Venture Profile: Rami Kalish, Pitango Venture Capital

By Angel Mehta, Managing Director, Sterling-Hoffman Executive Search

Angel Mehta: Israel seems to have a burgeoning venture capital industry; how did it come about?

Rami Kalish: At the end of '92, perhaps near the beginning of '93, the Government of Israel initiated an incentive program called YOZMA, to stimulate private venture capital...I don't know if you've ever heard about it?

Angel Mehta: Never…

Rami Kalish: YOZMA, in Hebrew, stands for "Initiative" and it may be one of the few cases that I know that a government-founded business initiative was actually successful. Prior to '92 you had maybe one or two investment firms, and you wouldn't call those venture capital firms. What the government did in order to encourage entrepreneurs to start a new industry in Israel was actually provide them a program for loans or investments that you could repay over 5 years with normal interest and small upside. It was a great incentive to raise money.

They did it for only ten funds, but one of the funds that received approval was mine. The first fund of the Pitango Group was Polaris. We started Polaris in July of '93 together with Dovrat Shrem Group, a private investment house, and the total size of the fund was $20 million, out of which $8 million came from the government. The fund was very successful so of course we happily paid back the loan that we got plus all of the interest and the portion of the upside. This is how we started and really it's the story of Venture Capital in Israel. Most of the leading venture capital funds were financed by the same program in the beginning.

Angel Mehta: Why do you think that the Technology sector has blossomed so much in Israel? It seems like a number of Silicon Valley-based venture capital firms have setup shop over there….

Rami Kalish: Some are setting up shop, but most are co-investing with us and other Israeli funds. But to answer your question, I think Israel is one of the key hubs for technology innovation outside the U.S. There are just a lot of good ideas that seem to be flowing here, feeding the venture capital industry.

Secondly, there is an entrepreneurial spirit within the people here. They have the guts to try and aren't afraid to fail.

Angel Mehta: A key personality trait for entrepreneurs anywhere, I suppose…

Rami Kalish: Yes. If you to compare the average Israeli engineer to the average European engineer - I'm just using Europe as an example right now - I think you'll find that a higher percentage of the European engineers are more likely to be happy going to work for siemens or Nokia… they're very happy with their standard of life, the time they have for themselves, the family and vacations etc., and that's fine. However, Israelis tend to be more aggressive and ambitious about the targets they set for themselves.

Angel Mehta: You mentioned the strong flow of ideas… where does the technology innovation come from?

Rami Kalish: Three sources, I'd say. First, Israel has a strong focus on Science and Academia. Second, many of the technologies that were developed for the Defense Industry were later spun-off and are being commercialized. Of course, it's never the same application but many times it's the same underlying technology. Third, the immigration flow of Jewish people from Russia, or the ex-Soviet Union, is quite high. Many of them were highly educated in science and technology and they brought a lot of know-how in physics, basic science, optics, materials and all those are very relevant to different industrial sectors.

Angel Mehta: What are some of the differences between the dynamics of venture capital and early stage investing in Israel, vs. Silicon Valley?

Rami Kalish: They are very similar, however, there are some basic differences. One is that we're forced to think globally from day one. We do not have a local market. In many cases the first market is not the U.S…it may be Europe or Asia Pacific. Therefore, you will see that Israeli startups are exposed to the different international markets sooner than U.S. or European companies. A U.S. company can be very successful just focusing on the local market. A German company could be very successful doing business only in Germany for the first five years or so. We have no choice but to go international. I think it is going to be one of our advantages, long-term, because today everyone realizes that you need to have a global strategy.

Another difference is that, in general, the cost of operating in Israel is lower than in the U.S., and therefore the cost to build a product will usually be lower. The amount of money invested until you have the product ready will be lower and therefore, in most cases, the valuations will be lower.

Another difference is that, in general, the cost of operating in Israel is lower than in the U.S., and therefore the cost to build a product will usually be lower. The amount of money invested until you have the product ready will be lower and therefore, in most cases, the valuations will be lower.

Angel Mehta: Do you have or do you participate in deal flow from Silicon Valley?

Rami Kalish: Not really. Our business model and charter from our investors is to do Israeli-related deals, so we need the deal to have an Israeli Nexus. I want to differentiate between, let's say, the legal structure of the company and where the deal is coming from. Many of our companies are officially based in the U.S. because we thought it makes more sense to register them as a Delaware Corporation. So from that perspective, yes, we invest in U.S. companies.

But from a deal flow point of view, our deals come from Israel and from our Israeli network outside of Israel, mainly in the U.S. There are many Israeli entrepreneurs residing in the Valley or on the East Coast who have graduated from great schools in the U.S., and have held different positions in some of the large U.S. companies. In fact, we have a Silicon Valley office in San Mateo and we source deals from our Israeli network over there.

Angel Mehta: How do you find the talent pool of Business Managers…is it easy to attract the right CEO?

Rami Kalish: It's not as developed as the U.S. because we are lagging ten years behind…

Angel Mehta: It's a young industry….

Rami Kalish: …yes, it's a younger industry. You know, in the same way that I spent seven years outside of Israel, all of the nine partners in Pitango have lived outside of Israel, studied outside of Israel, or worked outside of Israel for many years. This is typical to other firms and/or high-tech companies that are based here. So the new generation of managers in Israel is really a generation that grew, studied, worked outside of Israel and in the last ten years. Definitely the management pool in the U.S. is significantly larger, and we also have U.S. or European managers in our companies, but the local talent pool is improving. Eventually, we'll catch up - it's only a matter of time.

Rami Kalish is the Managing General Partner and Co-Founder of Pitango. Rami has extensive experience in Venture Capital and international management in the high-tech environment. He has been active in the field of Venture Capital since 1992, and has served as Managing General Partner since that time. Prior to founding Pitango (originally under the name Polaris), Rami garnered rich managerial experience at high-technology firms in the U.S., Europe and Israel. He previously held sales and marketing positions at IBM and senior executive roles at Orbotech (NASDAQ:ORBK), a leading manufacturer of capital equipment for the PCB and semiconductor industries. He can be reached for feedback at rami.k@pitango.com

Angel Mehta is Managing Director of Sterling-Hoffman, a retained executive search firm focused on VP Sales, VP Marketing, and CEO searches for enterprise software companies. He can be reached for feedback at: amehta@sterlinghoffman.net