Unique in the land­scape

Leu­miTech CEO Yi­fat Oron ex­plains how the bank is boost­ing Is­rael’s hi-tech suc­cess

The Jerusalem Post Magazine - - TRAFNEASTPUORETATION - • YU­VAL PACE

Is­raeli hi-tech has ex­pe­ri­enced im­pres­sive highs in re­cent years. More and more tech­no­log­i­cal com­pa­nies are emerg­ing, some of them sell­ing af­ter a short time and snag­ging a high-pro­file exit. In other words, many young peo­ple are sell­ing their ideas to large com­pany and mak­ing mil­lions – but this is not al­ways an op­ti­mal sce­nario.

Bank Leumi, un­der­stand­ing the hi-tech mar­ket po­ten­tial, es­tab­lished Leu­miTech four and a half years ago, spe­cial­iz­ing in work­ing with hi-tech com­pa­nies, es­pe­cially start-ups.

“The hi-tech in­dus­try is crit­i­cal in Is­rael,” says Yi­fat Oron, the CEO of Leu­miTech, who lives the hi-tech world and knows it in­side out. “It is the growth en­gine of the econ­omy, con­sti­tut­ing about 40% of pro­duc­tion, some­thing like 10% of our GDP and 10% of our work­force. We have about 6,500 hi-tech com­pa­nies of all sizes here.”

It is no ac­ci­dent that hi-tech en­ter­prises have flour­ished here.

“They arose be­cause the in­fra­struc­ture – or lack of in­fra­struc­ture – ren­dered the Is­raeli busi­ness world in­ca­pable of re­ly­ing on strong en­ergy re­sources or a strong lo­cal mar­ket.

Lo­cal Is­raeli funds are rais­ing money in record-break­ing amounts: bil­lions of dol­lars a year. Spe­cific tech in­dus­tries grow­ing in Is­rael, such as cy­ber, are lead­ers in the world. We are punch­ing far above our weight in the world in terms of the num­ber of cy­ber com­pa­nies and in terms of how

we ex­port cy­ber prod­ucts to the world. About 20% of the in­vest­ment in cy­ber com­pa­nies in the world comes to Is­rael – it’s crazy.”

Oron notes that the exit phe­nom­e­non is ac­tu­ally on the de­cline.

“In the past, it was claimed that Is­raelis know how to set up suc­cess­ful com­pa­nies. But in ac­tu­al­ity, they were sell­ing quickly and early to Mi­crosoft, Google or other big names for only $10 mil­lion or so,” she said. “Now, we’re en­abling com­pa­nies stop ca­pit­u­lat­ing to pres­sure to sell early and ac­tu­ally grow in­de­pen­dently. Con­se­quently, we see Is­raeli com­pa­nies worth hun­dreds of mil­lions of dol­lars and even bil­lions, which makes the in­dus­try more sta­ble be­cause there are many in­de­pen­dent Is­raeli com­pa­nies here and all of these fac­tors turn the in­dus­try to an at­trac­tive one.”

Why do we need a bank like Leu­miTech?

Not all bankers are fa­mil­iar with the hi-tech world and its unique char­ac­ter­is­tics. What is a start-up? It’s a very young com­pany, with a great idea, whose key fig­ures think they know what they will do, but they don’t re­ally know. When a com­pany like this comes to the bank, how should it be han­dled? At the end of the day, it’s just two peo­ple with an idea. Should it re­ceive re­tail treat­ment? Should it get busi­ness treat­ment? Of­ten these com­pa­nies would open an ac­count at a branch in which the en­tre­pre­neur had an ac­count from the age of 16.

What’s the prob­lem with that? There is al­most no branch with ex­pe­ri­ence in deal­ing with a com­pany that within half a year is sud­denly be­gin­ning to bring in se­ri­ous in­vestor money. These in­vestors can be in­ter­na­tional com­pa­nies or funds that are not in Is­rael. The bank­ing world has be­come so­phis­ti­cated and wants to know where the money is com­ing from, who the con­trol­ling share­holder is. Tra­di­tional busi­nesses have a con­trol­ling share­holder and are gen­er­ally sta­ble. In hi-tech, how­ever it tends to be un­sta­ble and fren­zied.

A start-up com­pany can raise money ev­ery six months and then ex­pe­ri­ence a struc­tural change that re­sults in the con­trol­ling share­holder re­spon­si­bil­i­ties be­ing passed to some­one else. This be­comes quite dif­fi­cult for the banker.

How can credit be given to these com­pa­nies that have an un­clear fu­ture?

What char­ac­ter­izes hi-tech com­pa­nies is that they burn or in­vest a lot of money over the course of a few years to de­velop the tech­nol­ogy, so these com­pa­nies lose money ini­tially. Even com­pa­nies that al­ready have sales con­tinue to lose mil­lions or tens of mil­lions of dol­lars a year.

It is im­por­tant to rec­og­nize this, be­cause when banks eval­u­ate a busi­ness for the pur­pose of giv­ing credit and loans, they want to see that the busi­ness is prof­itable. In hi-tech, how­ever, busi­ness is al­most un­prof­itable by def­i­ni­tion. The com­pa­nies take the prof­its and in­vest them back in the busi­ness in or­der to grow. In hi-tech there is a need for rapid growth in or­der to gain mind-share and a foothold in emerg­ing mar­kets. Af­ter all, no hi-tech prod­uct should be one that al­ready ex­ists, oth­er­wise it is not in­ter­est­ing. So they in­vent new things and de­velop a new mar­ket and in­vest a lot of money in it. Then comes the banker who says, “I have a los­ing com­pany here, its mar­ket is a new mar­ket that I do not re­ally un­der­stand be­cause I do not have any­thing to com­pare it to.”

Tra­di­tional bankers want to see as­sets that can serve as col­lat­eral for credit, but a hi-tech com­pany usu­ally has few as­sets: no fac­tory premises, no raw ma­te­ri­als, no equip­ment. It’s all a kind of tech­nol­ogy cloud. For bankers who do not live and breathe hi-tech from morn­ing to evening, this thing called a tech­no­log­i­cal start-up com­pany is not easy to deal with.

How are you dif­fer­ent?

Bank Leumi un­der­stood this whole thing nearly five years ago, when our CEO, Rake­fet Rus­sak-Ami­noach, fo­cused on this huge, strate­gi­cally im­por­tant field that wasn’t be­ing han­dled prop­erly in the Is­raeli bank­ing in­dus­try.

No bank had a des­ig­nated sys­tem to sup­port hitech needs. When these com­pa­nies needed credit, they would sim­ply jump to the other side of the ocean. Amer­ica has an un­der­stand­ing of these things and their banks knew how to lend money, some­thing that just didn’t hap­pen here in Is­rael.

Our CEO said, “We have to bring a new and real mes­sage here. We have to set up an or­ga­ni­za­tion in the bank that works dif­fer­ently, looks at things dif­fer­ently. We need to be a bank that talks to the nascent com­pa­nies in their own lan­guage, un­der­stands them and is not afraid when a com­pany loses money and is go­ing through some grow­ing pains.

It is a strength for us that our struc­ture is global; even though Bank Leumi is an Is­raeli bank, it has a sub­sidiary com­pa­nies in the US and UK. This is what a hi-tech com­pany needs. It starts in Pe­tah Tikva, for ex­am­ple, and then opens an of­fice in New York, where we have a pres­ence, so we will pro­vide them con­ti­nu­ity of ser­vice there. If the start-up moves to Europe, we will give them the ser­vice from Lon­don as well.

How many cus­tomers use your ser­vices and how does it make a dif­fer­ence for them?

We cur­rently serve about 4,500 hi-tech com­pa­nies world­wide. We give them ac­cess to a world of credit that was not de­vel­oped pre­vi­ously in Is­rael.

This is makes a huge dif­fer­ence for them. A grow­ing com­pany re­quires a lot of in­vest­ment. The more start-ups can bring some of that money in credit rather than eq­uity, the bet­ter, be­cause it en­ables them to avoid di­lut­ing their value to in­vestors and en­trepreneurs. We tell the com­pa­nies, “Let us help you side by side – your vi­sion and as­sets and our credit. We will help you to in­crease your growth with­out di­lut­ing your value.” This is ex­tremely at­trac­tive to these com­pa­nies.

In the last four years, the en­try of Leu­miTech into this world has cre­ated a move­ment of com­pa­nies that started re­al­iz­ing that the bank can serve as a growth en­gine and the credit mar­ket for hi-tech has grown tremen­dously. We are not ex­clu­sive in the mar­ket – there are com­peti­tors – but it greatly ex­panded the credit mar­ket.

This is very im­por­tant be­cause it helps com­pa­nies es­cape pres­sure to make an exit. They now have an eco­nomic op­tion that does not con­fuse their own­er­ship struc­ture and al­lows them to chan­nel their en­er­gies into what they do best and grow – in­stead of con­stantly search­ing for in­vestors and di­lut­ing their own­er­ship.

(Pho­tos: Si­van Farag)

YI­FAT ORON, CEO of Leu­miTech, Leumi Group’s hi-tech sub­sidiary.

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