Finding Gems in the "Start-up Nation"

by Amy Parvaneh, 02/23/2015

Efforts to identify sound technology investments have led Taylor Frigon Capital Management LLC to Israel.

Investing in Israeli businesses is “part of a globally diversified approach,” says Gerry Frigon, president and chief investment officer of the California-based investment management firm. The firm isn’t necessarily trying to invest in every corner of the world, Frigon says, but is simply looking for investments that make sense and following them.

“And it so happens that it’s Israel,” he says. “We don’t care where in the world, as long as it’s great technology and fits in our portfolio. Our focus on Israel is a component of a broader strategy, and it happens to be an important component, because we think this is where we’ll see some of our most significant returns.”

Taylor Frigon currently has seven investments in Israel. The roster has public and private companies, including ASOCS Limited, a developer of virtual base stations that aims to reduce the cost for carriers to run cell towers. Taylor Frigon is the largest private investor in ASOCS. It also owns shares of EZchip Semiconductor Ltd., which is traded on both the NASDAQ and the Tel Aviv Stock Exchange. EZchip, a $629 million market capitalization provider of Ethernet network processes, is the largest holding in Taylor Frigon’s public Core Growth portfolio.

Israel might sound remote, but investing in Israeli tech-oriented companies “isn’t anything new,” according to Frigon. “There has been a longstanding, mutually beneficial relationship between Israel and the U.S., especially taking Silicon Valley into account.”

Investor, technologist and best-selling author, George Gilder, noted the growing significance of Israel’s impact to the U.S. and other countries in his 2009 book The Israel Test. “[B]eyond doubt is the increasing role of Israel as a prime source of innovations vital to the United States and to the world,” the book says. “As it approached the end of the first decade of the new century, Israel was a global center of microchip, telecom, optics, software, biotech, and medical-devices research, the country’s development and entrepreneurship rivaled only by its partners in Silicon Valley.”

Frigon pointed to Intel Corp. as an example of high-tech and high-profile companies being closely connected to Israel.

“During the early years, especially, Intel’s research and development efforts were largely driven in Israel,” he says. “If you go back to some of the early days of Silicon Valley and tech, some would argue that Israel was right there along with Silicon Valley, for example, in the early stages of semiconductors.”

A book called Start-up Nation: The Story of Israel’s Economic Miracle, published in 2009, observes Israel’s potential for entrepreneurs and opportunities for business creativity. As told by the book, written by Dan Senor and Saul Singer, Israel has continued to prove that its culture and infrastructure are conducive to starting businesses. For instance, data from PricewaterhouseCoopers LLP showed Israel had a sum of 70 exits and initial public offerings worth about $15 billion last year, coming off another big year with the sale of mobile mapping application Waze to Google for nearly $1 billion. Furthermore, Israeli companies were acquired “within an average of 3.95 years,” a “faster pace than ever,” according to data from Dow Jones VentureSource. A 2014 Deloitte survey on venture-capital confidence levels showed that global investor confidence for Israel has increased and ranked second only to the U.S.

Frigon noted that there are risks in investing in Israeli companies, but they’re no greater than investing in any other company.

“The geopolitical side of it” doesn’t worry him much, as it’s “a risk no matter where in the world you are investing,” he says. “That being the case, we’re appropriately concerned about business risk. We conduct due diligence for Israeli companies the same way as we would any other investment.”

It helps that Israel practices similar accounting and other legal or regulatory systems as the U.S., Frigon says.

“The system of accounting, the systems of even basic things like property rights—it’s so similar. Whether we’re investing in public companies or approaching a business through our venture arm, our legal system and theirs are so closely intertwined. Also, often times the Israeli companies are traded on American stock exchanges, like the New York Stock Exchange. And often times you have active operations here, and the executives are always here, too. Israel is such a small country, but companies there are extremely world savvy. Almost all of their business is done outside of Israel.”

Taylor Frigon has recently tapped Jonathan Wornick to help lead the Israel-oriented investments. Wornick, who oversees client relationships in Northern California for the firm, also serves as the regional campaign chair of the American Israel Public Affairs Committee.

“He is one of the most Middle East-savvy individuals we know,” Frigon says. “There’s a personal relationship that we’ve developed over the years. Having Jonathan on board gives us more macro knowledge.”

Taylor Frigon, with the recent boost in the talent base and network reach, is looking to keep close watch on potential investment targets in Israel. Companies sometimes come up in the firm’s screening methods, but opportunities arise mostly through active involvement.

“It’s really about putting your ear to the ground,” Frigon says. “There’s really no magic to it. It’s about the years of experience and putting in the practical efforts, like going to the conferences, knowing who the people are, knowing the experts, and staying connected to them. That’s what’s done it for us.”

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