Israeli Startup Exits Don’t Deserve a Bad Rap

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The team from Replay, an Israeli startup that was sold to Intel for $175 million in March 2016.
The team from Replay, an Israeli startup that was sold to Intel for $175 million in March 2016.Credit: Ofer Vaknin

“The exits we applaud today are a disaster for the State of Israel,” said Manuel Trajtenberg last week. Speaking at an investments conference, the Laborite Knesset member and former economic adviser to Prime Minister Benjamin Netanyahu sparked quite a protest in high-tech circles. “A handful of people grow rich by selling the future of the nation. High-tech isn’t a growth driver any more,” Trajtenberg added.

Attacking the culture of getting rich quick through technology exits is nothing new, but a lashing by an economist of Trajtenberg’s status is a whole other level.

“Without even noticing I went and sold the future of the nation,” mocked Shahar Kaminitz, founder and seller of the startup WorkLight to IBM in 2012, on his Facebook page. Following the acquisition, Worklight’s people joined IBM’s R&D center in Israel. He later left IBM and founded another company.

“WorkLight was sold to IBM four years ago,” Kaminitz went on to write in his post. “Before its acquisition, it had a lot of employees and brought tens of millions of dollars to Israel from foreign investors. Since 2012, WorkLight has been IBM’s R&D center for mobile and has significantly expanded its activity in Israel, generating tax income for the state and knowhow in one of the fastest-growing areas of technology. But I still don’t feel I have caused enough damage. I set up a new company that has 30 employees and am determined to continue to gnaw at the Zionist dream.”

Guy Horowitz, a partner in the Deutsche Telekom Capital Partners investments fund, has a graphic view of the world. “Israeli high-tech can be described as a triangle: one point of it is the entrepreneurs, the technological talents; a second is investor money; and the third is multinationals. If the multinationals, meaning the exits, are take out of the equation, investors will vanish too,” he says. And the upshot will be to stifle job creation and innovation.

Trajtenberg. "A handful of people grow rich by selling the future of the nation. High-tech isn’t a growth driver any more," he sais.Credit: Olivier Fitoussi

Itay Frishman – who is head of high-tech and venture capital at the GKH law firm and has represented clients in some major high-tech exits in the last year – and also took offense at Trajtenberg’s remarks. Among other deals, Frishman was involved in Microsoft’s acquisition of Adallom for $320 million, and the acquisition of ConteXtream by HP. He feels the view that exits are bad for the country is based on ignorance.

“In the vast majority of exits, the technology remains in Israel. Not only isn’t there a brain drain: The startups grow, from employing 30 people to companies with 100 employees or more, who get paid more,” claims Frishman. The funders then go on to found other companies, creating more jobs. “Why is that wrong?” he asks.

Michael Eisenberg, a founding partner at the Aleph venture capital fund, also posted a Facebook announcement, titled “No, Trajtenberg! The problem is the government, not the exits.”

Eisnberg agrees with Trajtenberg that not enough big high-tech companies grow in Israel. But selling companies that continue to pay tax and grow a new generation of managers who accrue experience at the big buyers, is hardly a disaster, in his view.

“Not every company can grow,” he observes. “Most startups fail. One has to celebrate the ones that succeed and create income for the state and their founders, even if it would be better for them to have grown into big companies.”

It is possible that some startups were sold early and did not realize their potential. Last week’s exit, in which Intel bought Replay Technologies for $175 million, led to claims that the Israeli startup could have reached a half-billion-dollar value within a few years. But who can blame a founder who’d been struggling in the jungle of startups for embracing pay dirt?

Also, as many point out, an acquired startup often becomes the Israeli R&D center of the buyer, which actually brings technology leaders to Israel. And despite the talk about multinationals fleeing Israel the moment the first missile hits, in fact the wars and military campaigns of recent years have proved that life goes on.

Nobody has come up yet with figures on the number of Israelis employed at these R&D centers; or exits. And nobody has analyzed growth in sales following acquisitions. Often startups get sold before they even have a product on the shelf, rendering that question moot – while meanwhile their products are making hay for their buyers.

A week ago the Central Bureau of Statistics published figures that are, however, indicative of the status of such R&D centers. Multinationals, it turns out, finance almost half (46%) of all corporate R&D in Israel. Their spending came to 17.5 billion shekels in 2013 and over 80% of that went on salaries, mainly to engineers and developers, who make twice the average wage.

Also, not only don’t multinationals flee at the sound of gunfire: They’ve been increasing their investment in Israeli R&D faster than other sources. In 2013, multinational corporate spending on R&D in the country grew by nearly 10% against the year before, while Israeli corporate spending on R&D grew by 4.5%. Without exits, these multinationals wouldn’t be here, and there are no two ways about it: Without them, Israeli high-tech wouldn’t have gone as far as it has.

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