"US investors big winners from Israeli high tech"

Yair Seroussi, Hagai Golan and 4 winners
Yair Seroussi, Hagai Golan and 4 winners

Bank Hapoalim chairman Yair Seroussi talks with Globes editor Hagai Golan about the Israeli economy and high tech.

Even during the selection of the four winning start-ups in the SmartUp3 competition of Globes and Bank Hapoalim (TASE: POLI), it was hard to avoid the repercussions of current security tensions on the Israeli economy, in particular on high-tech industry. Globes editor-in-chief Hagai Golan and Bank Hapoalim chairman Yair Seroussi discussed the issue, the condition of the Israeli economy, and the future of the countrys high-tech industry.

Golan: The following headline appeared in Monday's edition of Globes - a quote from the chief economist of one of Israels investment houses: Markets are mistaken if they dont price Israels higher risk caused by the security situation. Do you agree with him?

Seroussi: Israel has always been under a cloud of rising and falling geopolitical risk. There is no question that when the risk rises, the cloud is darker. S&P and Moodys staffers are currently in Israel, and if you were to ask them what is happening to Israel rating if the country were located somewhere else, theyd tell you that the rating would be two grades higher, i.e. going from A/A+ to AA.

The question of the effect of the current tensions is very complicated, as it depends on how long the tensions last. Our experience shows that, in local terms, the Israeli capital market recovers very quickly after a brief crisis. If the crisis is prolonged, there will be an economic impact in the form of a slowdown. At the moment, the market is not pricing the security tensions; on the contrary, the Israeli shekel is strengthening, which tells us that the tensions are having no real effect on the economy.

Golan: That same economist said that the fact there is no second side to the violence increases the uncertainty about its scope, effect, and end. The view is therefore short term, which is more optimistic. Is it the right perspective?

Seroussi: We always tend to be optimistic, which is a good thing.

Golan: Long before the current security tensions, the Israeli economy was showing signs of slowing down. It can even be said that it was grounded, including private consumption, its main growth engine. As a banker, which reality do you see?

Seroussi: There is no question that weve seen sluggish economic growth in Israel in the past two to three years. Part of it is due to international effects, and part of it is our own doing. We have an economy that is comprised of completely different components: there is industry and manufacturing, which are in a severe slowdown; and there is high tech, which is a serious growth engine. Infrastructures have been another growth engine in recent years, and real estate is also currently defined as a growth engine.

But if take a longer view, there is no question that we have fallen from a fairly robust growth rate while Israels growth potential should be 4-5% a year to much lower rates. The reason is that growth is now driven more by private consumption, which has fallen because of the drop in investment and fixed assets that began in several years ago.

In order to invest, you have to be optimistic, you have to feel that there is some kind of certainty around us. At the moment, uncertainty has increased. People who invest in capital and fixed assets sense great uncertainty, which is why the level of investment has fallen. This casts a giant shadow over the Israeli economy, and the question is how to restore optimism to the manufacturing.

At this point, Seroussi took a more global perspective, saying, In the past 20 years, emerging markets have driven global growth. But now, especially in the past two years, the growth rate in these markets is slow and capital markets are responding accordingly. In contrast, the American market is recovering; it has actually had the strongest recovery since the 2008 crisis. Even Europe is showing signs of recovery. In other words, were in a period the creators have flipped. The US dictates the growth rate, and basically says that there is global growth.

Golan: According to a comprehensive Globes project on the Israeli high-tech industry, $4.2 billion has been invested in Israeli start-ups since the beginning of the year the highest annualized figure since 2006. Is the high-tech industry a bubble in the sense that there is no external event that can adversely affect it?

Seroussi: First, the success of the Israeli high-tech industry is part of the success of this industry worldwide. Israel is an excellent and special case because it is a small country that behaves as if it is an island, but it is not alone. The world is trying, and part of it is succeeding, in creating start-ups, beginning with the US, which is the global leader, through London, Berlin, Paris, and others, and in Israel. The technology sector is at its peak now, both in terms of the interest that it creates, and in terms of the limits it enables to be broken. That is why I do not think its a bubble. It is simply a massive inflow of money into this industry. $1.8 billion was raised in 2012. The money raised this year will allow the companies that raised it to be ready for harder times.

Golan: In view of the latest capital market correction, in your opinion, should we expect a larger correction, and if so, what affect will it have on the ability of start-ups to raise capital and your rosy reality?

Seroussi: Raising capital is always a matter of timing. Windows of opportunity always open and close. In general, there is no doubt that the flow of money to the high-tech industry is partly because of the very low interest rates in the world. This interest rate level causes people to take greater risks to increase the return on their capital. In other words, the managers of large pension funds, especially in the US, are increasing the allocation to more private investment instruments with higher risk profiles, and some of this money goes to new technology companies. Therefore, in terms of sources of financing, we are at a peak. The interest rate environment will likely stay low next year, so the allocation, which increases the risk component in investment portfolios, will continue.

Golan: This is an optimistic forecast?

Seroussi: For start-ups raising capital, yes.

Golan: Who are the main players financing Israels high-tech industry?

Seroussi: The return of the angels, the private investors, is the most prominent thing. They always arrive first. Some of them are entrepreneurs with an exit under their belts, and some have simply learned how to be an angel. They are the people who can and are prepared to invest in the pre-seed stage. The turn of the venture capital funds, both Israeli and foreign, usually comes next, and in the later stages, we mostly seen foreign, usually American, funds, which have the big money.

Golan: Israeli institutional investors tend not to invest in high tech. How can they be encouraged to invest in this industry?

Seroussi: I wouldnt comment on that. Time and success do their own thing. There is no question that investment managers, like provident and pension funds, are much more cautious, but there is a trend to increase the exposure of Israeli institutional investors to the high-tech industry. But there is no question that the big winners from Israeli high tech are American investors.

Golan: From the investors perspective, what is his main consideration when deciding whether to invest in a particular start-up?

Seroussi: First, the people; the team. The human factor thats the most important thing. Second, their target market. Some also invest on the basis of experience. And yet, the most important thing in my opinion are the skills of the start-ups people.

Golan: Which are the dominant high-tech segments now?

Seroussi: Israeli high tech is much more diverse now than in the past. People are moving from one field to another, but I still think that most skills are focused on the use of data as an analytic tool the analysis of medical data, the use of analytical tools to make advertising more effective, and, of course, cyber. The whole world is becoming more and more digital, and cyber is becoming much more relevant. It is truly an industry for the long term. At the same time, every industry undergoes consolidation after a few years, and when that happens, its hard to find the new market leader.

Golan: According to the latest McKinsey report, a large part of banks revenue and profits in the coming decade is at high risk because of rapid technological change. Do you agree with this finding, and if so, what are doing to avoid it?

Seroussi: There is no doubt that the big upheaval in the banking world, and not just in Israel, will be related to technology, rather than legislation or regulation. Service companies have been, and are being, challenged by technology companies, and this trend has reached banking. Fintech is touching on almost field, and even creating very interesting solutions. A bank cannot develop it at the same pace or specialization, so we cooperate; in other words bring the best people and most advanced technologies to the bank.

It is no small matter for a large entity like Bank Hapoalim to sit with start-up entrepreneurs. There are cultural differences between them, and we need to learn how to bridge them. I think that were improving, at least on the basis of the number of agreements weve made and the number of technologies weve installed at the bank to date. And yes, its going to be complicated. Life is going to become very complicated because technology is changing the way of the world, and time is of the essence. I sometimes feel like a start-up entrepreneur myself, because, every morning, I have to seek out the most innovative solutions we can offer the customer and the bank itself.

The four winners: The Grid, TapReason, PayBox, Finupp For the third year, Globes and Bank Hapoalim have held the Smartup competition for Israeli start-ups. Each of the four winners announced Tuesday will receive three months mentoring by high-tech and business experts from a range of fields affecting the start-ups. This year, in contrast to previous years, two programs were designed: the general program for companies engage in a variety of content with the exception of financial technologies; and the fintech program for companies developing financial technology products and services which have the potential to change and improve the lives of all of us. Bank Hapoalim will grant the four companies a start-up package that includes a high-tech bank account at preferential terms, and a NIS 20,000 grant. Top consultants from leading Israeli high-tech accelerators and incubators Nielsen Innovate, 8200 EISP, Explore.Dream.Discover, and Moneta Seeds - will advise the start-ups executives.

The Grid Ltd. - general program

Founders: Gur Harel, Yuval Niv, and Nir Weiner.

The solution: a platform for moment-to-moment delivery services within 90 minutes in an urban area, through an app with a unique transparent experience accessible to all users. The service makes it possible to send or receive any item that can be loaded into a private car immediately and without the need for prior registration. Deliveries are made by a community of couriers who use the companys operating grid to provide a fee-based service for each task. The platform is a flexible source of revenue for people with a vehicle who wish to make money during their free time at a time of their choice. The technology is unique because it optimizes routes in real time, making it possible to combine unplanned tasks with the shortest routes in the timeliest way.

The business model: revenue sharing with the couriers of the fee per delivery.

Target markets: worldwide.

Main competitors: large courier companies and US ventures such as Zipments, Postmates, and Deliv.

Main investors: 2BAngels, Plus Ventures, Explore.

Amount raised to date: $600,000

Why it should win (according to the founders): the company is making an anachronistic, inefficient, and inaccessible service, which everyone uses, into something innovative, available, and experiential. The Grid is also a unique, attractive, and flexible source of livelihood that is relevant for almost anyone with free time and can-do attitude.

Finupp Ltd. - fintech program

Founders: CEO Asaf Regev, a lawyer and CPA; CTO Dani Silberstein, a software engineer; VP marketing Lior Albeck

The solution: the cloud-based solution manages financial and accounting data. It has already helped 11,000 users obtain tax refunds exceeding NIS 1 million. The technology is unique because of its accounting algorithms.

The business model: NS 195 per application for a tax refund.

Target markets: currently Israel, to be followed by the UK, France, Germany, Italy, and the US.

Main competitors: CPA and tax refund firms, and Britains Intuit Ltd.

Main investors: family and friends

Amount raised to date: $20,000

Why it should win (according to the founders): the companys user growth rate is 30% per month, because it offers online services, which were previously the domain of accountants and tax consultants.

TapReasonLtd. - fintech program

Founders: Nimrod Elias, CEO CEO Ailon Velger, CPO Jane Velger, all three of whom are veterans of the IDF Mamram - Center of Computing and Information Systems.

The solution: an aid for virally distributed mobile apps by encouraging users to promote, share, and recommend the app by word of mouth. The technology is unique because it finds the right time to ask users to act. The technology is based on algorithms that learn users behavior and offers a customized prediction for timing, and the right message and channel.

The business model: monthly subscription based on use.

Target markets: mobile apps targeting end users in news, health, games, and other fields.

Main competitors: measuring tools (Yozio Inc. and Branch.io Inc.), analytic tools (MixPanel Inc.), and A/B testing tools (Optimizely Inc.)

Main investors: Nielsen Innovate

Amount raised to date: $500,000

Why it should win (according to the founders): the company is offering a material solution in an era in which apps are struggling for distribution. Distribution costs are high, and most apps fail to achieve a critical mass of users, rending the solution critical for contemporary companies and app owners.

PayBox Ltd. - fintech program

Founders: CEO Tal Grinberg has fulfilled a number of financial positions in the investment and financial oversight world; VP marketing Udi Liberman has experience at User Experience Israel (UXI) and in digital marketing campaign management; VP development Omri Hapner previously worked at Intel Israel Ltd. and at Ben Gurion University of the Negevs Natural Language Processing laboratory; COO David Rahamim fulfilled risk management and fraud prevention positions at cyber companies.

The solution: a social network payments solution that facilitates and simplifies group payments. The company is developing proprietary tools for collective collection, management, and payment. The technology is unique because it is a financial tool in the form of a dynamic checking account for groups, designed to support the user experience. The company has developed many-to-many payment options via credit cards without the need for integration with point-of-sale systems or the issue of an actual credit card.

The business model: commissions, targeted advertising, integration with third parties through revenue sharing, and data monetization.

Target markets: Europe, the US, and Israel.

Main competitors: Leetchi, Tilt

Amount raised to date: no financing

Why it should win (according to the founders): the sharing economic and collective consumption world is picking up, and a large part of this world requires payment and money sharing. In the coming decade, the banking industrys main clientele will be the Y generation, which has become used to the social network user experience. We are trying to connect the two worlds, traditional banking and social networks in a single product.

Published by Globes [online], Israel business news - www.globes-online.com - on October 22, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Yair Seroussi, Hagai Golan and 4 winners
Yair Seroussi, Hagai Golan and 4 winners
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