28 Nov 2018

Foreign investment in Israel reaches 77% of total

Guest post by UK Israel Business non-executive director Eze Vidra

Foreign investors’ share in Israeli high-tech capital raising kept growing during the past two years, reaching 77% of the total capital raised – the largest share since 2013, according to the latest IVC Report (see pdf). In many ways, the multinational corporation involvement is part of Israel’s secret sauce of innovation, but there are downsides too.

Capital Raised in Israeli Deals Involving Foreign Investors | 580 733 861 784 704 963 1,003 1,089 1,211 1,222 917 1,399 1,397 1,632 1,228 842 1,175 1,281 1,621 1,427 1,297 1,676 1,564 49% 26% 34% 34% 37% 26% 32% 31% 29% 21% 25% 34% 32% 27% 31% 22% 35% 37% 32% 31% 32% 31% 23% 51% 74% 66% 66% 63% 74% 68% 69% 71% 79% 75% 66% 68% 73% 69% 78% 65% 63% 68% 69% 68% 69% 77% Israel High-Tech Capital Raising: Foreign vs. Israeli Investments $m

Israel High-Tech Capital Raising: Foreign vs. Israeli Investments $m

MNC Activity in Israel on the rise

There are 368 multinational corporations active today in Israel. Most of them started with an acquisition of a local startup and grew over the years. The largest one is Intel, with 11,000 employees in Israel, and 105 of them employ more than 100 people each. There are different ‘depths’ of involvement for corporates when it comes to Israeli high tech. As described in a report by Mind the Bridge organisation, there are 4 types of corporate outposts:

  1. The Corporate Innovation Antenna –  which usually houses only a small team doing trendspotting and
    startup engagement on an individual level. In addition to being lean, this is usually the opening steps for a larger presence, and as such, antennae are often young.
  2. Corporate Innovation Labs act as incubators, and accelerators powered by corporate resources for out of house technology research and development. This is the lean version of the R&D facility and allows for better interaction with startups working with new technologies.
  3. R&D Centre – The most established presence takes the form of a corporate outpost which employs the
    most people and represents the most dedicated mission to a region. R&D Centres draw on both startup technology, as well as local talent to give corporates the power to interact and implement new solutions. Some corporates have multiple R&D Centres specialising in different technologies.
  4. Corporate Venture Capital Outpost (CVC) –  an office of a venture fund set up by the corporate. Proximity to startups is an invaluable resource for VCs of all types, and the importance of moving to an ecosystem for on the ground presence is a move many CVCs are making. This trend is common both in Silicon Valley and in Israel.

I’d add a 5th: limited partner investments in funds. We’ve seen it recently with Sky and ProsiebenSat1 Remagine Ventures (disclosure: I’m a co-founder and managing partner), Alibaba and JVP, Cisco and StageOne etc. This level of interaction provides the corporate with access to the market and creates strong ties without permanent establishment. For the startups, it means additional channels to international markets in the form of sales, partnerships and investments, facilitated by the local fund.

Select Multinational Corporates Active in Israel in 2018

                                                                     Select Multinational Corporates Active in Israel in 2018 (source)

In terms of geographies, US investors are still the most dominant, capturing 35% of capital raised by Israeli companies. Chinese, British, Japanese and German investors hold around 3% each.

Multinationals countries active in Israeli high tech investments

Countries active in Israeli high tech investments

Talent squeeze

Reports estimate that approximately 300,000 skilled workers are involved in Israeli high tech. Competition over this skilled population is fierce. Startups compete with corporates for hiring top talent, but the corporates can pay higher salaries, offer perks and benefits (like a car, training, etc) and to some extent making it hard for startups to scale up in Israel.

One solution is diversifying the talent pool. This could come from within Israel, by employing a hire rate of Israeli Arabs and ultra Orthodox jews. Initiatives like Kama Tech are looking to bring Orthodox to the tech entrepreneurship, but ultimately massive education reforms are required to skill up large parts of the population so there’s a pipeline of talented, socially networked tech workers.

Alternatively, talent can come from abroad in the form of foreign workers. While Israel has reduced the visa processing time to six days and it in a simple online process, it can be tricky to lure top talent to relocate to Israel. Initiatives like BETA (Be in Tel Aviv), started by local entrepreneurs, are looking to attract potential employees for a year of work.

It’s underestimated how much of Israel’s startup ecosystem is comprised of outsourced development in Eastern Europe, which currently helps alleviate the talent gap.

Overall, the net effect of the multinational involvement in Israel is overwhelmingly positive. According to the IVC report, the knowledge that arrives with the establishment of multinational R&D centres skills up talent and helps build meaningful industry verticals, as we are seeing today with Automotive for example. Many of the startup founders have previously been employees of these companies. In Cyber security for example, 85% of founders have worked at Checkpoint.

This post first appeared here: https://www.vccafe.com/2018/11/26/foreign-investment-in-israel-tech-reaches-77-of-total/