from the October 2008 issue

Selling small is a way of life

Success breeds criticism. Only after Israel's high-technology sector reached a critical mass, did criticism emerge.

"Some people think we are only meant to innovate, and that once we build something, the best strategy going forward is to sell that company," says venture capitalist .Chemi Peres. "The other school of thought is that you have to focus on building significant companies. Otherwise, it will endanger the idea of Israel as a country of science and technology," Over the years young companies, after reaching a certain level of sales, generally seek a buyout partner. This has been criticized over and over again but no soulution has been proposed. We see the problem related to a dearth of top level management that could lead a company into international markets. In the united States, for example, when a top executive is released, we hear of an immediate replacement. There seems to be an unending pool of qualified managers. In Israel there probably, not more than a handful of managers who could step in and manage a new company.

Nokia in Finland is a case in point. It is a global giant but the only one in Finland. Perhaps it goes to show that small countries are not structured to breed mega companies. Israel has Teva, Comverse, CheckPoint and Amdocs, all have billion dollars a year in sales.

Most people forget that building a major company one requires a large home market, something that Israel is missing. Coca Cola was a major seller in the United States long before turning to international markets.

The activities of the Office of the Chief Scientist (OCS) of the Ministry of Trade and Industry have also come under criticism. With an annual budget of more than $250m. the office supports a number of programs. The most important of these is the up to $250,000 per startup program. These grants are generally used for validation of a project. The incubator project is also funded by the OCS. Small companies get support, primarily in administration and a location for their activities.

Whether "build a small company and sell out" syndrome is a major issue is questionable. If you can not build a small successful company you will never have a successful big company.

Professors Hershko and Ciechanover, both Nobel Prize winners in chemistry, criticize the declining state of Israel's educational system. "Israel will always have limited resources so we have to focus on the important, innovative and groundbreaking things," said Hershko. He added that "we would be unable to do such things as the work that led to the Nobel prize while the educational system is collapsing."

Education is paramount in the structure of Israel's high-technology. However, it is a function of Government budgets that can be adjusted as needs dictate. On balance the size of a country's companies is far less important than the state of its educational structure.

Yair Goldfinger, a founder of ICQ, which was sold for $420m., recently sold another one of the companies which he founded. We might have preferred had he founded another Teva, but we have no objection if he sells out his company early in its development.

Reprinted from the Israel High-Tech & Investment Report October 2008

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