ISRAEL ECONOMY
Financing a Start-Up Nation
In their book, Start-up Nation, Dan Senor and Saul Singer unravel the secrets of Israel’s entrepreneurial success. Arguing that Israel is as much a state of mind as it is a nation-state, they analyze the policies and underlying cultural attributes which have made entrepreneurism work in Israel.
Underpinning Israel’s success is a national ethos, based on a well-blended – sometimes shaken and sometimes stirred - cocktail of know-how, self-reliance, chutzpah and never taking ‘no’ for an answer. Israel’s capacity for creating successful technology clusters can be attributed to a number of factors.
In addition to a pool of talented human resources, Israel’s high-tech industries are supported upstream by its excellent academic and medical institutions. The military also plays a vital role, not only as an incubator for both technology and leadership, but as a demanding client as well. Downstream, Israeli hi-tech is also blessed with a highly experienced and active venture capital community, which includes quite a number of serial entrepreneurs.
Proactively Propelled
Israel has a committed government sector which over the years has implemented proactive policies which were pivotal for the development of Israeli tech companies.
As early as the 1960s, the government began encouraging industrial R&D with the establishment of the Chief Scientist’s Office at the Ministry of Industry and Trade, with tax benefits for direct investment in industrial R&D and with the introduction of R&D grants.
When it was felt that there was a need to channel more private equity into the technology sector, the government jump-started Israel’s venture capital industry with Yozma, a since-privatized government VC fund which participated with Israel’s fledgling private sector VCs in technology investments.
The technology incubator program was conceived in the1990s to prevent the talent and technological know-how entering Israel with the wave of new immigrants, mostly from the former Soviet Union, from slipping through its fingers.
Open to immigrants and native Israelis alike, this program has given birth to a number of companies which otherwise would not have seen the light of day and which today trade not only in Tel Aviv but on major U.S. stock exchanges too.
Sustaining Comparative Advantage
At the 2010 annual meeting of the High Tech Industry Association (HTIA) (www.htia.co.il), an organization bringing together Israel’s hi-tech and venture capital communities, Finance Minister Dr. Yuval Steinitz launched the Comparative Advantage Program.
While consisting of a set of seemingly unrelated legislative measures, this initiative takes a comprehensive approach to promoting Israel’s science-based industries.
It addresses the entire chain of production – from upstream education and basic research, through seed financing, technology development and commercialization, and on to, as Steinitz phrased it, “the establishment of an Israeli Nokia”.
The impetus for the program came from concerns regarding the erosion of both domestic and foreign sources of venture capital subsequent to the financial crisis, and fear that Israel could lose its competitive edge to foreign competition in the future.
All Tech Enterprises Big or Small
In December 2010 , many of the provisions introduced in the Comparative Advantage Program were signed into law. Introduced by the HTIA and Knesset member Robert Ilatov, an amendment to the Tax Ordinance, nicknamed the “Angels’ Law”, was approved.
This new legislation addresses a need to encourage seed investment, since early-stage companies are the first to suffer when VCs hit hard times.
The Angels’ Law extends the tax deduction currently granted to direct investment in R&D to financial investment in the shares of a R&D startup. Individuals and partnerships will be able to deduct equity investments of up to €1 m. in the shares of privately held early stage companies from their taxable income from any source, including salaries or business.
At the time of the investment, the target company’s expenditures on R&D conducted in Israel must comprise the lion’s share of its expenses and be at least double the company’s earnings. Under the newly amended law, investors will be able to amortize their investment over the course of three years.
According to Oded Hermoni, CEO of the HTIA, the Angels’ Law addresses a critical market failure in Israel’s private equity industry. “While in VC, industry is quite strong, the same cannot be said for the community of early stage angel investors.
There is so much technological and entrepreneurial talent in Israel which we cannot afford to lose for lack of seed capital. The new law will help Israel capture this talent and cultivate innovative enterprises through private sector investment.”
At the other end of the spectrum, the Comparative Advantage Plan encourages consolidation of Israeli tech companies by encouraging mergers and acquisitions between them in order to facilitate the formation of large enterprises a la Nokia.
Applying a similar tax deduction incentive, the amended Tax Ordinance enables Israeli companies acquiring the shares of privately held Israel R&D companies to amortize the investment over a course of five years.
Until now, such investments were subject to taxation as capital gains, meaning that losses could be deducted only when the shares were subsequently sold and solely against passive income.
Taking Tech Public
At the beginning of 2010, the Tel Aviv Stock Exchange (TASE) (www.tase.co.il) placed technology companies near the top of its strategic agenda. TASE is positioning itself to be a financial hub for technology companies seeking to go public, initially targeting Israeli companies as it believes that Tel Aviv can ultimately be the venue of choice for foreign hi-tech companies too.
TASE offers both investors and companies the advantages of a developed market and a regulated exchange in a country that understands both technology and risk.
“At the end of the day, these advantages translate into investor confidence and high valuations for the companies”, claims Ester Levanon, TASE CEO.Tel Aviv Stock Exchange at NASDAQ
Of the 600 companies currently listed on TASE, over 140 are technology companies. Of these, more than 50 are “biomed” firms, primarily small firms engaged in biotechnology and medical device development. This makes TASE one of the exchanges with the highest concentration of biomed firms in the world.
Many incentives for technology listings were put in place years ago. TASE listing requirements for R&D companies are considerably lower than for other operating companies, affording start-ups the opportunity to go public at an earlier stage than would otherwise be possible.
In addition, an amendment to Israel’s Securities Law in 2000 set up special provisions for companies “dually” listed on TASE and either the major U.S. stock exchanges or the Premium Listings of the London Stock Exchange. These provisions enable companies (regardless of industry classification) to list on TASE, while complying solely with the regulatory requirements imposed on them abroad.
This essentially means two listings for the price of one - one prospectus, one set of financial reports, one set of current disclosure filings and all in one language. Close to 50 companies currently take advantage of the dual-listing arrangement. In this past year alone, four technology companies traded in the United States opted to list dually on TASE, while one TASE-listed company completed an offering on NASDAQ and is now traded on both exchanges.
In 2010, TASE stepped up its tech-targeted efforts. It has conducted one-on-one meetings with IPO-worthy hi-tech companies and teamed up with Tel Aviv University to launch a course for financial analysts specializing in life science industries.
It has also initiated ties with international research firms to secure professional ongoing analyst coverage (in English and Hebrew) of TASE-traded shares. In 2010, TASE launched its “Biomed” index, which tracks the share prices of the larger biomed firms and recently organized a delegation of 14 biomed CEOs to meet with U.S. investors and analysts at a dedicated investor conference held at NASDAQ OMX headquarters in New York.
Much remains to be done before TASE’s vision can come to fruition. Both Ester Levanon and Sam Bronfeld, TASE’s Chairman of the Board, believe that legislative changes are imperative.
Specifically they believe that technology companies, even those not dually listed, should be entitled to file disclosures in English and companies incorporated in the U.S. should be able to use US-GAAP as their accounting language.
They also feel that in order to encourage more companies to go public, tax benefits, such as those introduced with the “Angels’ Law” should apply to investments in publicly traded as well as privately held R&D companies.
