Unique in the landscape
LeumiTech CEO Yifat Oron explains how the bank is boosting Israel’s hi-tech success
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.
YIFAT ORON, CEO of LeumiTech, Leumi Group’s hi-tech subsidiary.