Israel’s innovation ecosystem hosts event

Around 300 delegates heard international corporate venturers discuss topics including how they engage with startups and venture capitalists and the future of venture in mobility, interspersed with startup showcase sessions on financial technology and security, telecommunications, consumer and mobility.

Lead sponsors, Centrica Innovations, the corporate venture capital (CVC) arm of UK-based energy utility Centrica, led a panel discussing home energy networks with two chief executives of their portfolio companies – Israel-based artificial intelligence (AI)-equipped energy management technology provider FSight and Germany-based energy internet-of-things (IoT) software provider Greencom Networks.

Christophe Defert, vice-president of Centrica Innovations and a four-time GCV Rising Star from 2017, when asked why he made the trip from San Francisco to Israel for the event, said: “Israel has a thriving innovation ecosystem and it is important to keep the relationships going, so this is a perfect opportunity to do it.”

Centrica Innovations, which focuses on four verticals: distributed energy and power, electrification of transport, smart homes and industry 4.0, has a team spanning London, New York, San Francisco and Tel Aviv.

Defert added: “We have been sponsoring this event for three years now – we are doing that because Israel is one of the main innovation hubs in the west and one that we wanted to cover – partnership with GCV was a great way to do that.”

Above: Home energy management panel (from left): Annemie Ress, Michal Mravec, Emek Sadot, Christian
Feisst and Idan Mor (moderator)

Defert mentioned that Idan Mor, an Israel-based investment director of ventures at Centrica Innovations, is active in the local ecosystem. Mor said: “We are collaborating with local and foreign CVCs on venture investments. Local VCs are partners of choice for us in any region that we invest in. With universities and government, we work through Israel Innovation Authority funding programs – usually through unique programs or accelerators.”

Christian Feisst, CEO of Greencom Networks, told GCV: “We help utilities like Centrica or others enable new business models based on our IoT platform by connecting distributed assets such as solar PV [photovoltaics], electric vehicles, heat pumps and battery storage.

“Centrica changed the entire mission of the company to create services around the end-customers and that is extremely important for us because we believe the asset of the future is the end-customers.”

When asked how Centrica is helping Greencom, Feisst said apart from being a shareholder, Centrica is also a customer. “We are doing a lot of business with Centrica, so it established a home energy management business unit. They are utilising, for instance, our platform as a foundation.”

Paolo Bavaj, a GCV Powerlist mainstay and head of Henkel Ventures, Germany-based chemicals and consumer goods manufacturer Henkel Adhesive Technologies’ corporate venturing unit, which also sponsored GCV Israel this year, said: “I come to Israel four times a year because it is one of the major hubs for material science. There is a hub in Boston because of Massachusetts Institute of Technology, of course, but Israel is also very prominent in material science because of Hebrew University and Technion University [Israel Institute of Technology].

“There are many good material startups in Israel as a result, and we have identified excellent teams with superb skillsets, and also the mindset to try new things is very good for us.”

Above: Virtual reality demo in the Israeli Innovation Center, Peres Center for Peace & Innovation

The day before the conference the corporate venture delegation joined GCV staff for an afternoon workshop at The Squadron, a startup run by serving reserve Israeli Air Force pilots. The delegates each flew “missions” in F-16 fighter jet simulators and then experienced how the Israeli Air Force uses debriefing techniques to improve performance.

Alex McCracken, a managing director at venture debt firm Silicon Valley Bank, said: “We often forget in business how important it is to debrief and learn from our mistakes. This was one of the best management sessions I have ever attended. And really fun, too.”

The conference took place at the Peres Centre for Peace and Innovation and included a tour of its Innovation Centre, showcasing ground-breaking Israeli technologies past and present including a virtual reality experience.

Israeli tech companies recorded a record high of $8.3bn distributed in 522 funding deals in 2019, according to Israel-focused data provider IVC Research Centre. In total, corporate investors have backed 425 rounds in the Israeli ecosystem from 2011 to early 2020, according to GCV Analytics.

A survey conducted by Axis Innovation in January 2020 showed that more than half of Israel-based startup founders had travelled abroad to meet investors and 50% said they wanted to create impact through technology developed.

Roughly a third said they considered Israel would be the next tech innovation hub, which is reflected in the CVC investment amounts in the past two years which have exceeded $1.6bn in 2018 and $1.5bn in 2019.

Most of these deals’ corporate investors are not headquartered in Israel, however. Zeev Holtzman, founder and chairman of IVC Research Centre as well as venture capital firm Giza Venture Capital, told GCV that global technology companies from the US, Europe and Asia have a strong presence in Israel.

Holtzman said Giza had already partnered corporates in the past, including industrial and power technology conglomerate General Electric’s GE Capital unit in the 1990s – GE Capital had invested through its Equity Capital Group in Giza’s investment fund.

Corporate venturing activities since then have only accelerated, according to Holtzman, who added: “Especially in the past two years, the importance of CVCs has grown substantially.” International players include chipmakers Intel and Qualcomm, software provider Microsoft and electronics manufacturer Samsung, focusing on the cybersecurity, smart mobility and healthcare sectors.

There were 362 active multinational companies (MNC) in Israel in 2019, of which Intel is the most active corporation in Israel from 2014 to 2019. Intel Capital has participated in 52 investment deals and Intel has acquired five companies totalling $17.5bn, according to the MNC Contribution to the Israeli Tech Ecosystem report.

The top three technology clusters in MNCs in Israel are in the machine vision, IoT and cybersecurity sectors. 115 companies, or 32% of all MNCs active in Israel, develop technologies in at least one of these three clusters.

A notable domestic player is technology holding company Elron Electronic Industries, whose portfolio companies include enterprise cyber threat intelligence provider Sixgill, keyless mobile crypto wallet developer ZenGo and Sayata Labs, the creator of an AI-equipped risk assessment tool for digital insurance providers. It also runs a joint investment vehicle called RDC, which was formed with defence systems producer Rafael.

Regarding Israel’s innovation ecosystem, Boaz Peer, investment director for Israel and Europe at Qualcomm’s corporate venturing unit, Qualcomm Ventures, said: “Israel has one of the fastest-growing tech startup scenes in the world. It was ranked number one in the world in terms of VC investment per capita and number one in terms of the percentage of GDP spent on research and development (R&D) globally,” citing 2018 World Economic Forum Global Competitiveness Report by PricewaterhouseCoopers and Startup Nation Central.

Peer added the Israeli ecosystem generated over $21bn in exits in 2019 with four deals valued at over $1bn, including the acquisition of networking equipment supplier Mellanox Technologies by graphics technology producer Nvidia for $6.9bn and deep learning technology provider Habana Labs by Intel for $2bn.

“Several factors contribute to such successful ecosystem,” continued Peer. “Among these, a significant one is the culture of the Israeli entrepreneur – straightforward approach, consistency and ability to manage failures. Another factor is the effect of the Israeli military, which is a catalyst for young technical talents, who are being trained in domains such as cybersecurity and AI, which later helps them founding successful startups.”

David “Dede” Goldschmidt, Israel-based vice-president and managing director for Samsung Catalyst Fund, said the most notable differences from other ecosystems – such as North America and Europe – were two key enablers.

“First, unique entrepreneurial culture – Israelis are very practical and agile in their problem-solving attitude, seeking a way for fast implementation of new concepts and technologies. They are more open to taking risks and be first to operate in blue ocean, emerging domains.

“Second, relevant knowledge and expertise – the brightest minds that serve at Israeli Defence Forces have access to leading-edge technology and opportunity for high-scale implementation, and the very active and vibrant local tech scene with thousands of funded startups and over 350 multinationals’ R&D centres. Also, academia is very strong in multiple domains, such as computer vision – the foundation for [Intel’s Israel-based driving systems technology subsidiary] Mobileye.

“For this reason, we see a lot of interest in Israel from foreign VCs. In fact, more than 75% of the direct investments in Israel are by foreign investors, whereas in Europe, traditionally the majority of capital invested was local. Moreover, the magnitude of venture funding in Israel is very high – Israel alone attracts more VC dollars than the largest European nations.

“Israel follows Silicon Valley and is probably ahead of Europe in the maturity of the venture ecosystem. Earlier in this century, Israel had strong sources for early-stage financing but it lacked the capital needed to fund growth. This resulted with early exits at relatively lower valuations. Over the past decade, we have seen many growth-stage players attracted to Israel, allowing liquidity to the early investors and growth capital to the companies, fuelling their growth and scale – by now Israel has more than 15 unicorns.

“Samsung Catalyst Fund and many of the other CVCs have a strong presence in Israel, even compared with other regions in the world.”

Israel-based corporate venturers prefer mid and later-stage rounds – series A and beyond – however, many Israeli CVC-backed deals are undisclosed.

Orly Glick, a partner at Vintage Investment Partners, an Israel-based VC firm with multiple corporate limited partners (LPs) that also provides an advisory service to CVCs, said: “Israel is a small country, about 20,000 square kilometres (8,000 square miles), just to provide perspective – this is about the size of New Jersey.

“Thus entrepreneurs target international markets rather than local markets and so from day one, startups plan their products to fit an international market, often with a very large TAM [total addressable market]. As Israel had no natural resources until recently and is a very young nation, the country supported startups in the form of grants in order to provide an initial funding base.

“Today 87% of the funding raised by startups last year originated by investors from other countries and with the presence of around 400 multinational companies playing a local role such as CVC, accelerators, innovation labs and so on – there is a major ecosystem that supports local innovation.

“When it comes to the culture, Israelis are very open, think outside of the box, continuously question the status quo and work to improve it, appreciate open debate with being very direct to the extent of being perceived as somewhat audacious to other cultures.

“Hierarchies are flat and uncertainty is a part of the routine which is exactly what startups thrive on. Lastly, mandatory army service supports the ecosystem in a non-direct way building discipline, knowledge and a high level of responsibility in new generations of entrepreneurs.”

Oron Chertkow, an associate at Amdocs Ventures, the corporate venturing arm of Israel-based enterprise software and services provider Amdocs, said: “Israel’s uniqueness is embedded in the local culture and is driven by a combination [of several factors].

“It is small enough for success stories to travel fast and incentivise others to give entrepreneurship a go – there is a feeling that everyone around benefits from startups exits. There is also a small enough network that it is easy and efficient to do substantive diligence on good leaders and strong technology.

“Mandatory military service cultivates personal attributes such as responsibility, management, a can-do attitude, and strategic thinking from a very young age. An open, say-it-as-it-is culture is very conducive to building trust and taking risks.”

Qualcomm’s Peer added: “The Israeli innovation system has come a long way in the past 20 years in terms of diversity, maturity and scale. The amount invested has grown from $3.7bn in 2015 to $8.3bn in 2019, [according to IVC–Meitar exit report 2019] and the number of Israeli unicorns doubled to over 20 companies.”

“The latest addition to the noble list is [endpoint protection software provider] Sentinel One, a Qualcomm Ventures portfolio company. We also saw some mega exits in the past few years such as Mellanox, Mobileye, Habana and others. There has also been a shift in founders’ perspective from targeting a quick exit to aiming at building a bigger company, which in turn led to larger funding rounds – roughly 70 companies raised over $30m round compared with 21 only in 2015,” Peer said, citing the IVC-Meitar exit report 2019.

“These changes highlight the importance for investors to be patient when it comes to the timeframe of returns as well as being open to putting more money into their portfolio companies – the good news is that they may see higher returns on their investment,” continued Qualcomm’s Peer.

“Another interesting development is the rise of new domains for local startups. Enterprise software, computer vision, communication and cybersecurity were typically strong sectors for the Israeli startup ecosystem. However, in the past few years, there has been a rise of new companies across new sectors such as automotive, industry 4.0 and AI.

“These new sectors are also a focus area for Qualcomm Ventures. We have invested in companies such as Prospera, Wiliot, Anyvision, Coretigo, CyberX and Flolive. We [at Qualcomm Ventures] have a strong interest in investing in AI and launched a $100m AI fund in 2018.

“We are also looking forward to investing in the next wave of startups, which is why we also launched a $200m 5G fund targeting new opportunities for the Israeli entrepreneurs not only around connectivity and infrastructure but also around various new use cases and applications that can leverage the 5G revolution.”

Samsung’s Goldschmidt holds a similar view on the innovation ecosystem. He said: “The Israeli ecosystem has matured quite significantly in the past years and we are seeing larger Israeli companies and larger exits. 2019 was a record-breaking year both in startups fundraising which exceeded a total of $8bn raised and in exits with total exits value of $21.7bn in 138 deals. We see more and more serial entrepreneurs, forming their third or fourth company, seeking this time to build category leaders.

“Our investment approach has changed accordingly and we at Samsung Catalyst Fund now invest in more mature companies.

“With a long-term view, we see how Israeli talent has adjusted to serve demand, following ‘hype cycles’. Back in the 90s, Israel ecosystem had very strong telecoms and wireless systems startups such as Breezecom and others.

“In the early 2000s, we saw a rise of storage and networking subsystems and chipsets such as XIV, Passave and Broadlight. The second decade of this century saw a strong rise in cybersecurity, adtech, and internet and mobile, with companies such as Waze, Wix and Trusteer.

“Later came the automotive and AI-wave with companies such as Innoviz – globally leading automotive lidar – and Habana Labs – an AI chip developer, which was acquired for $2bn last year – both portfolio companies of the Samsung Catalyst Fund.

“It is worth noting the emergence of data and AI-driven startups. Data-driven innovation is disrupting many verticals and we [at Samsung Catalyst Fund] are specifically interested in the large, trillion-dollar markets being disrupted by these companies. Examples of such verticals are fintech, healthcare or digital health and industry 4.0.

“We are looking to invest in these companies which have demonstrated a flywheel effect. As these companies grow and have more customers, they collect more data and improve the solution based on the collected data, which in turn drives additional customer growth.”

The largest deals that count backing from Israel-based CVCs have a life sciences focus, according to GCV Analytics’ data.

Amdocs’ Chertkow added: “Over the past decade, we have witnessed a real maturing of the Israeli ecosystem from a tech-only driven innovation ecosystem to one with real businesses and high-quality managers. This is a result of the age of the ecosystem and the co-location here of the largest tech companies in the world that have each spawned a strong management alumni group.”

Vintage’s Glick also said: “Today we [at Vintage Investment Partners] manage $2bn in three investment strategies – fund of funds, investing across different sizes of funds, secondary funds investing in secondary LP transactions and secondary directly in growth-stage startups, and a direct fund that co-invests in startups alongside other funds.

“All three strategies invest in the US, Europe and Israel. Israel has a very strong deeptech ecosystem with outstanding startups in DevOps, cloud, cyber, automotive, fintech, data, AI, marketing tech, communication, sensors and others, mainly B2B [business-to-business] enterprise software.

“The Israeli ecosystem is very mature now with startups that raised $9.5bn in 2019. As many international VCs and CVCs invest in Israel, we are now investing in Israeli and in international funds in order to be invested in startups in Israel. We also invest alongside corporate VCs.”

Concerning how Israeli ecosystem players work with each other, Qualcomm’s Peer said: “Israel is a very collaborative environment. We work closely with both traditional VCs and other corporate VCs as well as with accelerators, incubators and academia in order to find the best companies.

“We like to co-invest with both Institutional VCs as well as CVCs, as we believe that a good syndicate of investors is a highly important factor for the success of any startup.

“This approach has helped us invest in great companies such as Waze, acquired by Google for $1bn; Ravello, acquired by Oracle; Wilocity, acquired by Qualcomm; and many others.

“We also invested in Team8 which builds new startups mainly in cybersecurity and in i3 Equity Partners, an early-stage deeptech VC fund investing in pre-seed and seed companies.”

Samsung’s Goldschmidt also noted: “We work closely with CVCs and institutional VCs as co-investors. As a corporate VC, whether we lead or not, we will always prefer to invest together with a strong syndicate. We think it makes sense to have a financial VC in the syndicate. In addition, we look to the earlier-stage local VCs as a source for later-stage deals.”

Amdocs’ Chertkow remarked: “At Amdocs Ventures, we put in a lot of time to be constantly engaged with the startup ecosystem. First of all, we turn the tables and work for the companies we invest in. Second, we try to add value to companies we meet whether we invest or not. Lastly, it is a small enough ecosystem that we actively help other firms, funds and institutions on the ideas they are working on, and they do the same for us.”

Vintage’s Glick said: “We invest alongside other funds and that could be CVCs as well. We recently announced an investment in Wiliot, alongside existing local funds and international CVCs. We are neutral in our view and always love to collaborate with all ecosystem players.”

Additional reporting by Tim Lafferty, GCV managing director of Asia, and Kaloyan Andonov, head of GCV Analytics.