The Profitable Israeli Start Up Export Industry

A new, unheard-of industry is developing in Israel: Start-Ups, that is small companies nurtured still they are viable and then sold to foreign concerns. Great coproporations find it difficult to innovate, which is the key to their survival, so it is much easier and cheaper for them to buy ready-made small companies. I am invested in this new industry through a closed fund of one of the largest banks, but the fund has lost half of its value from 2000. I bought it when the hi tech bubble was expanding, but soon it exploded and the startups were shown to worth nothing. Now is trying to build up itself again, but it is uphill. Lately they bought other fund shares, "to be exposed to more startups". A kind of funds of funds idea. It is a way of saying - we give up, know nothing.

Foreign investment in Israeli start-ups has totaled $2.1 billion since January 2006. Top of the list is optical communications solutions developer, Passave Technologies, which forewent a Nasdaq IPO in favor of being sold to PMC Sierra Inc. (Nasdaq:PMCS) for $300 million in shares. Passave’s founders sold their shares in the company a few days after the sale. 31 start-ups have been sold since the beginning of the year. Three start-ups were biomedical or medical devices companies: ColBar LifeScience Ltd., Alma Lasers Ltd. and Predix Pharmaceuticals Inc. The other companies developed technology of one kind or another.

EMC Corp. (NYSE:EMC) has made more investments in Israel this year than any other foreign investor. Since January, it has acquired three Israeli start-ups: Kashya, nLayers, and Proactivity for an aggregate $233 million. Software giant Microsoft Corp. (Nasdaq:MSFT) has acquired two Israeli start-ups since January: Gteko for $120 million and Whale Communications for $76 million. 2006 has also been the year in which other US giants decided to buy an Israeli start-up. Xerox Corp. (NYSE:XRX) acquired XMPie Inc. for $54 million. McAfee Inc. (NYSE:MFE) acquired Onigma Ltd. a few days ago for $20 million.

Most of the acquisitions were in cash. Exceptions were the acquisition of Passave and SightLine (a cash and share-swap deal), the merger of Predix with Epix Pharmaceuticals Inc. (Nasdaq:EPIX), and four other acquisitions for sums of between $2 million and $52 million. Of the 31 start-ups mentioned, seven were sold for over $100 million, and accounted for half the total foreign investment in Israeli start-ups so far this year.

None of the startups was in the water area. The pic illustrates the state of the water industry in Israel (click to enlarge).