Mind to Market

Sunday, February 17, 2008

Early Stage Funding in Israel

I had coffee recently with Amir Genosar, a very talented and creative Boulder entrepreneur. Amir has no less than three medical device start-ups underway; including aespironics and SteadyMed.

Having started his career in Israel, Amir now calls Boulder home. Why then does he, while surrounded by Boulder's angel and VC investors, still rely on Israeli investors to fund his businesses? Amir contends that Israeli investors are willing to accept more risk in return for lower valuations. These investors are more interested in the technology, even if unproven, than they are in the business model.

A business plan submitted to an Israeli investor for early stage funding must be heavy on technology and light on marketing and business model. How could this be? Are Israeli investors that unsophisticated? I have a few theories: there are many sources of funding for product development in this country such as the federal SBIR and STTR programs, state funding programs to commercialize university IP, corporate R&D or the entrepreneur's own resources. If a product does not receive funding from one or more of these sources, how viable could it be?

There are certain categories of products that provide exceptions to this. In new and evolving markets such as Web 2.0/social networking where products traverse their entire life cycle in a period of weeks, investors may take on less developed products simply to get in on the action. No federal program could possibly keep up with the pace of development in this arena, but the impressive valuations of Web 2.0 companies are hard for VCs to ignore.

In categories such as medical devices and enterprise software however, the number of developed products is high providing ample opportunities for investors to forego the risk of product development. Although valuations are higher, more capital is available than in a small country such as Israel.

It wouldn't surprise me that Israel does not have government programs that support commercialization and that this is a role taken on by private investors. Given the non-dilutive product development resources available to the entrepreneur in this country it may be less desirable for the entrepreneur to go the Israeli route.

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