“Leadership is hard to define,
and good leadership even harder.
But if you can get
people to follow you to the
ends of the earth, you are a great leader.”
Indra Nooyi (Former CEO, PepsiCo)
Israel has a global reputation for its prosperous and groundbreaking high-tech industry which turned the Israeli economy into a strong, growing economy that can successfully handle and survive crises thanks to, among other factors, the Israeli high-tech engine. This industry did not evolve by chance.
In the 1990s, the State of Israel initiated the Yozma programme to encourage venture capital investments in Israel through government investment in venture capital funds, with the aim of planting seeds for the future development of the Israeli high-tech industry, with state funding. For years, the State of Israel intentionally invested in and promoted the local high-tech industry, recognising it as a significant and promising growth engine for the Israeli economy. However, the success of the local high-tech industry was not reflected in the Israeli capital market.
Traditionally, funding for such high-tech companies during the first stages of their lives, was provided mostly by the venture capital industry (which was primarily funded by foreign investors). In more advanced stages, when these companies achieved success and growth, they were usually sold to foreign entities, merged into foreign companies or floated on the world’s leading stock exchanges, primarily in the United States. Only a small portion of the successful Israeli high-tech companies received significant funding from Israeli savings or investment funds, or were floated on the Tel Aviv Stock Exchange (TASE).
The outcome, from the perspective of the Israeli investing public, was less than optimal, and in some cases even grim – they did not take part in the success of the Israeli high-tech industry.
This rift between the Israeli high-tech sector and the Israeli capital market did not escape the attention of decisionmakers, and recurring attempts were made throughout the years to reduce it: regulatory reliefs and benefits were given; mutual funds were established for investment in high-tech; funding solutions were promoted outside TASE through crowdfunding; and institutional investors were encouraged to invest in listed high-tech companies. And yet, success was very limited.
Soon after stepping in as Chairwoman of the Israel Securities Authority (ISA), in January 2018, I decided that this rift is unreasonable, and moreover threatened the stability of the local high-tech industry, due to the small number of funding sources, and the need to diversify them. I decided that diminishing this rift would be one of the main challenges of my term of office. Therefore, I also declared that I would use all my influence for this purpose, and presented my vision to many senior figures, with the aim of building a broad coalition that would together lead the way to change. However, after many years in which the system had been working to achieve this very same goal, my declaration was met with responses ranging from cold indifference to hostility, along with deep scepticism about my chances of success. Some reminded me of the famous saying attributed (in error, some say) to Albert Einstein: “The definition of insanity is doing the same thing over and over again and expecting different results.”
Faith in my ability
However, I had no intention of doing more of the same. I was well informed about what had already been done in the past, I knew what I was going to do, and had faith in my ability to change reality and succeed. I also realised that beating this complex challenge would require simultaneous action in multiple channels. An issue so complicated, which so many had already failed to tackle, required a holistic and multi-faceted approach.
First, I realised that in order to confront the challenge we would need assistance, guidance and support from figures outside the ISA. This is an irregular step. Bringing in outsiders is not always popular with in-house professionals, but it was the right thing to do. Since this issue is not a core expertise of ISA staff, it was vital to gain support from market experts, who could point us in the right direction better than we could do ourselves. Accordingly, we set up an advisory committee on technology and the capital market. The committee comprised leading entrepreneurs and executives with vast experience in venture capital, the high-tech industry, regulation and academia. The committee helped us explore ways to better connect the local high-tech industry to the capital market, to the benefit of the investment portfolio of Israel’s citizens.
Second, I realised that since this was a national challenge, the solution also required teaming up with national functions. Humankind is only as strong as the ability of its individuals to collaborate effectively, and it is the ability of state functions to collaborate that makes up a state’s power to overcome national challenges. Therefore, we enhanced our strategic collaborations with the Innovation Authority, the Ministry of Finance, TASE and many others.
Simplified capital raising
Accordingly, several months ago we authorised TASE to launch a new funding platform that significantly simplifies capital raising without a prospectus, for private companies from the high-tech sector, including venture capital funds and private equity funds (TASE-UP). This initiative enables high-tech companies to raise capital or debt through a separate trading platform for accredited investors, allowing such investors to later trade the securities they bought. Our aim was to create a new entry gate to the public capital market, through a platform which can be accessed at a lower cost and with reduced regulation.
Another important step was the granting of state guarantees for direct investment by institutional investors in high-tech – through the launch of Incentive Programme 43 of the Israel Innovation Authority. Under this programme, institutional investors received protection for 40% of their investment in high-tech companies. This programme aims to expand the involvement of institutional investors in the Israeli high-tech industry, and to support high-tech companies during the Covid-19 crisis.
In addition, in order to enhance the expertise of institutional investors in Israel in the high-tech sector, we also participated in launching a programme to build high-tech investment analysis capabilities at Israeli institutional bodies. Under this programme, the state bears the cost of employment of specialist analysts who are employed by these bodies. The goal of the programme is to accelerate the increase in investment by Israeli institutional investors in such companies, thus strengthening the connection between the Israeli capital market and the Israeli high-tech industry. On the one hand, the programme lends confidence to institutional investors through state guarantees for their investments, and on the other hand, with time they will develop independent expertise which will grow to become a solid body of knowledge about the high-tech sector. There are other initiatives as well.
Third, I realised I had to promote a diverse basket of initiatives in the technology and fin-tech worlds, knowing full well that some would be more successful than others, but with a constant flow and progress towards the bigger goal. Failure is the best predictor of success, which is why failures never discouraged me, but only accentuated the desire to succeed. In the context of this basket of initiatives we established, together with the Innovation Authority – our ally and partner – the Data Sandbox programme, which invited start-ups with excellent ideas to use the capital market for funding and information, and to do a pilot with the regulator or one of the supervised bodies which would serve as the Beta site. Thus far, we have completed two rounds, and a third round was recently launched. Eight companies from several sectors are already working in this programme, and its impact is significant.
Marketable venture capital funds
We also set up an Innovation Hub whose goal is to gain first-hand information about the technology and the challenges from the entrepreneurs themselves. We met dozens of companies in this framework, and a first fintech company was recently listed for trading on TASE, after years in which such companies preferred to list outside of Israel.
Furthermore, we approved the possibility to list a new financial instrument – R&D partnerships, a type of marketable venture capital funds, which offer retail investors exposure to investments in high-tech companies which are not yet ready for the public market, while the companies gain additional funding alternatives.
Another initiative was to allow all companies listed on TASE to report only in English. One of the aims of this move is to make it easier for Israeli high-tech companies which usually operate in English to list on TASE. We are also in the midst of an IXBRL pilot that will enable reporting in an international standard format used in the US and in Europe, to better connect our market to the global community.
Fourth, I realised that in order to effect change, we must move forward in all of these channels at the same time. And we did.
Indeed, 2020 was the turning point.
In this year alone, 19 high-tech companies were listed for trading, including five R&D partnerships. TASE currently has 136 technology companies listed. An even larger number of technology companies are expected to enter the market this year. I therefore believe, in all modesty, that the vision is becoming reality, and patience pays off.
The technological diversity of the public market is attracting global players to be active in the capital market in Israel, based on the understanding that the focus of the companies’ attention is coming home – to Israel, and anyone wishing to keep their slice of the pie must now take Israel into account.
Obviously, I am not ignoring other factors that have had a dramatic effect on capital markets worldwide in 2020, and contributed to the thriving of capital markets in general, and the technology industry in particular. However, what we did differently was to plant the seeds in time, so that when the rain came they were ready to sprout and grow into a flourishing field. Covid-19 was the rain, and I am confident that at the same time my determination, vision and decision that we must not be discouraged by the chances of failure, coupled with the hard work of everyone at the ISA and our partners – contributed significantly to the beating of the challenge I defined.