Cisco's Winning $1.5 Billion Bet on Israeli High-tech

Giant U.S. maker of networking equipment has a long history in Israel, now helping to develop super-fast Internet. The company's top executive talks to TheMarker.

Reuters

Fifteen years ago, the giant United States maker of networking equipment Cisco was one of the symbols of the dot.com bubble. For several weeks in the year 2000, its shares were traded on Nsadaq at a market value of more than half a trillion dollars, making it the most valuable company in the world at the time.

Now Cisco is worth a more modest $140 billion, and the top of Nasdaq’s most valuable companies list has been conquered by Apple, Google, Facebook and Amazon – all of them companies that succeeded in creating sexy products and services that generate a lot more interest. Ironically, they did so on the basis of the Internet infrastructure that Cisco laid down.

With the opening of Amazon’s research and development center in Israel this year, each of these Internet giants now has an R&D presence in the country. But it is the veteran technology company Cisco that most varied activity here. In addition to an R&D center that employs about 1,800 workers, it established in 1998, Cisco has acquired 10 Israeli startups for a total of more than $1.5 billion. In addition, it has invested in close to 25 others, not including its acquisition of NDS – which was long past the startup stage when Cisco bought it and had changed hands several times before the acquisition – for $5 billion three years ago.

Cisco also made Israel into a global laboratory with the super-fast fiber optic network being developed by Israel Electric Corporation, in which it is a major partner. Cisco’s social-responsibility team in Israel is also responsible for laying technological infrastructure in the Palestinian Authority.

Cisco’s history in Israel began shortly after the birth of the Israeli startup and venture capital industry in the early 1990s. Its first office in Israel was set up in 1995. Cisco was responsible for half the capital put by the American venture capital fund Sequoia into its first fund in Israel in 1999 and served as a partner in the fund, which was an extraordinary commitment for the company. Later on, it invested in Benchmark’s first fund in Israel and continues to invest to this day, its latest being an investment in the cyber fund that Jerusalem Venture Partners formed last year.

“We continue to see Israel as the spearhead of our investments and one of the key places where we’re looking for innovation,” Yoav Samet, Cisco’s vice president for corporate development, said in a telephone interview from the U.S. “After all these years, the ups and downs and the other places where companies’ development centers and outsourcing centers were opened, Israel continues to be our top place outside the U.S.”

Samet, the highest-ranking Israeli executive at Cisco, is responsible for the investments and acquisitions that the company makes outside the U.S. except for India and China as well acquisitions and investments in service providers, mobility technology and content-based solutions. Among the Israel-related transactions in which Samet was involved was the acquisition of Intucell two years ago for $475 million and NDS.

Daniel Karp, who is responsible for investments and acquisitions in Israel and manages local corporate-development activity, is in constant contact with Israeli startups.

Cisco’s latest investment in Israel is in Team8, a cyber-security incubator established by Nadav Zafrir, former commander of the Israeli Defense Forces’ vaunted 8200 intelligence unit. Team8 raised $18 million from a series of venture capital funds and strategic investors, including Cisco.

In recent years, American companies – and more recently those from China, Japan and other countries – have become important startup investors. These multinationals have huger amounts of cash that dwarf anything a venture capital fund can raise. Cisco, for instance, has $53 billion.

Prominent among Cisco’s 25 investments in Israel is Wilocity, which was acquired by Qualcomm last year for about $400 million. Even though the startup was ultimately bought by another company, Cisco benefited from its partnership with Wilocity by giving the U.S. company access to the most advanced wireless communications technology.

“We do not invest in a company in order to acquire it from the start,” Samet says. “If the company interests us strategically, then we will not only invest in it as a financial investor, we will also acquire it at an early stage. We are very agile and good at that.”

Two examples of early-stage investments by Cisco in Israel that turned into acquisitions are Riverhead and Actona, both of which were acquired in 2004. On the other hand, Aeroscout, which developed network-based RFID chips and was a close partner of Cisco, was acquired by the tool-manufacturing company Stanley Black & Decker in 2012. In that case, Cisco profited from the sale as a financial investor.

Also in Cisco’s portfolio of investments are Ctera, a cloud storage and data protection hardware and software company. Another is Qwilt, which eases the bandwidth burden on networks caused by live broadcasts and has raised about $40 million since 2010. Cisco’s latest was in Stratoscale, which was formed by Ariel Maislos, the founder of Anobit Technologies, a startup sold to Apple in 2011.

Easier than Silicone Valley

Cisco revised its investments policy several months ago, defining six thematic fields it will focus on over the next three years. Cisco will invest $250 million to $300 in big data and analytics, the Internet, mobile devices, data storage, silicon and content technologies. Samet predicts that Cisco will invest in six to 12 companies. In addition to Israel, Cisco has also defined India as a geographical investment theme.

“There’s something extraordinary in what we see in Israel as opposed to other places,” Samet says. “In Israel there’s an ecosystem where everyone knows everyone else. There is a very large concentration of talent, and it is easier for us in Israel to reach the best investors and projects at early stages, even in comparison with Silicon Valley. We do not see that kind of concentration of innovation even in Silicon Valley.”

Isn’t that a bit of an overstatement?

“I don’t say that the level of innovation is higher than Silicon Valley’s, but that we have more of an ability to reach entrepreneurs and investors directly, without intermediaries, at earlier stages,” says Samet.

“In the past we looked for companies to invest in that were directly to the business of a certain business unit [in Cisco]. For every investment, we needed to find a sponsor in the relevant business unit that would justify the strategic importance of the investment and agree to collaborate with it immediately,” Samet explains. “We decided now to make investments with a longer-term perspective without requiring that a particular executive in the organization provide sponsorship.”

Last year, Cisco laid off 300 Israeli R&D workers, many of them former employees of NDS, just a year after buying the company.

“The acquisition of NDS was further testimony to Israel’s importance,” says Samet. “We don’t make acquisitions like this very easily. The year 2014 was difficult for everyone, not just in Israel. Cisco laid off people all over the world, including the United States. It’s the nature of a global company to act quickly in response to macro-economic changes. We move more quickly and efficiently than many other companies of our size, so we can adjust ourselves to market changes. As big as our Israeli center is, so will the impact be on it when changes occur at Cisco.”

Not just in Israel – Cisco has invested in the Palestinian Authority, too. It arguably is the main mover behind the high-tech cluster that has developed in the West Bank city of Ramallah in recent years.

“The goal of our first investments in Israel was visibility and building a presence in the ecosystem of innovation. There was no element of corporate generosity,” recalls Samet. “An extreme example of the opposite was the investments we made after a visit by [CEO] John Chambers during which he met with the PA chairman Mahmoud Abbas. Afterwards, Cisco announced it would invest $10 million in developing the technology economy of the authority.”

From 2008 to 2012, the company put $15 million into Palestinian high-tech, $4 million directly into startups and $11 million into two West Bank venture capital funds. Two eyars ago, Forbes did a cover story on the effort.

Cisco hasn’t been along. According to the Palestinian Central Bureau of Statistics, other multinational companies and organizations invested $78 million in Palestinian tech, among them the European Bank for Reconstruction and Development. Nevertheless, Palestinian high-tech is still in diapers.

“We are certainly seeing progress. It doesn’t mean that overnight there will be an eco-system but we have been the impact,” Samet says.

Back in Israel, Samet terms the super-fast Internet network Cisco is helping IEC development as an “especially important project” in relation to the American company’s operations in other parts of the world. Cisco was even involved in the financial structuring of the network, which will cost billions of shekels to deploy some 25,000 kilometers of fiber optics covering two-thirds of Israel by 2020. 

“A project like this is setting quite a precedent from the perspective of its financing mechanism,” says Samet. “It broke a barrier, and now there are many projects in many countries around the world where they want to replicate it . It’s a huge success.”