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If the average Venture Capitalist was asked to run a startup, would he/she be successful?

YES. The average VC would do a good job as CEO of a startup.

NO. VC's are investors, not operating executives, and would mess things up if they tried to run a business day to day.

Investing in Israel – A Silicon Valley on the Mediterranean

By David Anthony, Managing Partner, 21Ventures, LLC

American and British investors constantly ask me about investing in Israel.
Their first questions are: Why aren’t you investing in China? Why aren’t you investing in India? Why ‘Israel’? They go on and on about their concerns in Israel of political scandals, missile threats and Hamas. They inquire about terrorism, the Intifada, early elections and shifts in foreign policy. Then they ask me about Israel’s economy, and that’s when the discussion gets interesting.

Israel’s Strong Business Economy

We’ve all heard and read the news. Now let’s consider these facts: Israel’s GDP has been growing at 5% per year for the past 4 years. Over 65 venture capital funds invested $2 billion in Israel last year, compared to $23 billion in the United States, a country 50 times larger in population. Israel’s workforce leads the world, per capita, in the number of scientists, technicians, engineers and Ph. D’s in the workforce. Salaries of these highly skilled and educated professionals are roughly 50% of what they’d cost in the United States. Israel has the highest concentration of start-up companies in the world outside of Silicon Valley.

Bill Gates remarked during his recent visit to Microsoft Israel:

“While startups in Israel are similar to those in Silicon Valley, there are specialists in Israel...who get much of their experience from their service in the army. The science and technology curriculum in Israeli universities is also of a very high standard…. The level of technological integration in the country is evident. The use of fast-speed Internet, lap tops and cell phones is advanced here and puts Israel at cutting edge of world technology.”

Bill Gates was right. Mind-blowing advanced technologies continue to routinely emerge from Israel’s greatest resource: Brainpower. Instant messaging was invented in Israel by four young Israelis who sold it in the ’90s to AOL for $400 million (ICQ). Oil-eating bacteria that clean up oil contamination (BioPetroClean). Cargo drones that deliver payloads, sans the pilot (IAI and Elbit). Nanotechnological solar panels that generate electricity at half the cost and twice the output of silicon (Orion Solar). Video analytics software that notices suspicious activity allowing one guard to monitor hundreds of cameras (AgentVi). Security systems that detect and analyze acoustic waves from digging, drilling or other suspicious activities, and locate the intruder’s source (Hadas Detection & Decoding). Pill cameras that allows doctors to look from inside the body (Given Imaging). Eager investors have spring-boarded these concepts from idea to commercialized reality.

Many large companies realize these facts and allocate massive resources to tap this knowledge base. Intel’s Israel design and production centers, employing thousands, are critical to Intel’s next-generation products; Intel recently opened an additional $4 billion fabrication facility in southern Israel. Google is currently opening two research centers in Israel. Microsoft is expanding its presence in Haifa. Texas Instruments, Oracle, Applied Materials, Electronic Data Systems, Siemens, General Electric, Sun Microsystems, Lockheed Martin, Motorola – a long, growing list of who’s who in hi-tech regards a strong presence in Israel as essential.

Is there a payoff to investing in Israel? And how! Last summer, while rockets where raining down on northern Israel, Warren Buffet paid $4 billion (cash) for a majority stake in Iscar, and Hewlett Packard bought Mercury Interactive for $4.5 billion (cash).

M&A activity in 2006 involving Israel technology companies totaled $11 billion in 76 transactions. 20 Israeli companies had IPOs on American, European, Asian and Israeli stock exchanges.

Military-Trained Workforce
Military service in Israel is compulsory. As a result, most employees, including scientists, engineers and management have advanced military training and experience. Israel’s military technology is the most advanced in the world. Israeli solders receive training in advanced technologies BEFORE beginning university or work. By the time young Israelis join the workforce, they have already served several years in the military and have acclimated to operating in a stressful environment. This conditioning carries over into the business culture, and is especially useful when starting and running a company.

When situations arise and action needs to be taken, Israeli startups mobilize like platoons to carry out the mission critical objective of staying in business. To quote Sun-Tzu, “While heading the profit of my counsel, avail yourself also of any helpful circumstances over and beyond the ordinary rules.” By being able to lead in difficult circumstances, their team skills carry them through the startup hurdles. Cool under fire.

Intellectual Property Law
When investing in an idea, protecting that idea is of grave importance. Emerging economies that offer benefits in payroll and overhead costs typically fall short in the arena of protecting trade secrets. Israel offers the cost benefits of an emerging economy together with laws required to protect patents and trademarks. Protecting new ideas is critical to Israel’s economy.

Intellectual property is the backbone of Israel’s high-tech industry. Only a small portion of Israeli developed technologies are actually marketed within its borders. Since high-tech exports are largely information oriented, protecting that information and knowing it will be protected by law is critical for success. Israel’s legal system, invoked by the British Mandate of 1917, offers similar protection to that of the United States or United Kingdom. By protecting intellectual property, Israel has set the stage for large investment opportunities.

International Markets – Expertise in Export
Israel is close to emerging markets, and not only geographically. Long experience of Israeli exporters assisting developing countries with agricultural and other technologies has developed Israel’s expertise and contact in emerging markets. India, Africa and China have growing trade with Israel. Israel is the second-largest (after Russia) defense supplier to both India and China. Nearly all of Israel’s larger industries are export oriented. There is a reason for this. According to the CIA, Israel has roughly 6.4 million citizens, not nearly enough to solely support a high tech product launch. Exports are a must. Expanding to new continents is easier when you do it all the time. Israel is a country of immigrants whose innovative abilities make adapting to foreign markets easy. Additionally, many Israelis immigrants from the former Soviet Union, South America and Muslim countries possess the native language skills and business contacts that bring success in emerging markets.

Israel is no stranger to seasoned investors. NASDAQ has more companies listed from Israel than India or China – economies several hundred times the size of Israel. Only the United States and Canada have more companies listed. Even more shocking: Many of these publicly listed Israeli companies are driven by strong profits and growth, not hype and speculation. Lower costs, higher education and military experience is the recipe for these successes.

Other combined factors make Israel ideal for international business. Several treaties are in place, with the U.S.A., UK, and several other countries, to prevent double-taxation. ‘Tax holidays’ of up to 10 years help many startups grow to become larger corporations. Government grants such as the BIRD (Bi-national Industrial Research and Development) offset up to half the cost of R&D. These combined elements not only pique global investors, they also ensure that their interests have the tools they need to prosper.

There are many countries that offer a plethora of opportunities across many industries. Israel appeals the most to industries that depend on educated human capital. As the emerging markets become more important to the global economy, Israel offers a wealth of cost-effective solutions for the advancements needed to make for a better tomorrow, for the whole world.

David Anthony is a Managing Partner at 21Ventures LLC, a venture capital fund specializing in the investment and development of seed and early stage technology companies. He is also an Adjunct Professor at the New York Academy of Sciences where he teaches technology commercialization to Ph. D candidates, post-doctorates, and faculty from Colombia, NYU, Princeton, Yale, Rockefeller, Einstein and Sloan-Kettering. David has invested and continues to invest heavily in Israel. He also sits on the board of portfolio companies such as Agent Video Intelligence, Orion Photovoltaics, BioPetroClean, Cell2Bet, Energy Command and Control, Juice Wireless, Visioneered Image Systems, and VOIP Logic. For article feedback, contact David at david@21ventures.net  

*Yonatan Frimer, Vice President of Marketing at 21Ventures, LLC has also contributed to this article.

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