From the Western Wall to Wall Street

Written By Brian Hicks

Posted July 11, 2006

It has often been said that Israel is the best house in a bad neighborhood. Locked in a state of nearly constant warfare at varying levels of intensity, economic growth could understandably take a backseat to security. Instead, this small country nestled near the oil-rich Gulf States has cultivated its own natural resources – brains.

The Israeli private sector is still a relatively recent creation. Though there certainly have been market mechanisms in place since the state’s founding in 1948, economic policy tended more towards the Northern European social democratic model than towards US-style capitalism.

In science, this meant that like in the Soviet Union, innovation was a good unto itself. Profit was not the goal. Since the 1920s, when the area was the British Mandate of Palestine, the northern city of Haifa has housed the Technion, deemed by many to be the MIT of Israel.

Many prominent Jewish engineers later fled from Nazi Germany to Haifa, finding themselves in a position to incubate the egg of future Nobel-prize-winning science in the shadow of Elijah’s Mount Carmel.

As the entire world has seen a further commoditization of knowledge over the past decades, Israel has evolved into a champion of scientific industry.

 
 
Israel is second only to Canada in the number of national companies listed on Nasdaq. In 2005, twenty Israeli companies chose to list on the London Stock Exchange and its startup arm, the AIM (Alternative Investment Market). That’s quite impressive for a country in what is otherwise the boondocks of the world’s high-tech sector.

But this boom in foreign fundraising is a recent one, with its major roots in the inauspicious bubble years of the late 90s, when internet technologies were a dime a dozen. During that time Israeli technology scored a huge hit in high-tech with the ICQ instant messaging technology that was purchased by AOL and now powers internet conversations worldwide.

This month, I attended a conference here in Baltimore that aims to corral the Israeli startup phenomenon in a more anatomical direction, i.e. biotech.

Say Shalom to Sarb-Ox

Israel is host to a staggering array of climates. In the north you can ski during the winter months. In the south, desert dunes and Bedouin tents eventually yield to the clear waters and coral reefs of the Red Sea. While I sat in a meeting room at the MarketReach America conference, one Israeli presenter asked what the weather was like in DC.

Everyone laughed because the difference is negligible, but given the drastic change in an hour’s drive in Israel, the question was well founded. Even more important and potentially perilous in the States, though, is the change in regulatory climate.

Sarbanes-Oxley, the post-Enron regime for accounting and reporting to which US-listed companies must adhere, has scared away some foreign firms who might otherwise be dying to scroll across the NYSE or Nasdaq ticker. London exchanges, as well as regional markets in places like Hong Kong, have surged in market cap due to the diversion.

In biotechnology, which was the focus of the Medical Devices and Life Sciences conference here in Baltimore, many other, health-related guidelines must be taken into account as well.

As Israeli scientists and businessmen presented strategies in order to attract investment, they were in turn handed packets of information from yankee law firms, whose bread is buttered by ushering startups through the maze of paperwork and due diligence necessary to achieve sound success stateside.

Not only listing requirements but compliance with the US Food and Drug Administration is of course essential. Reams of paper are needed to summarize the totality of a company’s operations. Here is a rundown:

Risk management; clinical research compliance; FDA compliance; reimbursement matters; sales and marketing; intellectual property… and all other contracts and legally germane paperwork must be handy before a good idea can draw the funds it needs to advance.

 

When’s this baby due?

But many of the companies I encountered are not yet at the funding level needed to list. Their operations need more venture capital financing (or as it’s known in Israel, "risk capital") and trials, their corporate relationships with international partners need to be cultivated and honed, and their management is often in need of a physical transplant (or, to continue the biomedical metaphor, a clone) to an office with a US address.

These companies are the new wave of Israeli major leaguers to hit American shores.

I am lucky to be in a part of the country where world-class research institutions like Johns Hopkins University, government bodies like the National Institutes of Health, and deep-pocketed venture capitalists act as a magnet to the next generation of Israeli brainpower.

And when the exciting new technologies I learned about and market movers I met are ready to compile all the lessons they’ve absorbed into ticker-symbol treasures, you’ll be the first to know.

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