Many Similarities Between the Pittsburgh and Israel Technology Sectors

By Elliot Dater

As I looked out my Pittsburgh window on May 12, it was 50°F outside with 16 mph winds, gusting to 28 mph, which resulted in a wind chill of 40°F. This caused me to observe (for not the first time) that there is no confusing the Steel City for Israel.

However, there are many similarities when it comes to the technology sector. For example, both places have extensive programs in place for very early stage technology development. These include universities; in Israel:  The Technion, The Hebrew University of Jerusalem, Ben Gurion University, Haifa University and Tel Aviv University; in Pittsburgh:  Carnegie Mellon University, the University of Pittsburgh, and University of Pittsburgh Medical Center; government-funded investments from entities like the Office of the Chief Scientist in Israel or incubators like Idea Foundry, Pittsburgh Life Sciences Greenhouse and Innovation Works in Pittsburgh.

Both regions are imbued with the entrepreneurial spirit.  Israel developed the “Start Up Nation” out of necessity. Without any natural resources and needing to develop its own defense electronics industry, Israel cultivated the math and science strength of its academic and immigrant communities. Pittsburgh’s technology industry also developed out of necessity, growing a new industry on the math and science strengths of its local academic community. Israel’s investment in technology transformed the nation from a primarily agricultural export economy to a technology powerhouse. Similarly, Pittsburgh has been transformed from “Steel City” to a center for “Eds and Meds,” as well as software, medical devices and robotics.

One of the common complaints that I hear in both communities is the lack of funding after the development phase and before a company is ready for a Series A round of venture capital financing. Part of the explanation for the dearth of funding at that stage is a lack of locally available venture capital financing. Although there is a significant Israeli venture capital industry, the bulk of venture capital financing for Israeli technology companies comes from foreign funds. Similarly, in Pittsburgh the vast majority of venture capital financing comes from funds outside of the Pittsburgh region while funds within the region seem to make most of their investments outside the region.

One interesting new development for raising additional capital in Israel is the new accredited investor crowdfunding website, Our Crowd, which was established by veteran Israeli investor Jon Medved. Our Crowd exposes accredited angel investors to Israeli opportunities, which in turn provides start-ups a new potential source of investor capital. Similarly, a number of new crowdfunding websites are popping up in the United States, however, they cannot sell securities to non-accredited investors until the crowdfunding portions of the JOBS Act of 2012 become effective. Another source of capital that may be available to local innovation companies is funding through angel investor networks such as Blue Tree Allied Angels and the Pittsburgh Chapter of the Keiretsu Forum. In fact, the Keiretsu Forum recently began an Israeli deal flow program, which resulted in Israeli companies presenting to Keiretsu members here in Pittsburgh.

Time will tell whether the new avenues of investment such as Our Crowd and the Pittsburgh Chapter of the Keiretsu Forum will speed the development of innovation companies in Pittsburgh and Israel, but these and other new ventures are certainly a good start.

Elliot Dater is a partner in Schnader’s Business Services Department,  and represents Israeli companies doing business in the United States and U.S. companies and investors doing business in Israel, as well as emerging growth companies in the technology and medical device industries

The materials posted on Schnader.com and SchnaderPittIsrael.com are prepared for informational purposes only and should not be considered as providing legal advice or creating an attorney-client relationship. Please see our disclaimer page for a full explanation.

Creative destruction: The benefit of failed start-ups

Recently there have been some very interesting success stories on the Israeli technology front, including one significant story with a Pittsburgh connection. As you may have heard, the Israeli crowd sourcing navigation app company, Waze, was recently bought by Google for between $1.1 and $1.3 billion. Although the transaction is being reviewed by the FTC, it has created a strong ripple effect throughout the Israeli technology sector, with the demand for mobile and internet app developers up by 40 percent, according to Globes.

A few months ago, another Israeli technology company, this time in the field of healthcare IT, also had a successful exit. dbMotion, an Israeli company with its U.S. operations in Pittsburgh, was sold to Allscripts for more than$230 million. According to published reports, Pittsburgh-based healthcare system UPMC was a significant investor in dbMotion. This was a very successful exit and has whetted the appetite for investment in medical device and healthcare IT coming out of Israel.

Not all of the news out of the Israeli tech sector is good, however. For example, Better Place, the electric car battery changing system company, recently went into liquidation in Israel. Although Better Place created an alternative to slow charging electric cars by creating battery-changing stations where the depleted battery would be replaced with a new, fully charged battery, the economics of the new system just did not add up; at least not in the near term. According to published reports, Israel Corp invested over $230 million in Better Place and will most likely never see that money again.

Success stories and nightmares, which provide the true picture of Israeli hi-tech? The answer is that they both do. The fact of the matter is, most start-ups fail, whether in Israel, Pittsburgh or the Silicon Valley. Some say that only one-in-ten succeed. Some say that out of ten start-ups, three or four will fail, three or four will be minor successes or return investors’ capital, and only one will be a home run. This sounds like a recipe for disaster; why would anyone ever found a start-up company with those odds, and even more importantly, why would anyone invest in an early stage technology company?

The answer is that failure is a necessary part of the growth of a technology industry and the creation of a serial entrepreneurial class. In essence, start-up failures are creative destruction. Without the experience of failure, successful entrepreneurs would not have learned how to be successful in their next company. On the other hand, if their previous, unsuccessful companies were not shut down, those entrepreneurs might have spent years and tremendous sums of capital beating a dead horse rather than investing their time and energy into a new venture. This is the technology version of creative destruction. Without something unproductive, like an unsuccessful company, being destroyed, there is no room for the creation of a new, potentially more successful company, from the aspect of both available capital and entrepreneurial talent.

Back to Waze, that $1.1-$1.3 billion company. According to Globes, Waze was founded in 2008. Of course, Waze was not the first company that its founders were involved in. I wonder what would have happened if after their initial start-up failure, they had given up and joined a large corporation, rather than created a new crowd sourcing navigation app? I am glad they did not, and I bet that their investors are even happier still.

 

New Opportunities for Business Collaboration Between Israel and Pittsburgh

By Elliot Dater

You might not know it, but there is a history of Israel-Pittsburgh collaborative technology investments and transactions. It started as a trickle, but that trickle will develop into a flow, given the right circumstances. Israeli companies such as medical device company Flexicath, portfolio company Pittsburgh Life Sciences Greenhouse and dbMotion (recently acquired by Allscripts for an undisclosed amount), set up their U.S. operations in the greater Pittsburgh area several years ago. In addition, Ness Technologies recently announced the opening of a new software development center in Pittsburgh.

More recently, a new attempt to introduce Israeli companies to Pittsburgh area investors was kicked off. The Keiretsu Forum, the world’s largest angel investor network, recently brought a number of Israeli startups to Pittsburgh to present their companies to local investors as part of the Keiretsu Forum Mid-Atlantic Regions’ Quarterly Israeli Deal Flow program. Five Israeli companies in the fields of internet technology, medical devices, transportation efficiency, human mobility products and drug development presented to a number of accredited investors. Although it is too early to tell whether any investments will be made, Israeli companies that have previously presented are currently under review to determine whether Keiretsu members will make an investment.

Earlier last month, the Israeli Deputy Consul General for the Mid-Atlantic Region visited Pittsburgh and met with a number of key players in the local technology ecosystem to explore ways to create and strengthen ties between the Israeli and Pittsburgh technology communities. This was just a first step, but hopefully the first of many to find ways to increase collaboration in the technology space between Israeli and Pittsburgh companies, academic institutions and sources of capital.

Academic institutions are also working to connect the dots between the Israeli and Pittsburgh technology ecosystems. Professor Paul Harper is creating a program in Global Innovation at the University of Pittsburgh Joseph M. Katz Graduate School of Business. The pilot country for kicking off this program in global innovation? Israel, of course. Professor Harper has been to Israel twice in the last 12 months and immediately noticed the potential for collaboration between the two technology ecosystems. The Israeli Pilot would include case studies of Israeli companies and a student trip to Israel to meet with entrepreneurs, investors and leading business figures in the Israeli economy. For more on this exciting new program, see “Israel Rising” in the Spring 2013 edition of the Katz School’s Pitt Business Magazine.

Although in its early stages, the University of Pittsburgh School of Law is looking to create a collaborative program with the Academic Center of Law and Business in Ramat Gan Israel. Potential parts of this program could include combined classes taught by faculty members of both schools, student internships in immigration law and student exchange programs. Dean William Carter has been leading this effort and it will be fascinating to see what the future holds.

A lot is already happening to link the Pittsburgh and Israeli technology economies. The two keys to creating additional growth is getting the word out on what already exists and working to create more connections where it makes business and/or academic sense.

Elliot Dater is a partner in Schnader’s Business Services Department,  and represents Israeli companies doing business in the United States and U.S. companies and investors doing business in Israel, as well as emerging growth companies in the technology and medical device industries

The materials posted on Schnader.com and SchnaderPittIsrael.com are prepared for informational purposes only and should not be considered as providing legal advice or creating an attorney-client relationship. Please see our disclaimer page for a full explanation.

Israel’s Influence in the “Pittsburgh Technology Triangle”

By Elliot Dater

Capital is the lifeblood of a technology company. An early stage technology company cannot be self-sustaining while it is developing its technology and products. Therefore, it is common for those companies to rely on investments from third parties. Those investments typically go through stages of friends and family investment, technology based economic development organizations and incubators, such as Innovation Works, Idea Foundry, the Pittsburgh Life Sciences Greenhouse, or the Office of the Chief Scientist in Israel, then angel investors, and if the company is successful, venture capital investors.

Often, the vitality of an area’s technology economy is judged by the number of investments made in its technology companies. Two recent surveys assessed the technology investment ecosystems in Israel and in Pittsburgh, respectively.

According to a report on venture capital investment in Israel in the first quarter of 2013 published by the IVC Research Center and accounting firm KPMG Somech Chaikin, 169 Israeli companies raised a total of $474 million from local and foreign investors. Of that total, $147 million was invested by Israeli venture capital funds. According to that same report, 17 companies raised more than $10 million each while 99 venture capital backed investments raised $364 million, or 77 percent of the total amount raised in that calendar quarter. The average company financing round was $2.8 million, while the average venture capital financing round was $3.68 million. In addition, 53 seed companies raised $31 million. Of the Israeli venture capital funds that made investments, 42 percent of those investments were first time investments and 58 percent were follow on investments. Of the total amount, 34 software companies accounted for 29 percent of investments, followed by the internet sector with 22 percent of investments.

Similarly, in Pittsburgh, Ernst & Young and Innovation Works recently published, “Optimizing Opportunities,” detailing investment in Pittsburgh’s technology sector from 2008-2012. According to their report, during that time period 217 companies raised a total of $1.3 billion in investment. In 2012, $329 million was invested in Pittsburgh technology companies by venture capital funds, angel investors, seed funds and other investment sources. Of those 217 companies, the largest number came from the software and information technology sector, including enterprise and consumer software, electronics, robotics, telecommunications and IT infrastructure. The second largest sector was the health care sector, including medical devices, health care IT, biotechnology and drug development as well as health care services. Of the capital invested during this period, nearly 75 percent came from venture capital funds, followed by angel and corporate investors, then seed funds and technology accelerators. While venture capital funds provided the largest amount of funding, almost 66 percent of the investment transactions were made up of smaller rounds made by angel investors or seed funds/technology accelerators as the lead investor.

Although Israel attracts a far larger amount of technology investment than Pittsburgh on an annual basis, Pittsburgh should be proud of the growth in this sector since the 1980’s. Similar to Israel, state, local and regional governments are making investments and are creating the infrastructure to encourage and retain technology entrepreneurs and the necessary capital in the Pittsburgh region. Israel, also known as the “Silicon Wadi,” is the second largest center of technology innovation in the world after the Silicon Valley. The Pittsburgh technology ecosystem is relatively young, dynamic and growing. Pittsburgh will never become the Silicon Wadi (for one thing, Wadi means a dry river bed, and I hope we will never see the Three Rivers run dry), but if the Pittsburgh technology ecosystem continues to grow, it can become the “Pittsburgh Technology Triangle,” a leading region for software, hardware, robotics and medical devices technology innovation.

If you don’t like the Pittsburgh Technology Triangle, send me a better name. If we like your idea, we’ll start using it.

Elliot Dater is a partner in Schnader’s Business Services Department,  and represents Israeli companies doing business in the United States and U.S. companies and investors doing business in Israel, as well as emerging growth companies in the technology and medical device industries

The materials posted on Schnader.com and SchnaderPittIsrael.com are prepared for informational purposes only and should not be considered as providing legal advice or creating an attorney-client relationship. Please see our disclaimer page for a full explanation.

Welcome to Schnader’s Israel – Pittsburgh Tech Report

Our goal is to raise awareness of the technology ecosystem in both communities and to create a space where entrepreneurs can “meet,” exchange ideas and even plant the seeds of future collaboration.

I lived and practiced law in Israel for more than seven years. I was part of the Start Up Nation before it ever received that name. Prior to living in Israel, I spent several years working on a number of sophisticated Israeli research and development projects.

I have been living in Pittsburgh for nearly 11 years. As a practitioner and teacher of law and entrepreneurship in this region, I am proud to be part of the continuing renaissance of the city’s technology ecosystem.

Every day I am amazed to see the ideas, science and products being created in Israel and Pittsburgh. As I work with Israeli companies doing business in the United States and with local entrepreneurs, I see the similarities between the technology ecosystems in both regions. While no one will ever confuse winter along the Mediterranean shore with winter in Southwestern Pennsylvania, the brainpower, creativity and entrepreneurial spirit coming out of Pittsburgh and Israel are striking, and I am constantly looking for ways to bring them together.

This is the intention of Schnader’s Pittsburgh-Israel Business Report. We want to generate interest and collaboration between the two communities. We want to make people in Pittsburgh aware of the cutting edge developments coming out of Israel in software, IT, medical devices and life sciences and connect them to institutions like the Weizmann Institute, The Technion, and companies that have been supported by the Office of the Chief Scientist. We want to make people in Israel aware of the technologies being developed by companies at the Pittsburgh Life Sciences Greenhouse, Innovation Works, Idea Foundry, Carnegie Mellon University, the University of Pittsburgh, University of Pittsburgh Medical Center and many other places.

Stay tuned, we will have more about recent events bringing Israelis and Israeli technology to Pittsburgh.

Elliot Dater
Editor-In-Chief
Schnader’s Pittsburgh-Israel Business Report

The materials posted on Schnader.com and SchnaderPittIsrael.com are prepared for informational purposes only and should not be considered as providing legal advice or creating an attorney-client relationship. Please see our disclaimer page for a full explanation.