Earlier this week I hosted a breakfast for Israeli VC’s and entrepreneurs in Herzilya – Israeli’s Silicon Valley or Route 128 – with Governor Patrick of Massachusetts. Later in the week I met with leading Palestinian entrepreneurs. Here are some of the things I learned – with no offense to anyone at all intended.
In Israel the VC industry is thought to have started in 1992 when the government committed $10 million to 10 funds and now it is estimated that between $1.3 to $1.5 billion is invested per annum. The market is mostly centered in Herzilya which is also known affectionately as “Silicon Wadi” (which in Arabic is channel for water or valley). At the peak there were 70 to 80 firms, but now partners I met with estimated that there are only 20 to 25 active firms. Quite notably this week it was announced that the Israeli venture industry did not raise a new fund in 2010. These same GP’s thought that this was going to be a much stronger fundraising year.
Of the $1.3 to $1.5 billion invested annually only one-third comes from Israeli-based firms while the balance is thought to come from firms based in the US and Europe. Industry analysts estimate that over 90% of the underlying capital being invested comes from offshore LP’s. Approximately 45 of the top 50 tech companies globally have significant R&D centers in Israeli. In fact when I was at EMC Israel I learned that their presence was built largely through local acquisition.
It required recent favorable changes in tax laws to spurn the local M&A activity (accelerated write-off of M&A goodwill) which underscored that Israeli VC’s also struggle with the lack of liquidity – like the rest of us. Also like in the States there is a very active angle investment community – there are 25 incubators – perhaps even more active in Israel than the US. In 2011 four micro-VC funds were announced – not bad for a country the size of New Jersey. Two other facts: there are no non-competes (like California) and the accounting standards are like the US to facilitate dual-listings – if IPO’s ever come back.
I also visited the Technion (the MIT/Harvard/Caltech of Israel) and met with the head licensing officer. The university receives around $60 million annually in R&D grants which leads to over 100 inventions, 8 companies and 8 licenses each year. Separately I also spent time at the Weizmann Institute of Sciences which is the preeminent life science research center; over 40 companies/600 patent families/$16 billion of pharma sales are based on discoveries at the Weitzmann.
These are just some of the centers of innovation which the local VC’s pore over. Pretty exciting.
At the outset of my meeting with three leading entrepreneurs from the West Bank this past week (see here) they announced that they come from the “most stable country in the Middle East” – which generated some nervous, if not relieved, laughter. They were nearly 45 minutes late because they were held up at the various checkpoints to get into Jerusalem – and sometimes I get frustrated on Storrow Drive.
There are 2.5 million people living in the West Bank, another 1.5 million in Gaza (the Israeli settlers are not counted in these numbers). Each year USAID contributes $400 million in aid, 80% of it to the West Bank. The per capita GDP in the West Bank is $1,600, in Gaza it is $744. There is 40% unemployment in these territories. Theses CEOs’ felt that hourly tech wages were 20% of those found elsewhere. There are 700,000 Facebook accounts in West Bank and Gaza – wonder what they are saying to each other right now?
Out of numerous “Corporate Social Responsibility” programs many leading tech companies now have people employed in the West Bank – H-P, Cisco, Google, Intel, SalesForce. Analysts estimate that there are 300 IT companies in these territories; in 2007 these companies gernerated $250 million in revenue. There are 10 ISP’s and broadband access is considered widely available. There are less than 3,500 people working in the tech sector in these territories while the university system is pumping out more than 3,000 graduate students per year – clearly an absorption issue. Most of the business models are outsourcing and/or service businesses –it appears that little “deep IP” discoveries get funded now – which is not surprising given the state of their economy.
Local search did not exist in Palestine until Google argued for the “PS” domain. US import/export forms until very recently did not have a Palestine designation making it virtually impossible for these CEO’s to do business in the States.
This past week a new $28 million Palestinian fund was announced by Cisco/Google/Soros/Steve Case among others, dubbed the Middle East Venture Capital Fund based in Ramallah. The local VC industry is now thought to be about $150 million – it certainly felt smaller than that.
But these CEO’s were smart, sophisticated and committed to building substantial businesses – like entrepreneurs all over the world. Somewhat ironically they felt that the Palestinian economy will evolve similar to the Israeli one – based on significant constraints and lack of natural resources, but rich in an energized tech-savvy, young generation eager to engage the world.