Eastern promise

?Go West! That has always been the advice to any aspiring Israeli businessman. Go West to the US, where you will find funding, customers and exit opportunities in abundance. Now, the opposite cry is being heard: ?Go East! And it's a proclamation growing louder and more persistent with each passing year. Young Israeli businesses, hit by slowing demand for their technology in the US, are increasingly turning to Asian markets such as China, Japan and Korea, where – conversely – demand is accelerating. With the Chinese mobile phone market now the largest in the world and South Korea's Internet penetration the highest globally (70 percent of households), Asia is increasingly the key place to do business for those with a funky new piece of technology to sell.

Of course, in order to take advantage of the trend, businesses thinking of venturing into the region will need support in the form of expert advice, guidance and funding. And that's where Israel's venture capitalists come in. Increasingly, they are putting down roots in Asia by launching representative offices, building contacts and even investing in local companies in addition to assisting Israeli companies develop a presence in the region.

One of the first Israeli venture capital firms to take Asia seriously was Tel Aviv-based Vertex Venture Capital, which was established in 1997 with a debut fund of $37 million and which now has representative offices in Singapore and Tokyo, as well as in the US, UK and France.

?We were pioneers of Asia among Israeli VCs, says Yoram Oron, Vertex founder and managing partner and chairman of the Israel Venture Association (IVA). ?Ten years ago, we were preaching that Asia was changing fast – even though at that time it was all about the US. But the center of gravity is moving and the likes of Japan, China, India and Singapore are all major markets these days. Our portfolio companies' main customers are often Japanese now rather than American.?

BIG IN JAPAN
An early example of how the firm spotted Asia's potential is provided by Midbar, an Israeli developer of proprietary technology for the protection of audio and video CDs against illegal copying. Vertex led a $3 million financing of the company in 2000, while Oron was appointed chairman and was tasked with helping to fix Midbar's ailing business model.

The ?fix included growing the company into Japan. From no sales in the country at the time of the initial financing, Japanese customers ended up accounting for around 40 percent of total revenues by the time Midbar was acquired by Macrovision, a larger Nasdaq-listed rival, in November 2002 for $25 million. Since then, Asia has continued to be a prime focus of Vertex' activities: for example, the firm invested $5 million in the $630 million third round financing of SMIC, a Chinese foundry, in September 2003.

?One cannot ignore Asian markets, and I think that Israelis are starting to understand the importance of Asia.

?One cannot ignore Asian markets, and I think that Israelis are starting to understand the importance of Asia, says Sharon Lewis, investor relations manager at Vertex. By the same token, Asia is taking an increasing interest in all things Israeli. Lewis says that when the Israeli Venture Association held its first conference in Tokyo in April, ?there were approximately 500 Japanese participants who came to learn more about Israeli potential and meet with Israelis. A similar number was recorded at a subsequent conference in Shanghai.

The extent of this interest is underlined by the fact that Vertex has some 17 Asian investors in its current fund (which closed on $160 million in 2000). They include Government Investment Corporation (GIC) and Temasek Holdings of Singapore; Nomura and NTT of Japan; and Winbond Electronics Corp, the Taiwanese semiconductor manufacturer. Indeed, Lewis claims the firm has more Asian investors than any other Israeli venture firm.

The advantages of having such investors on the roster are manifold, says Lewis: ?We have very close relations with our LPs. Some of them have invested in Vertex as they see us as a gateway to Israeli technology. We introduce companies to them that may be relevant for their business, especially in Asia. Many times we find synergy between an LP and a portfolio company.?

NO TO NASDAQ
Indeed, such is the burgeoning relationship between Israeli companies and the Asian investor community that listing on Nasdaq is no longer quite the automatic choice it would once have been. A number of Israeli companies are now traded in Japan and Hong Kong, and in April this year Sarin Technologies – a provider of precision technology products for processing diamonds – became the first Israeli company to float in Singapore. Whisper it quietly, but Asia could even become the natural destination for Israeli VCs seeking to exit investments.

Compared with many US or Europe-based venture capitalists either taking their first nervous steps into Asia or remaining steadfastly committed to their domestic markets, Israeli firms appear bold by comparison. Says Oron: ?One of the reasons for the success of Israeli companies is that from day one they are oriented to the international markets [because the domestic market is so small]. It is very tempting when you're based in somewhere like France or Germany to focus on the local market first – and many manage to do that successfully. But if you're an Israeli telecom or consumer business you have to build companies and products to international standards from the very beginning.?

That makes Israeli firms naturally inclined to reach out and embrace new markets. ?Don't forget that Israel is far from its commercial and capital markets, says Lewis. ?The domestic market is not enough. Israeli companies are established as global players from day one.?

This has made Israelis naturals when it comes to networking, says Oron – and in Asia, such a skill can be make or break. ?In Asia, getting to know people well is crucial to negotiations and doing so is even more important than in the Western world. Achieving a certain level of trust is crucial if you want to be a long term player.?

But while a preparedness to move swiftly into new markets is undoubtedly a plus, in some respects being forced to do so makes life harder. ?Unlike in the US or Europe, the endusers of Israeli products are non-Israelis, Oron points out. ?That makes life difficult – you would rather have local customers in order to benefit from easy interaction with them. We have to be very careful when it comes to analyzing market need pre-investment.?

Hence, the requirement for having eyes and ears on the ground through representative offices as well as signing up locally based LPs (who, in the case of Vertex, occasionally assist with due diligence). ?We like to capitalize on our human capital worldwide to help us pursue opportunities for our portfolio companies, says Lewis. ?It is important to work with people who understand local markets. A sentiment that would no doubt be echoed by all Israeli companies seeking to expand their business into Asia. Israeli venture capitalists are doing their best to oblige.