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After Dot-com Bust, Entrepreneurs from Israel Turn to Health-care Fields

April 28, 2006
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At a recent conference on Israeli start-up companies, a group of young investors stood in the hallway chatting animatedly about Israeli businesses and venture capital opportunities. They were particularly surprised by the growing number of health care-related firms that had come from Israel to the conference — held at the Newark offices of telecom giant IDT — to hawk their wares.

There was FlowMedic (Israel) Ltd., a company that develops non-invasive treatments for circulatory difficulties; InspireMD, which develops coronary and cartoid stents; and BrainSavers, which has developed a program to maintain and improve brain function as individuals age. And there were several others.

Had the conference, sponsored by youngStartUp Ventures, been held five years ago, it would have been dominated by Israeli high-tech firms, the investors said. Now, though, on the eve of Israel Independence Day 2006, businessmen looking to launch sustainable companies since the high-tech bubble burst are turning to health care.

The growth is “an outcome of investment over the last 20 years,” said Jacob Dagan, managing partner of ProMed, a financial investment firm with a focus on Israeli biotechnology companies. “But it takes time. You see the results over the last five years.”

Israel long has been on the cutting edge of medical research, from Parkinson’s to diabetes. But if necessity is the mother of invention, Israel’s precarious security situation has led to a significant investment in the defense industry. Much of the science behind new medical devices Israeli companies are developing originated in the defense realm, observers said.

Among these firms is Given Imaging Ltd., which developed a miniature, disposable video camera that can be fitted into a capsule and swallowed, giving doctors thousands of images of a person’s intestines.

“The brain behind the product designed missiles with sophisticated imaging systems,” Dagan said. “The infrastructure in Israel for devices is very developed. All of them are based on technology that came up from the defense industries.”

That doesn’t mean that strictly high-tech companies are no longer thriving in Israel; they still represent some three-quarters of Israeli start-ups.

But the biotech and health care industries are growing — quickly, noticeably and successfully. Some 70-100 new biotech companies now are created each year in Israel.

“There are far more start-ups and much more entrepreneurship on a ratio basis than there is just about anywhere else in the world,” said Adam Farber, COO of IDT Ventures, the telecom company’s venture capital arm.

“If you compare it to countries that are 100 times bigger than Israel,” Dagan said, “they don’t have this kind of growth.”

Health industry firms are receiving a great deal of financial assistance from the office of Israel’s chief scientist, insiders say.

“They’re really making a very big effort to move the technology along,” said Henry Kay, an executive in new market development and strategic planning for the Boston Scientific Corporation, a medical device company in Massachusetts.

Israeli start-ups also have been aided by government-funded incubators, where companies are provided with laboratories and offices to get their projects off the ground.

There are now some 30 incubators in Israel, including some in peripheral areas, an effort to encourage scientists to expand beyond Israel’s urban centers. These incubators increasingly are being privatized.

Kay, whose company has invested in several Israeli firms, said he has noticed a jump in the number of biotech conferences held in Israel over the past three to four years. He recently returned from one, and received an invitation to another in late May, he said.

Nevertheless, Kay said some Israeli firms still have things to learn if they hope to compete in the international market.

“The technology that I see is superb,” he said. “However, there’s a naivete on how to deal with American venture funds” and how to turn a good idea into a marketing strategy.

Also complicating matters for health-care companies is the fact that other fields allow for a quicker “exit” for investors. Because regulatory barriers for standard high-tech companies are relatively low compared to medical companies, they can be built, developed and sold more quickly, giving investors a quicker return on their money.

In addition, in the aftermath of the Sept. 11 terrorist attacks, the Palestinian intifada and the dot-com crash, Israel finds itself facing a capital shortage that could threaten the growth in health care and other kinds of start-ups.

In 2000, Dagan said, Israeli venture capitalists raised $3.7 billion; in 2003, they brought in just $14 million. In 2006 they’re expected to raise $600 million — a marked improvement, to be sure, but far short of the amounts raised at the turn of the century.

That could mean that some Israeli companies, desperate for capital, will become available at bargain basement prices.

“There’s not enough capital and there are lots of companies,” Dagan said. “From an economic point of view, there is more supply than demand, so the price goes down.”

While IDT Ventures’ Farber recognizes the capital shortage, he sees a concurrent, positive trend.

“The flip side is that in the last two to three years, there are a lot of high-tech companies — Microsoft, Intel, those types of companies — that have opened up offices in Israel and know that Israelis are entrepreneurial,” said Farber, whose parent company has a legal/accounting outsourcing division in Israel.

“We love giving to Israel, we love doing it,” he said. But, he added, “we recognize that there’s good stuff elsewhere, too.”

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