Israel is the “Start-Up Nation.” The tiny country has more scientists, engineers, and start-ups, per capita, than any other nation in the world. Numerous Israeli firms have been acquired by leading multinationals including Google, IBM, and HP. Other Israeli start-ups have gone public; more than 50 Israeli firms are listed on the NASDAQ alone.
Israel is also a hotbed of cleantech entrepreneurship. According to a new report from the Cleantech Group and WWF, Israel is the second most innovative country worldwide for cleantech. (Denmark ranked first). “Coming Clean: The Cleantech Global Innovation Index 2012” finds that Israel leads the world in creating cleantech companies and has produced a disproportionate number of high-quality firms.
Israel Cleantech Ventures (ICV) is the leading cleantech venture capital firm in Israel. To learn about Israeli cleantech innovation and ICV’s strategy and investments, I spoke with the firm’s three founding partners: Jack Levy, Meir Ukeles, and Glen Schwaber.
Q: Israel is often described as the “Start-Up Nation.” Why?
A, Jack Levy: Per capita, we have by far the most start-ups, particularly in cleantech. Although Israel is 60-plus years old, the country’s private sector is really young. Its roots are in the 1980s and 1990s. A lot of the dynamism in the economy really comes from that. Another driver is the military experiences that young people go through, which gives them great responsibilities, great opportunities, and a can do attitude. But the driver that is most important and hardest to replicate is cultural, the perspective that failure can be one step along the way. America shares that perspective, but there are plenty of other cultures where a fear of failure keeps very talented people from taking risks or leaving larger organizations to start enterprises. Israel has a risk-taking culture. A lot of it comes from the fact that the downside is not as strong. If you fail, you’ll try to learn from that failure and keep going. People won’t hold your failure as a strike against you.
Q: In what areas is Israel strongest in cleantech innovation?
A, Meir Ukeles: At Israel Cleantech Ventures, we focus on areas that make sense in Israel for venture investing. Generally these are areas where Israel has very strong roots, in traditional energy and water industries. Israel is a dry country with a lot of sunlight and, up until recently, no domestic fossil fuel resources. Not surprisingly, technologies for solar, water efficiency, water treatment, water reuse and, in the last 10-15 years, desalination, have pretty deep roots. Call that one bucket.
The second bucket is startups that draw on technology innovation and intellectual capital out of what would be called traditional technology industries: semiconductors, power electronics, communications, and wireless in particular. There has also been some innovation in energy storage, a lot of which over the years was funded by or benefited from research and development done in the military and in the defense establishment and then, in the last 20 years, has been a hotbed of more traditional venture-backed, for-profit activity. There is a lot of innovation that comes from those roots and finds its way to the biggest problems of our era: resource efficiency, resource imbalances, and the environmental footprint of consumption.
The third bucket is from pockets in which Israel’s traditional industrial base has a lot to contribute. Chemicals are one area where there is a lot of competence, some of which flows to the water industry. Other aspects go to agritech and green fertilizers, herbicides, and pesticides.
Q: Are you seeing more dealflow in agritech? Are you becoming more excited about agritech?
A, Jack Levy: The answer to both questions is yes. The underlying business drivers and the reasons to be excited about sustainable agritech are quite clear. Agritech gets to the heart to what people think about when they think about cleantech: doing more with less. Growing more with less, with marginal land or with marginal water. Increasing yields or designing into seeds the crop protection chemicals that you otherwise need to distribute in old-fashioned and potentially problematic ways. These are massive global opportunities.
Israel has already established itself as a strong source of innovative technologies, both in terms of gene discovery for plant genomics and for breeding. The agronomy community in Israel has been very strong. We have seen large multinationals get active in the Israel market, not only partnerships, but also with acquisitions. Syngenta and Monsanto have consummated acquisitions in Israel. That leads to a virtuous cycle of talent that gets exposed to the ways that these companies work, that stays in Israel and comes back here. Agritech is also an area, like solar and like water, on which the academic community in Israel has been focused for decades. All of this makes Israel very fertile, no pun intended, for agritech startups. We are definitely seeing an accelerated pace for the number of companies we are looking at in this area, with strong, experienced entrepreneurs.
A, Meir Ukeles: We are very interested in the meeting of distributed intelligence technology. Think of the intelligence that you have resident in your smartphone. We are interested in the meeting of that with the needs of modern agriculture. The opportunities to unlock the flow of information offered by the modernization of communication infrastructure are very exciting in terms of what that can offer to the agriculture market.
Q: ICV and Greylock Partners recently invested in Panoramic Power , a start-up pursuing a cloud-hosted energy monitoring platform and service. Why did you make the investment?
A, Meir Ukeles: There are a lot of companies honing in on the opportunity to measure energy consumption in a more effective way and by measuring it, to enable more effective management, discovery, and realization of efficiency gains. Panoramic Power is using what appears to be a really unique sensor technology that enables the company to go all the way down to the individual circuit level to capture the most granular data possible and do so in a way that is very cheap and very non-invasive. It is a self-powered sensor. It is a clamp-on.
A lot of the folks are bringing software only solutions to market because it is a lot easier to develop a software platform that helps the customer understand the consumption of electricity, the components of load in the enterprise, than it is to actually touch the circuit box. Traditional conductive transformers are very expensive. Submeters are very expensive. The other solutions out there are either wired or powered, meaning you need to have some kind of battery, making the logistics and overhead tremendously painful.
Panoramic Power is a classic Israeli story in that it is a terrific blend of power electronics and wireless/RF competence with very strong, large cloud-based analytics capabilities from a number of different and very successful companies. You can imagine RF power electronics and semiconductor capabilities going toward this unique patented sensor, collecting huge amounts of data that flow up into this very powerful analytics platform.
What are companies going to do with that capability? Panoramic Power will allow you to really see, at a very granular level, what is going on in a healthcare facility – or in a clothing store, retail outlet, or restaurant – and understand where there are faults, where there is equipment that is not performing well or other waste. As Panoramic gets more and more data, it starts to become more elegant. It will allow companies to see benchmark-optimized performance rather than the low-hanging fruit of a compressor that is just not working properly.
Q: Israel is a small country and a small market. How do you work with your portfolio companies to cultivate clients in Europe, the US, and Asia?
A, Glen Schwaber: Our portfolio companies are generally led by entrepreneurs who are seeking to do that from the get-go. In cleantech, there is going to be a local Israeli market. There will always be an opportunity for initial beta sales and initial sales ramping in Israel. But it is not the market of long-term interest. After the successful completion of betas, generally speaking, the entrepreneurs look abroad. The European market is close, sensitized to energy efficiency and has great industrial technologies and capabilities. Because Israel is a country of many immigrants, you can tap into a reasonably qualified talent pool that has any language that you need, which is a nice benefit as well when hiring your sales team.
Most of the people we work with bring a network of contacts, even if it is in an industry ancillary to the market they are now pursuing. As ICV, we do a lot of work as well. The three founding partners at Israel Cleantech Ventures are all non-native Israelis. We have our networks and our limited partners, particularly our strategic partners, can be customers themselves. That helps.
Q: You spoke earlier about chemicals. ICV invested in FRX Polymers, a manufacturer of flame retardants. If you look at the portfolios of American cleantech venture capitalists, FRX doesn’t seem like a typical cleantech company. How and why did you invest in FRX?
A, Jack Levy: FRX is a classic cleantech company in the sense that it is looking to disrupt an existing market for reasons that are driven by sustainability and increasing environmental regulation. The halogenated flame-retardant market is getting increasingly regulated. In Europe, I would call your attention to RoHS, the restriction against hazardous substances, which dates back to 2006. And REACH as well, which requires registration of different chemical is having a global impact. The US Congress has also held hearings on halogenated flame retardant additives in recent years.
When you are dealing with these chemicals, you are talking about a global supply chain. Flame-retardant additives go into plastics for electronics. They go into fibers. They go into carpets. They go into the aerospace market. If you are Apple and you are going to try to go halogen-free because of European regulations, then you are going to try to go halogen-free period. So the regulatory drivers are clear.
FRX has a unique non-halogenated polymer for this multi-billion dollar industry. What really got us excited about it is the unique properties that FRX can bring to its customers that we felt could really get them to shift and adopt it over time. Because FRX’s solution is a polymer itself, you can make inherently flame-retardant copolymers across multiple different applications, as opposed to needing to put in additives – whether they are powders or liquids – which is more difficult to do because it may impact the physical properties of the host polymer that you are trying to flame-retard.
Our co-investor in the first round, Capricorn Venture Partners, is a European cleantech fund. The plastics industry is very strong in Europe, withBASF and Bayer. FRX is headquartered in Chelmsford, Massachusetts and is very active in the US as well. The company started out with Israeli investors and one of the leading companies in the halogenated market is Israel Chemicals. Hence the Israeli connection.
Q: Another ICV portfolio company now headquartered in the US is Tigo Energy, which raised another $18 million at the end of last year. Tigo competes with Enphase Energy, which has filed to IPO. What justified the latest investment in Tigo?
A, Meir Ukeles: They’ve been making very strong progress and growing sales volume. They’ve also been doing a very good job at substantiating the value proposition of distributed electronics. It has been fun to watch this market evolve. We started looking at this space in 2007. Five years ago, the conventional wisdom was that there isn’t a need for distributed electronics at the panel level. It is a very different market now. There is broad recognition that for near-term gains in terms of enhancing power output from solar assets, there really is a case to be made for distributed electronics and for managing the solar asset at a more granular level. The longer-term opportunity is going beyond enhancing performance to enhancing the intelligence of the solar asset as part of a smarter grid.
In the near to medium-term, the challenge that Tigo, Enphase, and others face is that with solar panel prices coming down dramatically, they really have to show a compelling value proposition at a very minimal negative drag on overall pricing or overall profitability of the solar installation or else it is very hard to get into a project in the current price environment. What all of these companies have done is make a case that it makes sense at the distributed level to have distributed electronics.
Tigo stands to really break out in doing that and that is part of what has led a number of terrific investors to come into the company over the last couple years. It is led by a very experienced management team that has done great things in prior companies. There is a product roadmap and a vision about working with the forces in the industry, not trying to displace existing inverter or existing panel companies, but really trying to enhance the intelligence and efficiency and output and capabilities of the installation.
GCL Poly, a Chinese solar company, recently put out a press release about their new system offering, which is a GCL Poly module, a best in class SMA inverter, and Tigo as intelligence in the system. For us that is a great thing to see because this has been the theme that we have been hitting all along. Look a few years out. In Germany today, there is so much PV that the grid operators really need capability to control when solar is actually putting capacity into the grid, when they can back it off, when there is too much and when there is too little. Other markets are going to get there. When that happens, there needs to be intelligence in the system and we think Tigo stands a very good chance in playing a part.
Q: You’ve been at cleantech venture investing for several years. What have you learned?
A, Jack Levy: Particularly in solar, the pace at which commoditization can occur can be breathtaking. That is ultimately beneficial to consumers and for the value proposition of solar power. But it makes navigating through the ups and downs interesting. That is one thing that everybody has learned over the past five or six years.
A, Meir Ukeles: Read the WWF’s report. This is going to sound self-congratulatory so I will start with a caveat that there is still an enormous amount that Israel has to prove to maintain its place in the cleantech market.
What we’ve learned over the last five years is something we had a hypothesis about five years ago, which is that Israel is a genuinely unique place to be doing this kind of investing. That is not giving ourselves credit. We are fortunate enough to be here. The WWF study that does a good job at actually parsing data about innovation, about inputs and outputs to innovation, drivers of innovation, and scaling of companies and crunches that data and comes up with a fairly elegant presentation that Israel is a really, really, terrific place to do entrepreneurship and early-stage investing around cleantech.
What we’ve also learned – and this is a cautionary note in the report, which is definitely true – is that early-stage venture investing needs middle- to late-stage follow-on investing in order for the whole thing to make sense. There is still a lot more that needs to be done in terms of bringing this terrific pool of Israeli innovation into the global marketplace, certainly for later-stage capital. One of the trends that has been very good to see is the number of corporate investors coming to Israel and starting to do deals here. We spend a lot of time developing our outward relationships. For example, we have been cultivating a relationship with ABB over the last three or four years as they’ve revived their now incredibly active cleantech venturing activity.
A, Jack Levy : If you were to ask that question to other people in the global cleantech venture community, many people would talk about the shift in business models from more capital-intensive companies to less capital-intensive companies and from generation to energy efficiency. One of the nice things about operating in a smaller market is that we recognized from the very beginning that we were going to need to focus on the things that generally made venture capital work, which are capital efficiency and scalability and barriers to entry that are sustainable for a long period of time but that don’t have to be created by throwing massive amounts of capital at companies. We have generally missed the boom-bust cycle that happened in certain market segments. That said, the pace at which all of the cleantech markets are both growing and changing and the challenges that poses to new entrants is breathtaking.
Q: Fuel cells have been a tough market for investors. But you decided to invest early in CellEra, in which Vodafone recently invested as well. Why are ICV and Vodafone excited about CellEra?
A, Jack Levy: We were excited about CellEra originally because of the founding team. It was a combination of their experience in entrepreneurship and in the fuel cell sector. The founding CTO is Shimshon Gottesfeld, who was involved in fuel cells for the better part of 20 years and was the winner of a Grove Medal. He is a well-recognized global leader in the field. Everybody talks about how much time and effort has been put into trying to get costs down. Shimshon has lived through that. Another founder, Dario Dekel from Rafael, lived through the building of a thermal battery plant from start-up through large scale production. CellEra has a great team that has so far its vision to a T, on time and within budget. It has a first rate go to market partner, CommScope. This has all justified the trust and investment of a very significant potential customer, Vodafone, who has a desire to use CellEra’s product for its back-up power needs.
A, Glen Schwaber: There have been very capable and intelligent investors who have made large bets on game-changing and revolutionary fuel-cell companies over the last 30 years. Our take with CellEra was a little bit more modest in scope and scale. CellEra’s underlying innovation and what Shimshon wanted to build is about cost and about getting a really reliable and stable fuel cell into the market that is not going to revolutionize the global transportation infrastructure and that is not going to change every aspect of the way we live, but is going to take advantage of the unique things that a fuel cell can do… and do it cheap enough so that you don’t have to require your customer to pay a massive price premium to capture those benefits.
Cellular carriers, particularly those operating in developing countries in which grid reliability is an issue, are powering for a significant chunk of every day with diesel generators. If they can replace those diesel gensets with a piece of hardware that doesn’t require them to pay a huge premium up front and is at the same time fueled from a much cheaper, not polluting fuel source subject to less price volatility than diesel, then that has the potential to be a real home run.
Fuel cells are still a very, very challenging technology to invest in. CellEra has a very disciplined, very non-frothy team. It is an ongoing joke at ICV that no matter how spectacularly well things are going, when you ask Dario how things are going, he will grimly say ‘Well, it is not a total disaster.’ They are very cautious folks at CellEra and they’ve executed very well.
Q: The Israeli venture capital industry appears to be shrinking. What is your perspective? How does that impact your work, if at all?
A, Glen Schwaber: There will be some venture capital funds that for generational purposes are definitely going to stop investing. There will be fewer funds going forward. But I also think that there will be a fair number of announcements over the course of this coming year about funds successfully raising and continuing to invest.
A, Meir Ukeles: We are still seeing the identity of the Israeli venture capital industry evolve. I started my career in Israel in 1996 when you had the homegrown funds. Vertex was one of the first funds that had links to global networks. The model back then was that the Israeli fund would be the A round and then they would take it to their network of US funds and European funds for their B and C rounds. Then all of a sudden you started to have American funds set up shop in Israel. Then you had American funds setting up Israel-specific funds. In some cases that has worked smoothly. In some cases, it has had bumps.
There was a time when there was speculation that homegrown Israeli funds had no reason to exist. People asked, “How can they compete with Battery and Sequoia for dealflow?” But I think this is a very people-driven business. It is not just the entrepreneurs but the partners of the different funds. In Israel, you will continue to see an evolving mix of locally-branded funds, locally-branded funds with affiliations like DFJ’s affiliation with Tamir Fishman, and local branches of foreign funds, as well as offices representing foreign funds.
You also have the local flavor of the super-angel wave picking up in Israel. We are seeing far more angel involvement. In 1997-1998, as the bubble started to pick-up, you started to see a crazy number of angels doing deals. But back then it was a much tougher fit. Angels would do a deal or two, get overexposed, and leave companies short. You now have a very sophisticated group of angels now who are value-added investors. Based on my experience in the 1990s, when we started speaking with companies two or three years ago that had angel investors, I was categorically opposed to mixing venture money and angel money. Now I am happily embracing bringing in value-added individual investors who are themselves entrepreneurs. The Israeli venture capital industry is vibrant and lively organism that I do not believe is dying or suffering in any major way. It is natural for some brands to drop off or have succession issues.
Q: We can’t speak about Israeli cleantech for too long without asking about Better Place, in which ICV has also invested. Better Place recently started building 20 switching stations in Israel. How are Better Place’s stations and Renault’s electric cars being received in Israel?
A, Glen Schwaber: There is a steady stream of articles in the Israeli press…
A, Meir Ukeles: …saying these guys aren’t so crazy after all!
A, Jack Levy: Little by little, Better Place is facing the market and focusing on details. What are the terms of the contract that Better Place is offering its customers? For example, Better Place is asking customers to give them notification if they are going to be selling the car. Does that upset customers? Bloggers, the automotive reporting industry, and business journalists are currently doing their reviews of the Fluence Z.E., the Better Place car. The company is now at the moment of giving the cars to journalists to test drive and write reviews. The feedback has been very positive. Look at the stories about Better Place that have been written in the Israeli press. The car drives really well. The switching experience has been very simple. The test will be whether the adoption is going to be broad enough to prove that by disintermediating the battery from the vehicle, you can give people the psychological peace of mind that they have the full range that they need. The software interface that the vehicle has is really cool. The feedback on it has been terrific.
Q: Israel is a hotbed of water innovation. But water is a difficult and uncommon space for venture investing. How do you evaluate water startups?
A, Jack Levy: Very similar to how we look at other startups. But it is harder to find what we are looking for in water. We have done two deals in water, both in wastewater treatment, as opposed to energy efficiency, where we have done four for five. We are looking for something that can be disruptive for a very long period of time and that can scale efficiently and has a profitable business model. The challenge is that getting into a wastewater treatment company, you know you will be dealing with municipal customers. Water is a critical resource and it needs to be treated as such and effluent is heavily regulated. You are therefore going to have a conservative customer and long sales cycle. These are the kinds of things that you need to take into account. You need to make sure that the team you are backing is adept at that and is selling you a plan that is going to scale taking all of this into account.
There are other aspects of the water market which are also of interest to us. We’ve spent a lot of time looking at different desalination opportunities and we continue to look in that area though we’ve yet to pull the trigger. Smart water management is also interesting. Some of the agritech deals we are looking at are at some level about growing with marginal water through manipulation at the plant or seed or gene level. All of this remains an interest. Water is a commodity whose value is only going to increase over time.
Q: ICV portfolio company Emefcy recently raised follow-on funding from Energy Technology Ventures, a joint venture between GE, NRG Energy and ConocoPhillips. What is Emefcy working on?
A, Jack Levy: Emefcy is working on microbial fuel cell technology, with bugs that generate electricity while they degrade the organic content in wastewater. Emefcy was founded by Eytan Levy and Ronen Schechter who were also the founders of AqWise. They are second-time water entrepreneurs. They said that this time they really wanted to get at the core paradox of wastewater, which is that it has high-level energy content within it and yet the biggest cost in purifying it is energy. Technology can potentially break this paradox — that companies are spending all this energy to break down something with organic content, which could potentially be a source of energy.
Particularly for very high, concentrated waste streams that might be extremely expensive to deal with otherwise, this technology has a great deal of promise. Along the way, Emefcy developed a second technology, which is already in pilots, for treatment of lower-concentrated municipal wastewater. It does not generate energy from the organic content but can treat the wastewater in a way that does not require active aeration and therefore requires 90 plus percent less energy input.
Emefcy is getting at the core global problem, that we need more purified water. Israel is a global leader in reuse. Almost 80% of our wastewater finds its way back into agriculture. We do that with efficient treatment technologies. But the biggest cost of those treatment technologies is energy. That is the crux of what Emefcy is attacking, with promise. GE was attracted to the disruptive nature of the Emefcy solution and to a great, experienced team.
Q: You were all born in the US and grew up in the US. What are the challenges of investing in Israel?
A, Meir Ukeles: There can be modest challenges in terms of getting acclimated to a culture that you weren’t born and raised in. That is true of doing business anywhere. I’ve done business in Japan and China and Taiwan and the cultural barriers can be a challenge any time you go outside the place you were born and raised yourself.
That said, I have always found that when doing business in Israel, the benefits of being born and raised in the US have vastly outweighed the drawbacks. This goes back to the mid-1990s when Glen and I worked together at a firm where the CEO was Israeli and everyone else there had been raised in the US. It was terrific to be able to see very early on how that familiarity with US markets and US business culture was a real asset in terms of our ability to work with companies and make good investments. That is true today as well.
Finally, the Israeli entrepreneurial world is international and certainly US savvy. I know of many more Israeli technology entrepreneurs that are able to follow a football game than I ever thought possible. Those gaps have closed in the other direction as well. You have more Israeli entrepreneurs that spent time working at Cisco or Intel or TI and are now back in Israel.
Q: You recently raised a second fund and are actively investing. Are you particularly excited about any specific sectors?
A, Glen Schwaber: In general, we intend to stay focused on technology areas in which Israel has competitive advantages: power electronics, water technologies, green chemistry, optics, algorithms, semiconductors, and others.
A, Jack Levy: I am more recently spending a lot of time on agritech because there are very interesting opportunities that are of immediate relevance. It is an area where we have decided to have a little more of a focus in our second fund.