The State of VC in Israel: Interview with David Cohen of Gemini Israel Funds

Venture Capital
June 09, 2009

The State of VC in Israel: Interview with David Cohen of Gemini Israel Funds
June 9, 2009

Israel has proven to be one of the centers for technological innovation. In a recent conversation with David Cohen, general partner and CFO of Gemini Israel Funds, SVB asked for his thoughts on the entrepreneurial climate in this dynamic market.

SVB: How is the Israeli tech industry faring during this downturn versus the tech industry in other countries? Do you see any advantages that Israel might have over other geographies in terms of encouraging innovation?

Cohen: I believe that the Israeli high tech industry is following the behavior of other markets (i.e., facing challenges in raising money and in shrinking demands). Fewer groups are raising money and the groups who are raising money are raising less than in the past. This phenomenon is significantly decreasing the available resources in the market and enables us to carefully review our portfolio and carefully chose the potential winners within the portfolio. We can strengthen them and ensure their ability to grow in the challenging financial environment. However, companies do need a longer life span than initially planned with VC backing.

On the other hand, because funds are scarcer, there are many early stage opportunities which are higher quality than in the past, the competition is lower and the prices are lower. All of these facts make us believe that this is a great time for venture investments.

SVB: What are some bright spots that you can identify in the tech and life science industries?

Cohen: Given the fact that money became "expensive", we see many more unique and focused ideas that are coming to us to get funding.

In general, Israeli entrepreneurs are spread on all verticals, so our deal flow is quite varied, with companies ranging from communications and cleantech to software and Internet. Regarding the more exciting areas, there are a few areas that we have been looking at:

1. Cloud computing: Although the "Cloud" is over hyped, we are seeing IT organizations and software vendors putting real effort and budget into leveraging the potential of cloud computing. We believe smart infrastructure technologies will be crucial in the next few years as the Cloud becomes more pervasive.
2. Online services: With the strong contraction in the advertising world, there is a great opportunity to market online services through cheap advertising. It's a great time to use online marketing to increase market share.
3. Semiconductors: Although the semiconductor market is out of favor, we believe that there are vertical areas that will show strong growth for chip companies. We have made two recent investments in that area.

SVB: What further challenges are looming on the horizon for entrepreneurs in Israel?

Cohen: In the past two decades, Israeli entrepreneurs have been focused on marketing to the U.S. market. There is a lot of U.S. experience in Israel, as many executives have worked and lived in the U.S. With the current potential shift from the U.S. to the Far East market, Israeli entrepreneurs need to establish the right marketing and business strategies for succeeding in the Asian markets. There is definitely a lot of Asian experience in Israel, but we still need to catch up in that area.

In addition, the life span of VC backing to high quality is prolonged by the virtue of the fact that the exit opportunity is minimal to non-existent. There is, obviously the question of prolonging the life of these companies.

SVB: Is the government an important source of funding for tech companies in Israel? Are there specific programs that are especially significant? Do tax incentives exist for tech and life science companies?

Cohen: The government was and is a great support of R&D and marketing projects via several programs such as the Office of the Chief Scientist ("OCS") with an annual budget that reached over $400M annually at the late 90s early 2000s. While the budget today is around $300M, its effective size is lower due to the amount of royalties from companies that contribute to its size. The BIRD Foundation that supports mutual projects at a level of $16M annually, plays an important role in assisting Israeli and American companies to establish strategic relations.

At the moment, there are no tax incentives for direct investment in high tech companies, but there is a full tax exemption for foreign investors who invest in vehicles such as venture capital, funds of funds and debt funds.

SVB: What advice would you give to investors who are interested in funding Israeli companies? Should they be aware of any unique aspects of doing business in Israel?

Cohen: There are many foreign groups who invest in Israeli technology companies. In fact, well over 60 percent of the money invested in Israeli tech companies has been coming from non-Israeli groups. Tax-wise, it is important to get a specific tax ruling from the Israeli tax authorities that will ensure zero tax on their high tech activities in Israel. This is relatively simple process and it is recommended to get this tax ruling prior to your first investment in Israel.

I would recommend that foreign investors cooperate with the local Israeli groups in order to create a valuable "umbrella" for the benefit of the company in terms of view, connections, experience, recruitment and due diligence.



About SVB Israel Advisors Ltd.
SVB Israel Advisors Ltd. is a subsidiary of SVB Financial Group. Neither SVB Israel Advisors nor SVB Financial Group is licensed to conduct banking business or provide other financial services in Israel and neither engages in unlicensed banking activities. Banking services are provided by Silicon Valley Bank, a member of FDIC.

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High-growth, Israeli technology companies and venture capital firms can access customized financial services that help fuel growth through SVB's operation in Israel:

• Access to Silicon Valley Bank's financial services including global treasury management, deposits, foreign exchange, global finance and global trade
• Access to Silicon Valley Bank's debt capital for growing technology companies
• Business resources and services such as educational information, networking and introductions to investment and other industry professionals and partners

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