Israel is globally recognised for its technological innovation, with the mutually beneficial clustering of investors, laboratories, universities and developers calling to mind another technological hub. ‘There’s an ecosystem here unlike anything outside of Silicon Valley,’ says Glen Schwaber, a partner at Israel Cleantech Ventures. ‘There is a unique interplay between a mature, experienced venture capital industry, which has been through multiple investment cycles over the last 20 years, outstanding universities with world-class scientific research, a military and defence establishment with core high-tech competencies, a culture of entrepreneurship and risk-taking, and government policies designed to encourage technology R&D.’
The country has also set its sights on clean technology innovation and efficiency measures, which have been necessary for the continued survival of the resource-scarce country. Historically, its principal function has been as an incubator, with local innovations rolled out to the rest of the world. One of the country’s older green energy companies, Ormat, has become a major international geothermal energy player, despite originating in a country with non-existent geothermal resources.
Established in 2006, Israel Cleantech Ventures was the first Israeli venture capital firm to focus exclusively on the clean energy space. The move paid off, with other focused funds emerging in recent years. Investment in the sector increased from a four per cent proportion of Israel’s venture capital dollars in 2008 to seven per cent in 2009, according to the Israel Venture Capital Research Center. Despite being hit by the global downturn, some 15 deals were completed in 2009, with a total value of $100m.With a potential recovery on the cards, this investment looks set to rise.
Future opportunities
ICV is still investing its $75m first fund, although the deal flow at present is strong enough that the firm may need to start fundraising sooner rather than later, according to Schwaber. ‘We are still actively looking at new deals in the current fund and have additional capital to deploy,’ he says. ‘Looking forward, we do anticipate raising a second fund as deal flow continues to be robust both in terms of quantity and quality, and we believe there will continue to be great investment opportunities over the coming years,’ he adds.
The firm targets early stage investments, with the majority of portfolio companies pre-revenue at the time of acquisition. The firm’s presence at the very early end of the venture capital spectrum is in part a product of the market, which is still extremely young, according to Schwaber.
‘About half of our portfolio is now moving into revenue stage, ramping up from R&D to business development and sales. That said, it’s still early for us to be contemplating acquisitions or IPOs,’ says Schwaber. ‘Over time, the sector will mature as more companies transition from R&D to initial sales and eventually meaningful revenues. For the time being, however, from inception up to single digit revenue is generally our sweet spot.’
Breeding ground
Some Israeli companies have made the move from boot-strapped start-ups to global players in a relatively short space of time. Electric vehicle infrastructure company Better Place, which ICV invested in as an early stage company, has raised $1.2bn in funding since its inception in 2007, including $350m in January this year.
The small scale of the market for the most part precludes the kind of gigantic price tags required to grow large infrastructure and project finance-focused initiatives, adjusting the focus more towards innovation and technology refinement.
Schwaber says, ‘Many solutions within the energy market- place do not make sense to build from Israel. I wouldn’t advise an Israeli start-up company to build a photovoltaic (PV) plant, but rather developing equipment and methods to make PV production significantly more efficient is a relevant Israeli play.
‘Similarly, an Israeli company building desalination plants is an unlikely venture-relevant business, but companies developing novel membranes for energy efficient desalination and wastewater treatment are indeed of interest,’ he adds.
The country has a quiet dominance of the ultra high-tech sector. The first Intel chip was developed in an Israeli lab, and companies such as Siemens, GE, Dow Chemical and IBM have R&D bases there. Israel is often a willing partner in encouraging innovation, with Israel Electric Company (IEC) assisting companies developing refinements of electricity generation, transmission, storage or demand-side management technology. National water authority Mekorot also has a programme for beta-testing new solutions provided by start-ups.
‘Israel is undoubtedly a great testing ground for cleantech start-ups,’ says Schwaber. ‘Many cleantech companies can test their solutions locally and develop a nice local business here, with real referenceable customers.’
Buffer against recession
ICV’s portfolio is made up of companies providing innovation, with the potential to improve the efficiency and functionality of large infrastructure projects. The concentration of pre-revenue companies in its portfolio may have been a blessing during the downturn, according to Schwaber. He says, ‘In terms of our own portfolio, the downturn was not as severe as one might have imagined, as the vast majority of our companies were still in their development stages over the course of 2008 and 2009, and were effectively shielded from problems such as bloated inventories, difficult cash collections and large-scale layoffs that many later stage companies experienced.’
The firm invested in two companies in 2009: Tigo Energy, a developer of power electronics and software solutions to increase efficiency in PV installations, and FR Polymers, the firm’s first investment outside of the country. The investment was driven by one of ICV’s venture partners, Arnon Goldfarb, who had a long career at fertiliser and chemical manufacturer Israel Chemical, and is familiar with the bromine-based flame retardant industry.
The firm’s focus is still for the most part squarely focused on Israel, according to Schwaber. He says, ‘our competitive advantage as early stage investors is in the Israeli cleantech sector, so we don’t proactively source early-stage deal flow outside of the country.’
Next generation
Despite the nascency of the market, there have been some striking deals. Most notably in 2009, Israeli solar company Solel was acquired by Siemens for $418m. But at this stage, the big ticket deals are likely to be the exception, instead of the rule, according to Schwaber. He says, ‘We expect to see deals like this in the future, but still have some time before we reach that stage. ICV is focused on building Israeli companies that will either be large standalone concerns or will be acquired for significant sums of money, but the sector needs to mature before that can start happening in any kind of regularity.
‘We’re only now starting to see the first wave of cleantech companies emerging from research and development and beginning to generate revenues,’ he adds.
A familiar route for new companies in the sector is to start up in Israel, raising early stage financing and perfecting their technologies, before expanding into other territories. ‘To become substantial players on a global scale, they need to be thinking and extending beyond Israel’s borders early on,’ says Schwaber. ‘In many cases, as in the technology sector, I see the model of Israel-based R&D, with marketing and sales functions located abroad, as working quite well,’ he adds.
While there has been some interest in the sector from private investors, more capital will be needed to come to market to push it to the next stage of maturity, says Schwaber. ‘We have a ways to go before I would characterise this market as crowded,’ he says. ‘One of the biggest challenges is to get more capital flowing into the system, and to increase awareness of Israel and Israeli technology. It seems to be happening more and more, and continues to be something that we as a firm and colleagues in the industry are very focused on.’
Going forward, Schwaber sees rewards in the potential to leverage Israel’s extensive involvement in the IT boom to provide the crucial refinements to underpin the development of the future leaders in clean energy and related technology.
‘We’re spending a lot of time looking at what we call crossover IT, companies which leverage Israel’s core strengths in IT toward the cleantech sector. These include green IT, smart grid, energy storage and energy efficiency plays,’ says Schwaber.
‘Israel’s ability to compete globally in cleantech markets will depend to a large extent on our success in leveraging know-how from the general technology domains. And we are already seeing it happen,’ he adds. |
