I’ve been on a five-day trip to Israel to visit start-up companies upon the invitation of the Hong Kong Business Angel Network. I’ve made some interesting observations during the trip.
First, Israel has a mature start-up market for technology companies. In 2014, 12 Israel companies were listed on Nasdaq, and three of them — Waze, Wix and Viber — have a market cap of nearly US$1 billion. Mobileeye has even a bigger market cap of US$5 billion.
That has provided great inspiration to local entrepreneurs.
Israel has moved much earlier than Hong Kong in technology innovation. In June 1998, ICQ has been acquired by US internet company AOL for US$287 million. That’s when the country started attracting global investors.
Second, many start-up companies in Israel have formed entry barriers, making it difficult for others to copy their business model and operations. They have experts who have developed a deep understanding of the market after staying in the industry for a long time.
By contrast, most start-ups in Hong Kong are focusing on resources matching, like Uber or Airbnb. They work on apps that match people and jobs, home design companies and projects, tutors and students, tenants and landlords, etc.
There are successful examples. However, many of these projects lack high entry barrier. That is to say, their ideas can be stolen by others very easily.
Entrepreneurs have to build market entry barriers for their competitors, thus helping boost the chances of their companies to survive.
Third, most Israel start-ups focus on global markets. The nation has a small population of seven million, similar to that of Hong Kong. Both markets have a very limited size.
But more than 50 companies we visited during the trip all focus on the global market. In contrast, most Hong Kong start-up firms are limited to the local market.
Fourth, Israel has a unique culture. The nation is in a precarious geopolitical position in the Middle East, and all citizens are required to undergo military training. Discipline and teamwork offered in the military training are critical for operating start-ups.
Fifth, Israel start-ups offer high investment returns.
Valuation gap is a widely-used metric for investors. Most technology start-ups in the Silicon Valley have an average valuation of US$4.7 million during the seeding round, while those in Israel only have a valuation of US$1.5 million to US$2.5 million, according to iangels.com.
In the United States, start-ups can offer a value of US$243 million after raising US$41 million on average. That means they could offer a return of 5.9 times to investors when they exit.
By contrast, Israel firms are valued at US$192 million when investors exit and they need to raise some US$28 million during the process. Therefore, investors could get 6.9 times return on their investment, according to data from CrunchBase.
Last but not least, Israel is willing to shoulder greater risks for funding start-up firms.
Avi Hasson, Israel’s chief scientist, is responsible for distributing funding to technology start-ups.
There isn’t a chief scientist position in Hong Kong. Hong Kong’s Commissioner for Innovation and Technology is the closest comparable position.
This article appeared in the Hong Kong Economic Journal on July 23.
Translation by Julie Zhu
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