Israel: Font of Innovation For Big Corporates

 

When Apple acquired flash memory controller start-up Anobit Technologies in January for $390 million– a first acquisition in Israel for the Cupertino, California-based company – the start-up's team weren't the only ones celebrating. A tweet went out from the prime minister’s office welcoming Apple to Israel.

Israel has been particularly successful in attracting big U.S. tech giants like Intel, Microsoft, Cisco and IBM to buy start-ups and set up innovation centers in the country. And now, much to the delight of start-ups and the Israeli government, a new generation of tech companies is following suit.

Facebook bought its first company in Israel this year, acuiring facial recognition company Face.com for a reported $80 million. eBay made its second foray in 2011, buying The Gifts Project. (It purchased Israel’s shopping.com in 2005 for $620 million.) Shopping.com was based in the U.S. when it was purchased by eBay and absorbed into the mother ship. What is different this time is that The Gift Project never left Israel. It grew the company there and eBay is making The Gift Project’s technology and its team the core of a new global social center based out of Tel Aviv. Google is also planning to do more in Israel. It acquired Israeli start-ups for the first-time in 2010, snapping up LabPixies and Quiksee.Now the U.S. search engine giant plans to house 20 pre-seed-stage start-ups in a new center in Tel Aviv, which it is scheduled to open before year’s end.

Google is interested in connecting with start-ups developing open code technologies, and when the center opens it will reportedly also seek to house entrepreneurs from Israel's Arab and ultra-orthodox communities, which currently have little exposure in the country's high-tech industry (see the related stories on pages 14 and 17).

The next wave of corporate venturing is not limited to stronger connections between Tel Aviv and Silicon Valley.Nielsen Innovate, market research firm Nielsen’s majority-owned subsidiary in Israel, is launching a technology incubator which aims to support start-ups in marketing, consumer and advertising research technologies. The incubator was recently chosen to be part of a program run by Israel’s Chief Scientist (see the story on page 2). Technologies developed at the incubator will receive some funding by the Israeli government and be put on a “fast track” to be used by Nielsen’s clients around the world.Nielsen Innovate’s new incubator is being set up in Haifa, home of The Technion Israel Institute of Technology, a leading science and engineering school. It will be operated by Nielsen and Partam Hightech, an Israeli-based venture capital fund. (Nielsen has majority ownership of the fund).

Some other unexpected corporate buyers of Israeli tech have also emerged in recent years. For instance, U.S. power tool maker Stanley Black & Decker’s healthcare division bought Aeroscout, a developer of real-time location systems, for an estimated $200 million earlier this year. And Sears, the U.S. department store chain, bought Delver, a struggling social search engine start-up, for an undisclosed sum in 2009.

European phone companies are also moving into Israel. For example, the Israeli press is reporting that Spanish telecommunications operator Telefónica, which acquired Israeli start-up Jajah and already operates an R&D facility in Israel, plans to open a start-up incubator in Israel as part of the global roll-out of its Wayra program. When contacted by Informilo a company spokesman said he could not confirm the report.

Telecom operator Orange opened a new developer center in Israel several years ago which is serving as an experiment for an “open innovation”program. Why Israel? “It’s a start-up nation, a leading country for innovation, especially in high tech,” says Nathalie Boulanger, senior vice-president in the innovation marketing group at France Telecom Orange. At the center, developers carry out last miletesting of mobile content and applications and connect with Orange around a variety of communicationtechnologies. The collaboration has led to partnerships with several start-ups to offer new services to Orange’s customers around the globe, such as Orange Maps, she says.

That’s not all. A France Telecom-Orange and Publicis Groupe partnership with Iris Capital Management to make venture capital investments in digital start-ups made its first investment in March. The money went to – an Israeli start-up, myThings, which specializes in personalized display ad technology.

However, the traditional U.S. tech companies remain the most active corporate venture groups in Israel.

Cisco, for example, in March paid $5 billion for NDS, an Israelimaker of next-generation video services software – its largest acquisition outside of the U.S. to date. “Israel is the place where we have made the most investments to date outside the U.S. – not in terms of per capita but in sheer number,” says Tal Slobodkin, senior manager for corporate development at Cisco Israel.

If you count NDS (which moved its headquarters to London), Cisco has made 10 Israeli company acquisitions since 1999, say Slobodkin. But the U.S. gear maker has made many more investments in Israeli companies – a total of 21. Cisco first invested through two dedicated Israeli funds set up by prestigious Silicon Valley venture firm Sequoia, investing half the money in Sequoia 1 and Sequoia 2, then moved to make 21 direct equity investments of its own. Cisco usually waits until a series B round, then invests between $2 million and $5 million per company, although “this is a very general guideline broken more than few times,” says Slobodkin. “We look at areas that are adjacent to us now, and then make small equity investments in companies in those spaces to keep us very close to those companies and maintain a close touch with those markets.”

Intel Capital has had a number of successful exits. These include Anobit, which was acquired by Apple; Aeroscout, acquired by Stanley Black & Decker; Passave, acquired by PMC-Sierra; and Gteko, bought by Microsoft. Mellanox went public on Nasdaq.

There is so much innovation in Israel that Intel Capital’s one-person office couldn’t keep up. The firm recently tripled its staff. “We are looking to add more investments in Israel and the feeling was that to tap into the market we need to have more people on the ground, actively engaging with the start-up community and the entrepreneurs to find and identify and develop the investment opportunities,” says Uri Arazy, Investment Director at Intel Capital Israel.

Intel’s acquisitions are strategic to the company in the communications and IT sectors. Intel Corp. has had a presence in Israel since 1974 and is one of the largest employers in the high-tech space, with over 8,000 employees. Many of its core products, including CPUs, communication chips and products like the Thunderbolt, an interface for connecting peripheral devices to a computer via an expansion bus, were designed in Israel.

IBM has opened its biggest – by far — R&D labs outside the U.S. in Israel, employing more than 1,000 scientists, says Gabriel Tal, Director of ISV and developer relations for IBM Europe.

IBM has been in Israel since 1949. It has acquired nine companies headquartered in Israel and two Israeli companies that maintained development in Israel but moved their headquarters elsewhere, for a total of 11, a figure that Tal says is considered high at IBM for non-U.S. acquisitions. But like Intel, IBM engages with a far higher number of start-ups than it buys.

“The main thing that distinguishes Israel from any other company in the world is that high-tech companies from day one are targeting the international market,” says Tal. “IBM understood that phenomenon and saw that it could help those companies spread their solutions around the world. In 2001 Tal set up a special technology unit in Israel. That unit is part of a global network that helps independent software vendors sell alongside IBM. The Israel branch has consistently generated an outsized percentage of the group’s global revenues, says Tal.

IBM also engages with start-ups through its SmartCamp program, which is aimed at identifying early stage entrepreneurs who are developing business ventures that align with IBM’s Smarter Planet vision.

In 2012, IBM expanded its SmartCamp initiative to new geographies and has added a new type of focused event around smart cities and health technologies. Next up? IBM SmartCamp in Tel Aviv, during the same week as the DLD Tel Aviv conference and a variety of other tech conferences, all taking place next to each other at the Jaffa Port.

With the large number of big tech companies, venture capitalists and eager start-ups expected to converge in Jaffa Port during the festival there could well be a few more exits to report before the end of the year, creating some additional happy entrepreneurs and maybe a few more delighted tweets from the prime minister’s office.

 

Recent Examples of Israeli start-ups purchased by U.S. tech companies

 

July 2012 – Covidienbuys Oridion Systems, a maker of medical safety devices for $295 million; Intelacquires IDesia Biometrics, a medical device company for an undisclosed amount;and Salesforce acquires Blue Tail, a data mining company, for an undisclosed amount.

June 2012 – Facebook buys Face.com for an estimated $80 million and VMWare snaps up Digital Fuel, a SaaS company, for a reported $85 million.

May 2012EMC purchases XtremeIO for $430 million.

March 2012 –Cisco buys NDS, maker of next-generation video services software for $5 billion andBroadcom acquires Broadlight, a maker of chips and software for fiber optic broadband networks, for $195 million.

January 2012Appleacquires flash memory controller startup Anobit Technologies Ltd. for $390 million. IBM buys Worklight, an Israeli start-up that provides mobile app development and infrastructure software, for a reported $70 million.

November 2011Microsoft purchases VideoSurf, a maker of technology that scans video websites, such as Hulu, Metacafe, and Dailymotion, for a reported $70 million.

Oct. 2011 — Intel snaps us Telmap, a location-based services company, for $300 million.

September 2011eBay purchases The Gifts Project for $20 million.