Israel Enlists Money Managers to Help Fund Struggling Startups

(Bloomberg) -- Israel’s largest institutional investors manage a hoard of more than 1.9 trillion shekels ($538.5 billion) that has long drawn interest from government officials looking for ways to support the local technology industry. With the coronavirus pandemic battering money-starved startups, the funds could aid the sector’s survival.

Since financing is increasingly difficult to come by, particularly for smaller companies, the government is making available its own money, while at the same time pushing local institutional investors to allocate their funds. As an incentive, the government plans to provide guarantees as protection against potential downside.

“The world has changed,” said Sagi Dagan, head of the growth division at Israel’s Innovation Authority. “We see this crisis as an opportunity both for the institutional investors, and for the Israeli high-tech sector -- and for the people saving money in their pension funds to have a bigger portfolio.”

Israel’s tech sector -- including more than 6,000 startups -- is a critical component for the country, accounting for about 10% of all jobs. And with lucrative salaries and high productivity, the industry is disproportionately vital for the fate of the overall economy.

Funding has dried up as foreign investors, who provide the majority of financing in the industry, grow more cautious and travel less. Government officials expect both tech sales and private investment to take a 25% hit, a potentially debilitating blow for smaller firms with little sales and cash reserves. Data from the IVC Research Center already showed a slowdown in venture capital deals in the first quarter.

A relatively weak recovery for Israel’s tech sector could hurt the industry’s attractiveness to the world’s biggest companies and venture capital firms, which for years have plowed billions into the country to get an edge in research and development, according to Eugene Kandel, who is advising the government on its economic response to the pandemic.

“That could unravel fairly quickly,” said Kandel, the former chief economic adviser to Prime Minister Benjamin Netanyahu, and now chief executive officer of Start-Up Nation Central, a non-profit organization that advocates for the industry.

To avert a broad collapse, Israel’s government is planning to step into that void with a multi-faceted support plan, amplified by private sector co-investment. The smallest firms will have access to 500 million shekels in government investment, while companies with more than 200 employees will be able to secure guaranteed loans. Israel will also put in place tax incentives for seed investments, and mergers and acquisitions.

In addition, officials will coax Israel’s institutional investors into putting 2 billion shekels into mid-stage tech companies. The co-investment model is aimed at shortening due diligence and bridging the knowledge gap. If successful, the mid-tier program could support about 100 startups, while hundreds of smaller outfits would benefit from the early-stage fund, Dagan said.

It may be difficult to actually bring the money managers on board. Last November, the country’s Innovation Authority rolled out a grant program to develop tech expertise among institutional investors so they could expand investment in the sector and eliminate a market failure, but progress is slow going. And this time around, investment houses are wary of the risk that comes with the market rout.

Understanding The Risk

For example, less than 0.5% of assets at Meitav Dash Investments Ltd. are invested in startups.

“We’ll need to check it and then to understand what is the risk and what the guarantee is for us,” said Guy Mani, who manages roughly $15 billion at Meitav Dash. “Startups are a very dangerous sector because it’s hard to know what will fail and what will succeed.”

Along with the potential for downside, some investors see an opportunity amid the crisis. While the industry may slim down, overall adoption of technology will accelerate and deals may be more attractive to investors still looking to spend.

“It’s very hard to raise new funds in this environment,” said Gilad Shany, a managing partner and co-founder of ION Crossover Partners, which has invested in some of Israel’s biggest startups. “If we’re really able help these companies’ growth in this environment, they can take market share globally.”

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