?
"It will be a very nice thing for Lapid or any other senior official to do. It will be really educational. That's what will create a conceptual change."
So you are saying that entrepreneurs are under-appreciated.
"Not exactly. The public itself doesn't understand what entrepreneurship is, and how hard it is. Its attention is focused on reports of exits and making money quickly, and that makes it believe that the high-tech industry consists of a group of greedy people."
Isn't that the Israeli temperament? To make as much money as possible as quickly as possible?
"No. Most of the entrepreneurs I know are people with values that want to create a product that will do good for mankind. They aren't chasing after wealth."
An entrepreneur does not depend just on himself. When he reaches the point of building a large company, the process becomes more complicated. Could it be that they are running away from that?
"There's a saying: 'If you want to go fast, go alone. If you want to go far, go together.' In order to build a large company, you have to build an entire apparatus: investors, partners, customers, employees, and if this apparatus is managed correctly, it will move forward."
"Institutions should invest in venture capital"
Start-up nation means start-up inflation. Does this inflation have any negative aspects?
"Sure it does, and the main one is a loss of technological potential of human capital. I'll explain: we live in an era in which technology is running ahead, creating new industries, and destroying traditional industries. Employment security is declining. Fewer and fewer people are able to plan a long-term career, and therefore more and more people are founding start-ups, because the level of risk in founding a start-up is already starting to be equivalent to the risk in finding a regular job for 30 years from now. That's how start-up inflation is created, and it's a general public phenomenon, not just something for people who have left higher educational institutions, like Steve Jobs and people like him. These people, each of whom is raising a little money, are thereby skipping a process of technological innovation, because they are in such a rush to break into the market.
"The result is that an awful lot of capabilities and an awful lot of technological know-how is spread among a very large number of start-ups, each of which raises a little money and has very little chance of succeeding. Instead of talented people being concentrated in fewer companies, they're spread among many start-ups, most of which won't succeed. That's the price we're paying.
Can this be changed?
"No. You can't control it."
Will the start-ups inflation end?
"To tell you the truth, I don't know. I assume that at some point, the number of start-ups will decrease, but the phenomenon will remain, because today's younger generation has three possibilities: study at university, work in a family business or an existing company, or found a start-up. That's not something that can be stopped."
There may be more entrepreneurs taking chances, but when you're talking about institutional entities in Israel - the ones that manage our pension money - they still avoid taking risks like investing in venture capital funds like Pitango.
"Right, and that's an attitude that has to be changed. I believe that as time goes by, more and more such entities will enter the venture capital investment circle, for a rather simple reason: we're in an era in which there is no longer any separation between low tech, mid tech, and high tech. There's no company that doesn't need technological innovation."
When your raise money for a new fund, and you consider enlisting Israeli institutions, who calls whom?
"There's usually someone mediating between the two sides."
Why does a leading venture capital figure like you need mediators?
"In principle, I don't need them, but when I get the feeling that investment institutions in Israel don't want to invest in venture capital, it's easier for me to get on a plane and raise the money from foreign investors."
So you choose the easy way out.
"No, it simply never occurs to me - or it never used to occur to me - that Israeli investment institutions could want to invest in my fund."
And now?
"There's already more interest now."
A year ago, you said, "Take my word for it - up until now, those who invested in our funds didn't lose money." The question is whether they made more or less profits than other funds on the same scale as Pitango.
"There's no doubt that there both are better funds than ours and funds that aren't as good as ours."
And where are you between them?
"We're in a good place that enables us to go on investing money."
Published by Globes [online], Israel business news - www.globes-online.com - on November 9, 2014
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