Israel, you’ve got mojo, but where’s your Instagram?

The limits of local money, and arrival of foreign money, is felt everywhere. Just look at some of the latest news on Israeli deal activity. Of the exit returns that are going to Israel, Israeli VC firms appear to getting little of the action. The biggest exit recently was Cisco’s acquisition of video software company NDS for $5 billion. Started by a group of ten scientists in 1988, NDS was sold within four years to the U.S. based News Corp for a mere $15 million. London-based private equity firm Permira subsequently joined News Corp in taking a significant stake. So when NDS finally realized its full value, most of the value went to foreign owners, not to the entrepreneurs. Then there’s the pending IPO by Objet, a leader in 3D printing, with an expected market value of $500M [Update: Less a day after publishing this story, Stratasys, of Eden Prairie, Minnesota announced it is acquiring Objet for $1.4 billion]. It marks continuation of Israeli dominance of wide-format printing. However, that company too was also founded long ago (1999), and the majority shareholders are all external entities, based in the U.S. and the Netherlands (its largest investor is Elchanan Jaglom, an Israeli who lives in Switzerland).

Meanwhile, foreign capitalists, seeing the opportunity in Israel, are pouring in at a very fast rate. During my trip, I bumped into a hedge fund investor, who requested anonymity because of SEC guidelines around fundraising, but who is in Israel prowling for local opportunities. He told me Israeli opportunities are like manna from heaven. In the U.S., he combs through hundreds of deals, but competition had bid valuations to stratospheric levels. “It’s a ***ing miracle if you can find a decent company,” he told me. In Israel, valuations are lower. Acquisitions in the $150-$200M range seem to be happening weekly, he said. One of his most recent investments, he said, has now gotten four offers at a price that could peg it at about $150M, a year after investing. “That’s a ten bagger in less than a year,” he said.

Foreign investors now outnumber local venture investors in making new investments into local companies. A foreign firm, Innovation Endeavors, led by Google’s Eric Schmidt, is leading the pace with eight fresh investments last year. Last year, Apple acquired Israeli flash memory controller startup Anobit Technologies $390 million, with Israeli firm Pitango Venture Capital sharing the win after investing early in the deal. A majority of the late-stage funding, however, came from outside investors, including from Battery Ventures and Intel Capital.

This all is great news for Israeli’s hoping for more grand slams. People list a number of other companies they hope are aiming to go big. There’s Conduit, founded in 2005, backed by Benchmark, which offers publishers toolbars and mobile apps. Conduit last week was reportedly valued at $1.3 billion after an investment by JP Morgan. And then there’s Better Place, an audaciously ambitious electric vehicle company, started by former software executive Shai Agassi. Agassi surprised everyone four years ago, when he left the software giant SAP, where he’d been seen as a CEO-in-grooming. He wants to equip electric vehicles with replaceable batteries, saying this is the only way to make all-electric vehicles viable in the short-run. He’s raised $750 million from investors — mostly foreign — to start with national projects in Denmark and Israel. Agassi claims to have spent almost $500 million, and says that’s helped create jobs in Israel. There’s mobile ad company Amobee, founded in 2005 by Israelis, which patiently built its business, expanded to the U.S, and sold in March for $321 million, with foreign investors again being the sole backers. Imperva, started by Shlomo Kramer, the co-founder of CheckPoint Software, one of Israel’s early big successes (and one of the few, if only, companies that managed to scale), went public late last year, and is now valued at over $800 million, after raising $53.7M from outside investors.

Granted, not all investors see Israeli’s lack of big exits as a problem. Ed Mlavsky, considered one of the founders of the Israeli venture industry, after he set up Gemini Israel Funds in 1993, says bigger companies become sclerotic; he lists slow-moving mobile giant Nokia as an example of something Israel should avoid. Moreover, Israeli entrepreneurs tend to go on to form new companies 35 percent of the time, compared to 5 percent for U.S entrepreneurs — something he and others have ascribed to a Zionist penchant among entrepreneurs, i.e, that they’re starting companies for the good of Israel. Also, Mlavsky counters the notion that Israeli engineers — because of limited management and sales experience — are unable to scale. Something like 80 percent of entrepreneurs in Israel are still in control of their companies at the time of acquisition, he said. However, one could argue that the reason entrepreneurs are running their companies so long is precisely because they were unable to figure out a way to truly scale, and so exit at modest valuations. Indeed, Mlavsky’s argument that small is good is considered a cop-out for others. Zohar Zisapel, a well-known investor and entrepreneur, argued at the Innovation Summit that Israel does need bigger companies — they’re better for the overall economy because they employ more people.

My own thoughts on this are as follows: It’s only a matter of time before Israel gets its Google or Instagram. Until now, the odds just haven’t been in Israel’s favor. With thousands of companies launching every year in the U.S and Europe, the odds are simply higher that hits will happen in those larger regions first. But Israel is such an entrepreneur-focused country, and the distribution of money and experience is being flattened and democratized at such a fast rate, that there’s nothing stopping Israel’s success flowing outside of its borders in a bigger way.  If Israelis start believing they can be big, and then planning for it, I’m sure their time will come.

[Update: Here’s my separate piece about the 35 Israel startups that presented at the recent Innovation Marathon event in Tel Aviv]