“This might be the hottest time for start-ups in Israel and around the world. Interestingly, global growth is slow, but technology is thriving. In Israel in particular, it has been possible to see in the past couple of years a new spring, a revival, of technology,” Bank Hapoalim (TASE: POLI) chairman Yair Seroussi optimistically told “Globes” with regard to the bank’s joint Smartup2 program with the newspaper. He attributes part of Israel’s flourishing technology to the massive expansion of accelerators, which offer close support for young entrepreneurs. A longstanding example is 8200 EISP, which held Demo Day where this interview was being conducted.
“The good thing about an accelerator is that a start-up can get ready for the real market, but on the other hand, you have to distinguish between the real things and the easier applications, says Seroussi. Another problem that he also focuses on is competition for manpower and the best talent. The flood of accelerators and incubators has created an ecosystem that provides entrepreneurs with a platform to establish start-ups at the expense of other companies, which struggle to recruit skilled and experienced workers because they are dreaming of founding their own start-ups.
“There is no question that there is now competition for manpower and the best talent, and prices are rising accordingly,” says Seroussi. “On the other hand, this is a free market. The number of players is growing, and so is the learning curve. Many entrepreneurs learn and then return to the market. What must happen in Israel is for institutions of higher education to grow together in this area and create many more engineers, developers, and technologists.”
“Globes”: How connected is academia to the real world?
Seroussi: “I think that there is a lag in quantity, or I’d say in capability, but it’s not necessarily them. It should also be linked to government capabilities, higher budgets, and adapting the market to new needs. The Israeli economy has a very broad technological base, and it now needs to be deepened, to utilize what exists and increase the number of players. That means that we to see these institutions, especially in the natural sciences, expand.
“What we see coming from academe is interdisciplinary activities, i.e. more than one field. You can suddenly find people from the humanities and social sciences joining companies which began with the natural sciences. These combinations are necessitated by the current reality. Every profession is becoming relevant if you know how to integrate it.
“One of the factors intended to encourage entrepreneurship and innovation in Israel is the Chief Scientist through the incubators program. In retrospect, and looking at the present, do you think that this program has succeeded in creating significant companies?
“I think that the Chief Scientist is a very important tool that has been very successful in Israel, without question. If we take it and the Yozma Program, which established venture capital funds, the combination indicates a government strategy that has been a unique success. I think that there is no end to the existing possibilities that emerge from the Chief Scientist. It has influence and it has succeeded in positioning Israel in a very particular place in the contemporary global technology scene. In other words, the fact that we’re mentioned in second place after the US is definitely no small matter.”
No change in institutional investment
Looking at the last couple of years, most capital invested in start-ups is foreign.
“I am a bit worried by the situation in Israel. On one hand exits are happening earlier, while there is more foreign capital on the other, including capital of multinationals, compared with local capital. I hope that this will balance out, because I think that in the long term, I’d like to see more growth by Israeli companies, which grow, go public on the TASE or Nasdaq, and grow over the years. That is more complicated to achieve when foreigners seeking quick exits or to acquire your technology are involved. Nonetheless, the combination of technology and high-tech multinationals and what is happening in the country unquestionably turns this into something very refreshing and interesting.”
What differences do you see between Israeli and foreign funds?
“I think that Israeli funds invest much more in very early stages and take the bigger risks. They know the players and add value. Foreign funds often seek things that are already after some kind of round, something that someone has already invested in, or which has revenue. They are good for us especially when big money is needed. The Israeli funds are better for us in the early stage. Much more attention to management is needed here. Ultimately, we need a system that is not only foreign, but has both elements.”
When will we see a change in investment direction by institutions?
“I don’t see any change yet, and I don’t think it can be imposed. In other words, we have investment managers who must ultimately decide how they will allocate their money, and stick with the results. If we see higher returns, I am convinced that the money will flow to Israeli funds, and if not, no. By the way, in the US, most money flows to the top of funds. In Israel too, there will slowly be a division between the funds that achieve good results over time, and which will get more money.”
Another option we have seen in the past few years is attempts to raise capital through crowdfunding. How do you see this sector evolving?
“In my opinion, it is very important that more experienced investors should mainly engage in this. In other words, there is a question here about the extent that this should be open to the public, or if it should be limited to more experienced players. In cases of large amounts, there is no question that it should be limited to a group of experienced investors, while the general public should be limited to small amounts. In general, I see the development of crowdfunding as part of the attempt to find a way to shorten the process and eliminate mediators, but I believe that there will not be just one crowdfunding platform but many different kinds of platforms.”
How much might Israeli bureaucracy torpedo crowdfunding?
“I think that one of the reasons high tech succeeds is that there is very little regulation and legislation. This freedom is the engine of the Israeli economy. Where we give more freedom, more possibilities for people to express themselves, that is where we see rapid and flourishing growth. This is basically our edge: the ability to move fast and take decisions, even as businesspeople. That is why it is necessary to think about this in this context when discussing types of regulation.
“It is necessary to take into account that we want a flourishing economy of entrepreneurs, of people who found things, who have a reason to found them in Israel. Technology moves fast from Israel to the West Coast, and we must go and do this accordingly. That is why lesser regulation in this field will improve our situation.”
Banking in the technology era
Although banking, Seroussi’s business, is tightly regulated, the wheels of technology have nonetheless made it a hot market in the past couple of years. As a consequence, Israel’s top two banks Bank Hapoalim and Bank Leumi (TASE: LUMI) - have launched technology acquisition campaigns, in which each side adds more and more features in its digital arena.
How will stronger fintech affect the banks in the next 10-15 years? Will we still see brick and mortar branches, or will everything be online?
“I think that bank branches will continue to exist because people will still want to meet their banker face to face. However, how branches will look, their size and scope, and the kind of service they’ll offer will change over time. I think that we’ll see branches by segment, area, and types of customers, and that we’ll see more advisory systems that create added value than systems which only handle technical matters. In other words, there will be a change in concept, but there will still be a physical presence.
“By the way, a decade ago, people thought that bank branches would disappear, but they didn’t. The concept, size, and design changed, and this continues. It’s very hard to know now how things will look in ten years. It’s hard to know what any service company will look like, what changes it will undergo; I can say that technology-driven competition in every service sector is fierce. Therefore, some of the things attempted by legislation and regulation are unsuitable to the new environment. In the new environment, competition is bringing in all kinds of unforeseen players. If you ask me what the big competition will be to banking worldwide down the road, it will be a combination of technology and financial companies. That is where the world is headed.
The next hot ventures
Animation instead of banners, a digital platform to monitor and anticipate mental illnesses, or an app store for algorithms: on July 11, in the shadow of Hamas’s missile threat, foreign and Israeli investors gathered to watch the 8200 EISP’s entrepreneurship program finals. One after another, bright-eyed highly motivated entrepreneurs climbed on to the stage at the Bank Hapoalim Club in south Tel Aviv to make their best pitch and possibly tempt an investor or two in the audience, including Blumberg Capital managing partner David Blumberg and Plus Ventures chairman Yossi Moldowsky. The most interesting ventures included an online platform for leasing storage space in private homes,Costockage of French-Israeli entrepreneur Mickael Nadjar, and LifeGraph, which allows users to monitor their illnesses via their mobile phones without affecting their privacy.
Published by Globes [online], Israel business news - www.globes-online.com - on July 17, 2014
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