Israel’s Success Story of the Tech-Industry

by Edouard Cukierman and Yair Shamir

Hong Kong, July 2015

Key Success Factors of Israel’s Technology Cluster

1. Education and Universities

4. Defense Industry

5. VC and Access to Global

Financial Markets

Israel Cluster

6. Entrepreneurial Spirit

7. Attractive Investment

Environment

2. Government Support

3. Technology Sector Expanding

Globally

1- Education and Universities: brainpower that can be leveraged

140

85 65

53 38 35 35 34 28 25 22 19

Number of Engineers Per 10,000 Employees (1) 9.2%

7.0% 6.4% 6.4% 6.2% 5.9% 5.7% 5.5% 5.3% 5.0% 4.7%

4.0%

Investment in Education % GDP (4)

Largest number of academic degrees per capita (64 per 1000 people) (1)

Highest expenditure on education in the world (9.2% of GDP) (2)

12 Israelis won the Nobel Prize, 8 within the last decade (3)

Israel invests more than 4% of its GDP in R&D, which is the highest ratio of any country in the world (1)

Israel is blessed with an exceptional entrepreneurial workforce, ranked 3rd in the world (4)

c.1 million people from the FSU emigrated to Israel since early 90s (20% of engineers and 3% of scientists), representing 16% of the economically active population(5)

(1)Source: Ministry of Finance, Israel, 2013

(2)Source: Technion, Israel's Institute of Technology (3)Source: Worldbank Report 2012

(4)Central Bureau of Statistics, Israel, 2013 (5)Ministry of Absorption, Israel, 2012

1-1 Israeli Innovation Model: “The Tech Transfer” from University to Industry

Technology transfer: the secret engine

• The tech transfer from universities to industries has created

the institutionalized basis for scientific research

• Israel is the world’s pioneer in tech transfer since 1959

• 2 of the world’s top 15 tech transfer companies

• Yeda, Weizmann Institute of Science (1959)

7 out of the leading 25 world’s blockbuster drugs

have been developed in the Weizman Institute

US$ 400M in 2013 in licensed product revenues

• Yissum, Hebrew University of Jerusalem (1964)

$8 billion in licensed product sales

US$ hundreds of millions in tech transfer

revenues

Dozens of spinoffs

Source: ITTN

Dr. Albert Einstein, on his visit to the Technion, 1923

Creation of institutionalized basis for scientific research

2- Government Support in Israel

Technology Education

Government spending on high-tech education one of the highest in the world(1)

Highest spending on R&D as a percentage of GDP in the world (1)

Military Budget

Military as Talent Incubator for young entrepreneurs, engineers and scientists

Managerial experience at young age fosters entrepreneurial culture

Chief Scientist

Incubators R&D grants

Co-Investment with VC Industry

Yozma VC Fund & Health Fund

Immigration Support

Jewish Agency Gvahim MASA Nefesh B’Nefesh

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

(1) Source: WEF Global Competitiveness Report 2013-2014

Company Sector Size Position

Solar Energy Raised US$615m in equity; received US$1.2bn

grant from US Dept of Energy

Global leader in design and development of solar thermal power technology with 1.8GW of power under contract with California’s two largest utilities

Security Software Market cap: US$9.6bn World leader in network security solutions. Pioneered industry with Firewall and inspection technology

Medical Technology Market Cap. US$550mn Revolutionized GI imaging with invention of the PillCam, enabling a capsule-camera endoscopy

Water: Desalination Estimated valuation c. US$1bn Leading global player in development, engineering, production & operation of advanced water desalination plants

Industrial Technology /

Process

Acquired for US$5bn valuation by Warren

Buffet

Leading producer of cutting edge precision carbide metal cutting tools

Agritech: Crop Protection

Acquired for US$2.4bn by ChemChina Leading worldwide manufacturer and distributor of crop-protection solutions

Digital Technology/

Software

c.25% stake acquired at company value of US$1.5bn by BlackRock, Fidelity, Wellington, Sailing Capital, Enterprise Rent-A-Car

Manufacturer of anti-collision driver safety solutions that help drivers avoid traffic risks

Flash Memory Acquired for US$1.65 billion Invented USB Flash storage drives

Agritech/ Water: Micro irrigation

Acquired for c. US$900mn Leader in smart drip & micro-irrigation solutions

Geothermal Energy Market cap. US$900mn Leading geothermal technology company globally

Pharmaceuticals Market Cap: US$40.6bn #1 global generics company specializing in generic and propriety branded pharmaceuticals

Mobile Application Acquired for US$1.1 billion by Google World's fastest-growing community-based traffic & navigation app, pioneer of crowd sourced maps, traffic, road info

Leading Global Innovative Enterprises

Decades of history producing robust and continuous flow of leading global innovative companies

3 -The high-tech sector is the growth engine of the Israeli economy

Source : The Central Bureau of Statistics, Israel

1990 Manufacturing Exports $7.7 billion

2014 Manufacturing Exports $45.8 billion

High Tech, 30%

Medium High Tech,

32%

Medium Low Tech,

19%

Low Tech, 19%

High Tech, 47%

Medium High Tech, 17%

Medium Low Tech, 31%

Low Tech,

5%

• In 2014 Israel’s manufacturing exports represented 78.6% of total exports and amounted to US$ 45.8 billion (excluding diamonds), compared with US$ 7.7 billion in 1990

• Israel’s High-Tech exports totaled US$ 21.5 billion in 2013, which is 47% of the total manufacturing exports and represent a significant increase compared to 1990 when the High-Tech amounted to US$ 2.31 billion

• Israel’s economy keeps growing and continues to be a “safe haven” among the OECD markets

→ 45% of Israel’s growth comes from the

high tech Industry

Defense Industry -4

Israel 2014 military budget is 56.9 bn NIS (≈ US$ 13.5 bn), approximately 5.2% of the GDP and 13.0% of

the total budget

Israel is the 4th largest military equipment exporter after USA, Russia and Germany

Israel Aerospace Industry’s (IAI) 2014 sales grew by 5% and reached US$ 3.83bn

“Many Israeli start-ups should pay

royalties to the army. The military service

deserves some of the credit. Israel's

army does not just train soldiers, it

nurtures entrepreneurs”*. – Edouard

Cukierman , interview with “The Economist”.

Source: SIPRI (sipri.org); 2014

1.21.4

2.062.2

2.6

3.5

4.5

5.2

GermanyBrazilChinaUKS.KoreaUSRussiaIsrael

Military expenditure as percentage of GDP, 2014 (%)

5 - VC and Access to Global Financial Markets

Early stage investment by VC in Israel equals 50% of early stage investments for all of Europe

Israel has a prospering start-up & VC industry, 2nd largest in the world

Over the last decade, c. US$ 18 billion were raised by Israeli High-Tech companies, at the VC level

VC Investments per Capita in 2014, US $

0

200

400

600

800

1000

1200

1400

1600Foreign Direct Investment Per Capita by Nation

(2014 in US$)

5-1 Israel’s IPOs in Europe & US

Israeli Equity Offerings

Europe USA

Year Number of Equity Offerings

Capital Raised ($M)

Number of Equity

Offerings

Capital Raised ($M)

Up to 1997 9 78 60 2,398

1998 5 122 14 871

1999 12 446 20 3,375

2000 7 353 33 2,806

2001-2003 1 118 12 2,806

2004 5 150 12 1,117

2005 20 1,106 4 355

2006 16 2,078 8 3,460

2007-2009 8 2,339 19 1,628

2010-2013 6 1,084 36 4,010

2014 8 2,100 29 3,900

Total 97 9,974 247 26,726

Portfolio companies of Catalyst, which went public on NASDAQ: PowerDsine (PDSN), Scopus (SCOP), Omrix (OMRI), Commtouch (CTCH), BOS (BOSC), Cyalume (CYLU), Dot Hill (Hill), Orckit (ORCT). Some portfolio companies like MTI went public on AIM.

Cukierman & Co. (CIH) is the leading Investment House for IPOs of Israeli firms in Europe. Transactions of CIH include: Summit, Visonic and Metaltech in London, Astra and VCON in Paris, Wizcom, OTI and Electronics Line in Germany.

As of today, Israeli companies raised over $37B through foreign public equity offerings, in addition to over $46B in secondary sale on the market by shareholders.

With over 200 companies going public on American Stock Exchanges, Israel was ranked #3, after China and Canada, in terms of number of foreign companies (excl. North American companies) listed on NASDAQ.

With over 90 Israeli companies going public on European Stock Exchanges, Israel was ranked #2 in terms of number of foreign companies traded on European Exchanges.

CIH is the sole NYSE Euronext’s Israeli listing sponsor.

Source: Capital IQ, Dec. 2014

Blue Chip Acquirer Israel Acquisitions / Investments Total Invested

DSPC*, Envara, Oplus, Comsys, Sentrigo, Telmap, 2 Fabs

$7.1bn

Indigo, Scitex*, Mercury*, Orana, NUR Macroprinters $6.1bn

Iscar $6.0bn

Makhteshim Agan $2.4bn

M-Systems* $1.6bn

P-Cube, Pentacom, Seagul, HyNex, InfoGear, Intucell $1.3bn

XIV Storage, Guardium, WorkLight, Trusteer $1.25bn

MentorWave, LabPixies, Waze $1.2bn

Dune, Percello, Provigent , SC Square, Broadlight $869m

Anobit, PrimeSense $845m

Tecnomatix, Arava, Solel $703m

superDimension, Oridion Systems $622m

Omrix*, Given Imaging $488m

Peach Networks, Maximal Innovative, Whale, Gteko, Secured Dimensions, YaData, MSN Israel, 3DV Systems, Zoomix VideoSurf

$460m

Mobileye* $400m

Medingo $325m

Snaptu, Face.com, Onavo $300m

Sightline*, Surpass Medical $285m

Alma Lasers $240m

Attenti $230m

ELGEMS, Versamed, Lightech, Orbotech $100m

Algotec Systems, OREX Computed Radiography* $94m

5-2 Israel the Blue Chip Supermarket

Since 2000, approximately 1,000 Israeli companies were acquired by international corporations

Catalyst principals have been involved in over 140 completed transactions (including exits and investments in Israeli and related companies)

Many global blue chip corporations have made significant acquisitions and / or multiple acquisitions in Israel

Many key strategic products or solutions of leading blue chips were developed in Israel

Intel with 7,000 employees, 4 R&D centers, 2 manufacturing facilities developed the Pentium, Centrino and duo core chips in Israel

Microsoft's most popular operating systems were developed primarily in Israel. Microsoft has had a strong presence in Israel for many years, and has 2 R&D centers that employ 600 people. CEO Steve Ballmer said that MSFT is as much Israeli as it is American

HP has made more than 5 significant investments in Israel since 2000, investing more than US$6 bn and obtaining many key technologies

Outside of high-tech, many life sciences, med-tech and industrial companies are actively investing and acquiring Israeli companies

* Transactions involving Catalyst Fund Principals

5-3 Emerging Markets Acquiring Israeli Companies

EM Acquirer Israel Acquisitions / Investments Total Invested

ChemChina (CN) Makhteshim Agan (2011) $3.7bn

Bright Food (CN) Tnuva (2014) $2.5bn

Rakuten (JP) Viber (2014) $900m

Fosun Pharma (CN) Alma Laser (2013), Check-Cap (2014), Phoenix Insurance Company (2015)

$723m

Access Industries Inc. Clal Industries (2012), GetTaxi (2012) $665m

XIO Group Luminis (2015) $510m

SingTel (SN) Amobee (2012) $321m

Alibaba (CN) Tango (2014) $280m

Horizon Ventures (Li Ka-Shing, CN) Kaiima, Waze, MCS Medial, Onavo, Tipa, Hola, Nipendo, Cortica, Feex, Magisto, Ginger Software, Meteo Logic, everything.me, Wibbitz, Stevie Inc., Peen.me (2010-2014)

$188.1m

Sichuan Hebang Corp. Stockton Israel Ltd. (2015) $176m

Hutchison Whampoa (CN) Partner Communications, Orange, Kinrot (2012) $155m

Li Ka-Shing Foundation (CN) Technion – Institute of Technology (2014) $130m

Chabad 770 (RU) Z.B.I. Ltd. (2013) $100m

Samsung (S-Korea) StoreDot (2014), Mantis Vision (2014) $100m

China’s Sunpower Group (CN) Natali Seculife (2014) $70m

Sailing Capital (CN) Mobileye (2013) $75m

Yifang Digital (CN) Pegasus Technologies (2010) $60m

Jain Irrigation Systems (IN) NaanDan Irrigation Systems (2012) $43m

Yandex (RU) KitLocate, Face.com, TimeBooker, Gbooking (2013) $30m

CITIC (CN) Bank Ha’Poalim $20m

Zhejiang Sanhua (CN) HelioFocus (2012) $10.5m

Han’s Laser (CN) Nextec Technologies (2013) $10m

Baidu (CN) Pixellot (2014) $3M

Over the last decade, new trend visible in Israel: formerly, majority of all acquisitions of Israeli companies and technologies were done by US and European companies

Today, growing trend of emerging market players acquiring Israeli technologies from China, Russia, Japan and other countries from Asia

Bilateral trade between China and Israel increased : from US$51 million in 1992 to US$8.8 billion in 2014

Today, China (including Hong Kong) is Israel’s second top export destination after the US

Source: Israel Export & International Cooperation Institute, 2014

6 - Entrepreneurial Spirit

Jewish Education Studies: Questioning and Challenging (Passover, Hagada)

“The Israeli Chutzpah”: The absence of hierarchical barriers promotes innovation at all levels of a firm

Reaction to isolation and lack of resources

Democracy - Culture of Transparency

Melting Pot: Israeli Immigrants from more than 90 countries

Problem-solving approach starting in the army.

“A network of startups in a Start-Up Nation”: Israel has the highest amount of start-ups per capita in the world

R&D centers with world-wide recognition

Israel is blessed with an exceptional entrepreneurial workforce, ranked 3rd in the world (IMD index)

Ranked in 1st place for business entrepreneurship by IMD (2009)

Government reforms & regulations on concentration of wealth and deleveraging

Upgrade to OECD and Exit of Emerging Market Funds Creates Vacuum

Development of emerging oil & gas industry to buoy Israeli economy for decades

Israel upgrade to OECD status in May 2010 has disqualified the core international institutional market investors

Developed market funds slow to enter market playing in large cap liquid shares

Two of the largest gas discoveries in the past decade globally (“Leviathan, Tamar” offshore Israel) expected to begin production in 2013 and 2017

Estimated to generate USD$200+ billion in gas revenues for over the next 30 years starting in 2013

Expected to act as momentous, long-term stimulus

Expected lower energy costs will improve profitability for Israeli industry

Attractive Israel Investment Environment

14

Transparency of Governance

Investment in Israeli / or developed market entity provides a significantly superior investment vehicle in terms of transparency, corporate governance and overall legal environment

Government reforms / regulations targeting local tycoons and holding companies with disproportional concentration of wealth and economic power

10 largest groups own 41% of Israeli market cap, the highest in the OECD

New recommendations call for separation of large financial and non-financial holdings from single groups, weakening of holding company structure and stronger corporate governance

Holding companies and local tycoons which have traditionally been incumbent buyers of Israeli assets are no longer well positioned

Many are in deleveraging phase and are in fact the source of many of the assets hitting the market

In light of recent developments in Israel and the current and expected market environment, there are and are expected to be very interesting opportunities for investors in the Israeli market over the next number of years.

• The “Israel Valley: The Technological Shield of Innovation”, tells the story of Israel’s success in building the world’s leading High-Tech Industry

• The “Israel Valley” attempts to explain and analyze the Israeli experience, to illustrate it through numerous examples and stories •Taking into account some of Israel’s characteristics, such as the role of education, the Jewish culture, and the army, the book highlights the main ingredients of Israel’s successful economy. The economy is intimately intertwined and connected with the High-Tech industry.

• The “Technological Shield of Innovation” model which originally was meant to protect the country, became the source of innovation: Israel is the second Silicon Valley of the world, with companies like Checkpoint, Netafim, Given Imagin and others that are all “made in Israel”.

ISRAEL VALLEY

Merci – Thank you – רבה תודה - 谢谢