May 06, 2012 (Menafn - Globes - McClatchy-Tribune Information Services via COMTEX) --Most of the first chapter of "Start-up Nation: The Story of Israel's Economic Miracle" by Dan Senor and Saul Singer is taken up with the behind-the-scenes action of the acquisition of Frauds Science by eBay Inc. EBAY in early 2008. The plot is breathtaking, and includes everything needed to create the narrative that drives the book: big money, business competition, multinationals helpless in the face of technological challenges, and the Israeli underdog, which at first glance is barely noticed, but which an in-depth examination shows to be worth hundreds of millions of dollars. Provided the company is up for sale, of course.
"Start-up Nation" quickly became a bestseller. The story of the Israeli entrepreneurs who, through chutzpah and with a nothing ventured nothing gained spirit, succeeded in overcoming obstacles where giant companies failed, rivets readers who follow high tech and understand the importance of innovation. "Start-up Nation" is the latest book that tries to explain Israel's creation of a second Silicon Valley. Senor and Singer wrote an excellent piece of literature, but failed to offer anything new in terms of understanding the processes in Israeli high tech.
The wish to sell is natural
In the past decade, the extent of the dissonance in Israel's high tech has become apparent. While Israeli and foreign forums and books examined Israeli entrepreneurship in depth and with great creativity, anyone interested in the effect of high tech on Israel's economy realized that the big question is not how so many start-ups have been founded in Israel, but how has it happened that out of the hundreds of successful start-ups established over the past nearly 20 years, virtually none have become a new great company -- a company with hundreds of millions of dollars or more in annual sales, thousands of employees, and creating huge added value to the Israeli economy?
Explanations about the dynamics of Israeli companies, which are unable to reach large-scale operations, are usually limited to claiming that there is no capital available to enable companies to grow, the lack of skilled managers, entrepreneurs and investors who are in too much of a hurry to sell, and the like. But when examining each of these explanations, we realize that the dilemma about the reality of Israeli high tech is somewhere else entirely.
Not enough money? Ironically, there is plenty of capital. In the past 15 years, scores of Israeli high-tech companies have raised tens of millions to hundreds of millions of dollars each in public markets around the world. Alvarion Ltd. ALVR(tase:ALVR), AudioCodes Ltd. AUDC(tase:AUDC), Commtouch Software Ltd. CTCH(tase:CTCH), DSP Group Inc. DSPG, and Radvision Ltd. RVSN(tase:RVSN) are merely the opening items on a long list. But in the past ten years, only one company has succeeded in taking the next step after an IPO, which gave it access to big money -- Mellanox Technologies Ltd. MLNX(tase:MLNX). Most of the Israeli companies that went public failed to leverage their strategy to grow.
Inexperienced managers? A rule of thumb holds that entrepreneurs who try to found a second company have a better chance of success. Yet there are many second and even third-time Israeli entrepreneurs for whom success has been elusive. In addition, Israel already has an echelon of skilled managers who have worked for multinational high-tech companies, where they learned something about administration. There are also managers who have chalked up success at other companies, but struggle to transfer their accumulated knowledge.
Chasing an exit? The sale of start-ups that have developed a new technology is an embedded part of high-tech industry. In an industry where a substantial proportion of sales -- 5-25 percent -- is invested in R&D, it is natural that part of this knowledge will be developed outside the big companies, something that happens in no other industry. Since a technological edge provides a critical comparative advantage through patents, successful acquisitions include a generous premium, which is reflected in the bank accounts of the founders and investors. The wish to sell assets is completely natural, albeit in Israel the fame surrounding these sales has become especially great, distorting the image of the entire industry.
Calculating all the data
Hundreds of Israeli companies have been sold in the past 20 years. The details of some sales are unknown, but the scale of the data is enough to provide valid statistical estimates. An interesting experiment in this vein was recently conducted in the US by Prof. Noam Wasserman of the Harvard Business School. In his book, "The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup", he uses empiric factors to examine the success and failure of start-ups.
One of the interesting questions from the Israeli standpoint is when to sell a company? Most Israeli companies, we can guess, will respond positively when a giant high-tech multinational comes knocking on their doors. But what bothers us is not the agreement to be acquired, but how it happens that a large proportion of the companies that reject a serious acquisition offer end up on the wayside a few years later.
Many examples of Israeli high-tech companies leave the impression that the accumulated know-how now present in the country cannot provide the answer that correctly weighs all the variables. In-depth understanding of processes both within and surrounding the industry -- in Silicon Valley and in Israel -- is critical for the proper development of Israeli high-tech and a jump to the next level as a factor in the domestic economy.
The right answers to the question above, as well as others, will come with time and experience, and the sprouts of this knowledge are already seen. At the moment, the reason why no great Israeli companies have emerged in recent years is not related to technological development, a shortage of capital, management resources, or greed and shortsightedness, but to a kind of knowledge that has not yet developed here. Israeli entrepreneurs already know how to found companies, and how to sell them. But the test of real maturity of Israeli high tech is to obtain this know-how and crack the mechanism that turns companies into great corporations.
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