Israeli firms catch attention of investors

After the United States and Canada, Israel has the most companies traded on the Nasdaq Stock Market.Political violence in the United States and abroad this year has done little to discourage migration of Israeli technology firms to the Washington, D.C. …

After the United States and Canada, Israel has the most companies traded on the Nasdaq Stock Market.Political violence in the United States and abroad this year has done little to discourage migration of Israeli technology firms to the Washington, D.C. area.

The number of Israeli-owned high-tech companies in Fairfax County has more than doubled, to 20, this year – bolstered by the creation of two government-affiliated groups designed to entice Israeli companies to Northern Virginia. Newly arrived Israeli firms have created about 250 new jobs in Virginia this past year, according to a state agency.

And while most businesses are curtailing travel to the Middle East, some of the area’s well-known venture capital firms – including Mercator Broadband Partners Ltd. and Friedman, Billings, Ramsey Investment Management Group – officially opened branches in Israel this year to keep a watchful eye on promising Israeli start-ups.

This comes despite a 60 percent drop in investment from a year ago in Israeli companies, which have been just as battered by U.S. stock market gyrations as this country’s tech sector, according to D&A Hi-Tech Information Ltd., a research firm in Israel. After the United States and Canada, Israel has the most companies traded on the Nasdaq Stock Market.

“It’s going to be more difficult for people to get financing,” said Lior Samuelson, managing partner at Mercator Broadband. “But the successful company that’s well funded will make its way to the United States.”

Israeli presence in Washington’s high-tech sector is nothing new. Ever since America Online bought Tel Aviv-based Internet-messaging company Mirabilis three years ago for $287 million, Israeli companies have flocked to the region, a well-established telecommunications hub.

But investment in the most recent batch of arrivals appears counterintuitive, given the softening economy, the uncertainties created by the one-year-old Palestinian uprising, or intifada, and the Sept. 11 terrorist attacks. Jittery investors may think twice about boarding a plane these days for face time with firms based in Israel.

“Travel is very important, because at the end of the day one invests in people,” said Oded Lieberman, president and chief executive of Proteologics, an Israeli biotechnology firm that plans to open an office in Fairfax County next year. “You have to sit eyeball to eyeball to gain confidence in the management team.”

Yet the problems have also created opportunities for Israeli firms, said experts who track Israel’s economy.

Fear of business disruption prompted many Israeli firms this year to set up shop in the United States, traditionally the largest market for Israeli high-tech products, said Ralph Robbins, executive director of the Virginia Israel Advisory Board, an arm of the governor’s office created to strengthen the state’s ties with Israel.

“Prior to the intifada, companies were not as concerned about getting orders filled if they were produced in Israel,” Robbins said. “Now there is more concern about getting orders produced or receiving products.”

The Sept. 11 terrorist attacks also heightened demand for technology that emerged out of the Israeli military’s needs. Having fought three major wars within 20 years of its creation, Israel fended for itself by developing military technology that laid the groundwork for civilian spinoffs.

But Israel – a country the size of New Jersey – must look outside its borders for its market. Though it is home to only 6 million people, Israel has 3,000 start-ups – one for every 2,000 inhabitants, according to the McKinsey Quarterly.

“A lot of the services and products they’re marketing are commercializing their defense technologies,” said Gerald Gordon, president and chief executive of the Fairfax County Economic Development Authority. “These kinds of products have become increasingly important in the United States, and being in Washington to sell them makes infinite sense, especially after September 11.”

Fairfax County has been making this pitch to Israeli firms independently and through the U.S.-Israel Business Exchange, a joint venture between the Embassy of Israel and local companies launched last year to promote deals between the United States and Israel.

In exchange for U.S.-Ibex’s connections, the county provides the Vienna group with free office space and telephone and fax lines, Gordon said.

Together, the agencies are trying to woo companies away from the more traditional high-tech regions such as Silicon Valley. They highlight the federal government presence, the cheaper cost of living, a plentiful supply of tech workers, and the seven-hour time difference between Washington and Israel, as opposed to California’s 10-hour lapse.

“We see the greater Washington area as being one of the top three regions in the country for attracting Israeli companies,” said Dan Epstein, executive director of U.S.-Ibex. “In the next few years, it could possibly become number one.”

But that doesn’t mean the fledgling companies could escape a poor economic climate simply by opening a U.S. office.

Already this year, Trellis Photonics, a Columbia fiber-equipment maker with Israeli roots, shut down its U.S. operations, citing the economic slowdown.

After acquiring Israeli-founded Chromatis Networks Inc. for a whopping $4.75 billion, Lucent Technologies Inc. shuttered the Herndon optical-networking company in August, again citing the economic downturn.

George Abraham, senior managing director at Friedman, Billings, Ramsey Investment Management, said these setbacks are no reflection on the potential for Israeli firms.

In a joint collaboration with Israel Infinity and Clal Holdings, FBR closed a $60 million first round of funding in Israel last month and expects a big bang for its buck.

“The valuations [for high-tech companies] have come down drastically, which makes it even more attractive to invest,” Abraham said. “We’re looking at a five-to-10-year horizon.”