Startup Exits Cost Israel Heavily

The Israeli economy loses $3 or more for every dollar earned by entrepreneurs when they sell their startup companies to foreigners, Israel Securities Authority Chairman Shmuel Hauser said Monday, adding that the government must do more to keep high-tech firms in business by ensuring they can tap the domestic market.

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“We want to abandon the exit culture of high-tech companies in favor of keeping human capital and business operations in Israel,” Hauser told the Globes Israel Business Conference, saying he based his estimate on a simulation conducted by the ISA.

“We found that for every dollar entrepreneurs receive from selling their companies to a foreign buyer, the state loses a lot more than a dollar. If you take into account the indirect impact on the economy, the effect of all a company’s operations moving overseas can be several times that - in many cases three times more.”

He said corporate tax rates should be reduced significantly to encourage high-tech companies to raise capital on the Tel Aviv Stock Exchange on condition they keep their operations in Israel.

Although more than 20 biomed companies trade on the TASE, most Israeli startups opt to sell themselves to a foreign company after a few years. The few that choose to remain independent, such as Check Point Software and Amdocs, generally prefer to list their shares in the United States. On Monday, a medical devices maker, Caesarea Medical Electronics, agreed to sell a 40% stake to U.S. company CareFusion.

“Let’s assume a company like Check Point was also listed for trading on the Tel Aviv Stock Exchange. Its market value would be 43 billion shekels [$12.3 billion],” Hauser said. “Based on its trading volume in the U.S., which is $237 million [a day] on average, it’s safe to assume that its trading in Israel would reach 30 million shekels. If there were five companies like Check Point, it would mean 150 million shekels in additional daily trading .... TASE turnover would grow 20%.”

Listing more high-tech companies on the TASE would boost Israel’s financial-services sector, which contributes an estimated 9% to gross domestic product, said Hauser. That means every 10% increase in financial-services activity would increase the country’s growth rate by 0.9% annually, he said. “We want trading volume in 2020 to be several times current levels at close to 8 billion shekels or more,” Hauser added.

Hauser also addressed criticism that the ISA is imposing excessive regulation on the share markets, deterring companies from listing and investors from trading. He defended the current level of regulation. “Even if some think there’s a need for change, strong regulation designed to preserve the interests of investors is the essence of a fair and well-operating capital market,” Hauser said.

He said he wanted holding companies structured as pyramids to be “flattened,” while debt should be used to finance operations, not buy control of companies. Meanwhile, dividend payouts should be for the good of all shareholders, not just controlling shareholders, and there should be fewer debt bailouts.