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 From a thriving company that employed over 500 people, Solel has
been reduced to a factory with 50 workers.
Brenmiller's experience is one of a growing number of cases
illustrating the double-edged nature of Israel's high-tech boom.
While many entrepreneurs and investors have made lots of money from
Israel's start-ups over the past two decades, increasingly firms
acquired by foreign buyers are then either shut down, with their
intellectual property moving abroad, or turned into R&D centers for
the parent company.
Israel's high tech industry is a major growth engine and investment
magnet, attracting multinationals like Apple, Intel and Google, who
have been eager to snap up local start-ups.
High-tech goods and services account for 12.5 percent of Israel's
gross domestic product (GDP) and half of its industrial exports,
government data shows. Israel leads the OECD when it comes to R&D,
spending 4.3 percent of GDP on it, nearly twice the OECD average,
according to Ernst & Young.
Companies often tap into the skills of workers trained in the
military or intelligence sectors and start-ups benefit from tax
breaks and government funding.
But Karin Mayer Rubinstein, head of the Israel Advanced Technology
Industry association, said that while M&A brought money into Israel,
patents were being "vacuumed" out.
"In the last few years, most of the companies being bought don't
stay here as a separate entity," she said.
JOBS WARNING
Many Israeli companies are not growing into global players that
acquire others rather than being acquired. This trend is creating an
economic problem, said tech pioneer Dov Moran, who sold his firm
M-Systems - which developed the USB flash drive - to SanDisk for
$1.6 billion.
He said some companies should be sold because they would not be
successful on their own. He pointed to Google's $1 billion
acquisition of mapping start-up Waze as one such case.
"But the fact that companies are sold is not really great for the
country. Only R&D is kept in Israel, not sales, not logistics,"
Moran said. "We need companies that are creating jobs not just for
talented engineers and programmers."
After job creation in the high-tech sector grew an average of 2.5
percent annually from 2004-2012, it has started to shrink,
contracting nearly 2 percent in total in the past two years,
government figures show, even as the overall jobless rate fell.
Looking back, Moran said that had he stayed the course, M-Systems
could have grown to a company with $3-$4 billion a year in sales.
Today it operates as a SanDisk R&D center and its workforce has
fallen to 700 from 1,000 before the sale in 2006.
There are 282 R&D centers in Israel, most owned by foreign firms.
Eight out of 10 Israeli technology firms bought by multinationals
become a foreign R&D center in Israel, or are integrated in existing
foreign R&D centers, said the Israel Venture Capital (IVC) Research
Center.
Entrepreneurs say investors are often looking for high returns as
quickly as possible.
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"To build a long-term success story takes hard work, many years and
lots of patience," Brenmiller said.
Patience is not a strong point in Israel's start-up culture, where
entrepreneurs like to move from one idea to the next.
Israeli venture capital-backed companies take an average of 3.95
years from the first round of funding to acquisition, compared with
6.41 years in Britain and 6.66 in France, according to third-quarter
2014 figures from Dow Jones VentureSource.
SIGNS OF MATURITY
Solel is not alone in its experience. Chromatis Networks was one of
the biggest acquisitions ever of an Israeli company when it was
bought by Lucent in 2000, but was shut down about a year later. IBM
closed XIV in 2008 about a year after it paid $300 million for the
storage technology firm, according to IVC.
But there are some signs the sector is starting to mature as more
companies are willing to wait longer before selling, aiming to build
themselves up to a stand-alone size.
In 2014 there were 70 Israeli "exits" - stake sales from mergers,
acquisitions or initial public offerings (IPOs) - valued at nearly
$15 billion, according to PriceWaterhouseCoopers (PwC). But of that,
$9.8 billion was in IPOs - up from $1.2 billion in 2013 - while the
value of M&A fell to $5 billion from $6.5 billion.
This can partly be attributed to the fact many successful
entrepreneurs are on their second or third company, said Rubi
Suliman, head of high-tech at PwC Israel.
Brenmiller is one such case. He poured $20 million from the sale of
Solel into establishing Brenmiller Energy, which has developed a
more efficient way to store heat from the sun.
To keep more companies, the Israeli government needs a long-term
plan for incentives and support rather than simply early-stage aid,
Rubinstein said.
With wealthier entrepreneurs and less pressure to sell, some believe
Israel could begin producing more large companies such as network
security provider Check Point Software.
"It is very understandable that a second-time entrepreneur with a
large bank account is much more patient in his next venture and much
more willing to take risks," said Suliman.
(Editing by Pravin Char)
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