As a major technology exporter and with a highly entrepreneurial population, the small Jewish state is a giant when it comes to technological innovation.

Interview with Edouard Cukierman, Managing Partner of Catalyst Equity Management and co-author of the book Israël Valley: le bouclier de l’innovation technologique (Israel Valley, the Shield of Technological Innovation).

L’Atelier: You entitled your book ‘Israel Valley, the Shield of Technological Innovation’. Could you explain this idea of a ‘shield’?

Edouard Cukierman: The notion of ‘shield’ is very different in Hebrew from what we understand in Europe. The Shield of David (aka the six-pointed ‘Star of David’) is in fact a basic symbol of the establishment of the State of Israel. The technology dimension is also very important. Technology has enabled Israel to stand on its own two feet and to develop competitive advantage over the neighbouring countries. This advantage is due in part to the successive waves of immigration, especially to the latest massive wave of Russian immigrants. Some 37% of these people arrived with engineering degrees and they’ve made a profound impact on the country. One million people came – that’s 20% of the total population! Lastly, we mustn’t forget the notion of an economic shield. The country has built itself up over a short period of time and its economy now places it among the OECD countries.

So what proportion of the Israeli economy is actually dependent on ‘high tech’?

Over 50% of Israeli exports come from the high-tech sector and the rest is made up of what we call ‘mid-tech’ and ‘low-tech’ products. So almost all our exports are based on technology and innovation and high tech is the driver of our economy, which has been growing at a rate of 4 to 5% per year over the last few years. The fact is that Israel’s economy depends on success in technological innovation because our internal market is very small. Exports, and also the selloff of startups, therefore generate large amounts of revenue.

In your book, we see that the relationship between the army and civilian life is an important factor…

Well, statistics show that there is not much actual technology transfer between the army and the civil sector. However, the real advantage we gain from the military side is that when our citizens are still very young, they are asked to take on major responsibilities for their country and they get to use first-rate technology. (Editor’s note: military service is obligatory in Israel for a minimum of three years for men and 22 months for women.) This experience provides our young people with a handy toolkit, and they develop the ability to work in a team, which is a very useful skill for building a technology startup. So the true value of the military dimension is indirect.

So are we talking about an entire population of entrepreneurs?

Well, yes, there is a very strong entrepreneurial spirit in the Israeli people. I would say that the key word is ‘nerve’. Taking risks, failing, and starting again are common occurrences. As a venture capitalist, I regularly see people who come with original – even fanciful – ideas. The mere fact that people approach investors with such ideas and projects is amazing, and it makes my job very exciting. This spirit of innovation can also be found in our education system. Universities encourage students and experts to develop their innovations. There’s a well-developed ‘licencing’ ecosystem in the universities. Selling patents brought in $400 million for the Weizmann Institute alone in 2013. Lastly, at the risk of seeming to caricature Israelis, Jewish mothers do instil a sense of competitiveness in us from our infancy.

Israel also started a national programme of incubators very early on…

The initial programme started in the 1990s, with the particular aim of integrating the new Russian immigrants. The government set up 24 incubators, but realised very quickly that it would be difficult to obtain success stories from the incubators with the public sector way of managing things. So the incubators were privatised and they gradually came to specialise. Each has a mandate for a ten-year period and so is able to take a long-term view. The incubators work very closely with the universities and the State provides unsecured financing. On an average budget of $500,000 per project, $350,000 comes from State financing, which is reimbursed only if the project succeeds, and the State does not take any stake in a startup.

Your book also describes amazing access to venture capital…

Some 85% of all investment by our venture capitalists is at the company’s early stage. In Europe by contrast, 80% of all venture investment is ‘late stage’. However, the fact that it’s now taking longer to exit from such investments means that the situation is changing. While the target timeframe for an investment fund in this area is generally limited to ten years, nowadays it might actually take twelve to exit from a project.  So listing on the Tel Aviv stock exchange is a way for a startup to replace jaded stakeholders.

What about ‘Cleantech’, which covers for example water supply and water management, plus renewable energy? Are these areas for the future, given Israel’s geographical situation?

This is an interesting sector, both as regards sustainability policy and energy shortages.  As a venture capitalist however, I’m not expecting success to come from that area. I’m much less enthusiastic about the energy sector than I am about health and IT. Google, Cisco and Johnson & Johnson are all companies that have become adept at acquiring startups and using them to develop innovative solutions. This is not the case in the energy business, which is controlled by giant companies that have no experience of bringing startups into their business and don’t really know how to manage them.

So what are the sectors of the future for startups?

Technologies relating to the brain and nanotechnology are very promising sectors. Around twenty research centres in Israel are dedicated to nanotechnology and there’s a lot of investment going into this sector. Internet security is also a field that’s attracting attention as this is something that affects both the consumer sector and the State. Agrotech will also be an area for development and here Israel has an advantage in terms of skillsets. In Israel we have the world’s largest university specialising in agronomy.

Israel exports a lot of technology.  What sort of relationships does State of Israel have with the BRICs – which are set to become the new giants?

For a long time the US market was Israel’s prime target for obtaining foreign investment and it’s still very important as it’s our largest export market. But we mustn’t forget Europe, which is of great value to Israelis. Europe is in fact Israel’s number one economic partner. For a long time it was the ambition of Israeli companies to have a listing on the Nasdaq, but now many of them have started to look to Europe, especially to the London market. However, the BRICs are an extremely important export market. Chinese private equity players and Russian sovereign funds have made their appearance in the country.  We’re also seeking investors from Brazil and India to help Israeli firms get up and running in those markets. BRIC investment in the Israeli market is something quite new, but it’s definitely part of a growing trend. Recently we had a visit from around sixty heads of Chinese companies, among them Lenovo, HP’s main competitor. Lenovo’s boss told me that, given the difficulty Chinese companies are having acquiring US technology, Israel looks like a prime opportunity.

By Pierre-Marie Mateo