Tech entrepreneurs in Israel will benefit from making closer links with European investors

Israel is a small country with a population of just over 8.5 million, but it is the source of much of the deep technology behind the scientific advances and high-tech engineering innovations that are revolutionising our lives. In fact, the Israeli tech ecosystem is second only to San Francisco’s in disciplines such as artificial intelligence, digital health and cyber security, and is attracting large amounts of investment from overseas.

The strength of Israel’s ecosystem is reflected by the growth in the number of tech deals over the past five years, which are attracting increasing amounts of finance. In the first quarter of 2019, there were 128 Israeli high-tech capital funding deals – 15 per cent more than in the first quarter of 2018, and which are bringing in 28 per cent more investment. The quarterly median and average amounts raised were among the highest since 2014, with two deals each attracting finance of over USD100 million to bring in 16 per cent of the total raised. 

Venture capital is providing an increasing amount of the capital for Israel’s tech ecosystem, investing USD1.3 billion in 71 of the 128 capital-raising deals in the first quarter of 2019. The number of venture capital-backed deals for this period is close to the average for the last four years, which shows that much of the growth in funding levels includes venture capital. 

VC funds know that consumers want technologies which facilitate day-to-day activities and eliminate hassle in their lives – and they have discovered that Israel’s tech ecosystem is adept at creating such technologies. A good example is Medial EarlySign, founded by three Israeli pioneers in 2009 to apply advanced mathematical algorithms, AI and big data technology in order to detect early warning signals of ill health that can save lives. 

When it comes to selling tech businesses, exits by Israeli start-ups can achieve very large prices. The largest ever was the sale of Mobileye, an autonomous driving firm which was sold to Intel in 2017 for USD15.3 billion. Earlier billion-dollar exits included Waze, a driving navigation app sold to Google in 2013 for USD1.1 billion, and M-Systems whose USB flash drive was bought by SanDisk for USD1.5 billion in 2006. More recently, electronics parts manufacturer Orbotech was bought by China’s KLA Tencor in 2019 for USD3.26 billion, while flavour and ingredients manufacturer Frutarom was the biggest exit of 2018 when it was sold for USD7.1 billion to IFF, a Dutch flavours and fragrances firm. 

There are many reasons for the success of the country’s tech ecosystem, including its educational institutions which often focus on technology. But the mandatory conscription of men and women into the Israel Defence Forces also plays an important role as an engine for innovation. Entrepreneurs doing military service work on tech projects to match IDF needs such as high-tech weapons systems for missile defence and protection of vehicles. When they complete their service, they often try to convert their innovative military technology into consumer products or personal services. 

A further consequence of the military connections is that they have made Israelis more open to risk: failure is not seen as negative like it is in other advanced economies. If something new is tested and fails, Israel’s entrepreneurs do not give up but use the experience to improve what they are trying to achieve. And then there is Israeli chutzpah, a personal characteristic which allows people to make constructive – and sometimes rude – criticisms, saying what they really think about developments to move things on. 

Military needs made Israel a leading force in cyber security, but new domains are emerging all the time. One such is foodtech where more than 300 Israeli companies are now using life sciences and cleantech to innovate, drawing on artificial intelligence and big data analytics to improve productivity, profitability and sustainability. 

Tech innovators need local partners to make their voices heard on the ground, and one of Lakestar’s strengths is that it can play such a role

Foodtech is still a small sector in comparison with more traditional fields in the Israeli tech ecosystem such as IT, software, internet of things and fintech. But interest is growing rapidly, especially with global food and agricultural companies looking to take advantage of cutting-edge research by Israeli academic institutions. The 2018 sale of Frutarom to IFF focused overseas attention on other leading foodtech companies in Israel. 

More widely, many big US companies now have corporate development centres in Israel where they collaborate on innovations with organisations in the tech ecosystem. They include Intel whose latest chipsets have been mostly designed in Israel, and Amazon which designed and built the operating system for Alexa there. 

Lakestar is seeking to increase its investment in Israel where entrepreneurs often seek partnerships in the US, thinking that it will be easier to communicate in English and to raise funds there. But we believe they need to realise that such partnerships often require moving to the US where they will be a long way from their home country and its ecosystem, and working in very different time zones. European investors are much closer geographically and culturally, and one of my roles is to explain the advantages of working with European funds such as Lakestar.

For one thing, the European market is much bigger than the US and less spread-out. It also has large and diverse cities such as London, Berlin and Munich as well as smaller national centres such as Stockholm and Zürich. These have much of what Israeli entrepreneurs need for success – established tech industries, investment organisations, active governments and leading universities. 

They often have regulations for businesses which differ from country to country, however: AirBNB, for example, is banned or limited in cities such as Barcelona and Berlin, and Uber faces opposition in some European countries and cities. So tech innovators need local partners to make their voices heard on the ground, and one of Lakestar’s strengths is that it can play such a role. 

For example, we can interact with European carmakers to help entrepreneurs develop automotive tech innovations that are relevant to European roads. This can be difficult for US funds which inevitably focus on the big North American carmakers rather than the smaller auto companies in Europe. And consumer companies in Europe are often better able to match European tastes than giant US producers – as are the region’s banks, insurers and other financial organisations. 

There are many interesting deep tech companies emerging in Israel which would benefit from making closer links with European markets. Lakestar is a venture capital fund that can help Israeli entrepreneurs, not only by investing in their start-ups, but also by providing additional support such as advice on strategy, human resources, marketing and recruitment in the region. Successful entrepreneurs know that they need funding advisors who can offer value added services as well as finance – and that is what Lakestar provides. 

This article is part of the 'Lakestar Briefing', a periodical publication about Lakestar's portfolio companies and our network of inspiring minds we like to work with. If you wish to subscribe please click here to fill out your name and email and we will be in touch.