Tapping into the Israeli hi-tech venture market
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Helping the strong Israeli tech sector get funding is vital, says INE Ventures’ Paul Grossinger
The strength of the technology available in Israel, especially in the mobile and ‘software as a service’ (SaaS) sectors, has encouraged US-based Israel-Northeast Ventures (INE) to launch a dedicated first fund and incubation programme.
The Philadelphia, PA-based firm sees Israeli technology startups as an untapped opportunity for investors because of their relative lack of access to adequate levels of funding in their home country. This is despite the fact that some of the larger Israeli companies in the security sector generally, such as CyberArk, Zimperium, ForeScout, Checkpoint Software or Elbit Systems, have managed to enter the US market and sell their solutions. Some are even listed there.
“A lot of the solutions Israeli cloud and mobile startups are developing take root in the elite military or educational spaces – so many former intelligence and defence officials have now either created their own company or been hired to provide expertise to an existing one,” explains INE managing partner Paul Grossinger, adding that those startups often have strong core IP along with original technology.
“However, there is a severe funding gap at seed level in Israel because hundreds of technologically advanced companies are competing for a small amount of angel, seed or early-stage venture capital funding. The market is saturated, with a handful of Israeli investors often
relying on huge buy-ins from their US counterparts to be able to provide significant financing. Similarly, it is difficult for US investors to tap into the Israeli market on their own, especially in the early stages, as they don’t necessarily have the required local presence, connections or market understanding.”
From this perspective, INE’s aim is to invest in local seed companies with a focus on the B2B market, and then go on to relocate their operations to the US East Coast – especially in the New York and Tri-State area (Pennsylvania, New Jersey and Delaware) – where they will be able to benefit from local business development expertise, and access market and financing opportunities.
“Israeli companies’ valuations are dramatically reduced compared with their US counterparts,” Grossinger says. “In the US, the typical valuation pre-money for a company is usually in excess of $5m. In Israel, you will find it’s often half that amount, so the levels of investment required to commercialise a technology are obviously lower. Typically, we’d invest $250,000 at the seed-level for a sub-$2m valuation, and the valuation would grow from there.”
Grossinger argues that, from a relocation perspective, low amounts of capital are needed in the mobile security and SaaS sectors because there are lower overheads for compliance, premises and technology. Also, the fact that the firm is angling towards enterprise-level solutions rather than consumer market ones significantly lightens the bill.
“In something like the pharmaceutical sector or working with a company that manufactures medical devices, you are looking at huge amounts of investment because you need to gain government approval, constantly update and advance the R&D and so on,” Grossinger says. “The same goes for financial institutions. With solutions that are on a SaaS basis, this is not something that is required because the cloud in itself is a virtual infrastructure.”
INE’s first fund is targeting a close at between $5 and $10m, and it intends to make 16 investments from it. The first financing announcement is expected in early spring, once INE finds the right entrepreneur and the right technology.