A couple of months ago, a clutch of partners from prominent Israeli venture firms landed in Bangalore to swap war stories, and pick out synergies between a product-heavy Israeli market and the service-provider Indian market. Partners from Concord, Vertex, Tamir Fishman, Israel Seed, and Giza were working the circuits of India’s Silicon Valley, essaying a new platform of cooperation between the two countries.

Envisioning a true collaboration of Indian world-class services and Israeli innovative products as a juggernaut in conquering the global market, the team is hammering out an Indo-Israel cross border fund. Nechemia Peres, President of Israel Venture Association is explaining, “Such a cross border fund provides a unique opportunity to forge symbiotic collaborations between the Israeli product manufacturing and the Indian IT services to look for a global market.”

To Twist a Tale
Gary Benton, an attorney at Coudert Brothers law firm, who has been examining the Israeli venture capital industry for a decade, explains, “With Israel’s small population, the Israeli portfolio companies must set up U.S or European sales offices to reach sufficient number of consumers to return a profit, and most Israeli funds must look to U.S. or European markets for public offerings or M&A exits.” The joint venture would provide a new avenue to the diminishing Israeli IT sector, which needs global markets beyond the U.S.

Baruch Gindin, Gartner’s Managing Director for Israel and the Middle East echoes Benton’s views. “India is threatening the Israeli market in the IT industry. Israel is no longer unique in its ability to provide quality and advanced services in the IT industry. India is stealing much of this potential income from Israel,” says Gindin.

Like Benton and Gindin, many of the Silicon Valley VCs observe that Israeli VCs are confined to limited investments in their country, due to saturation of the market. This has made Israeli VCs’ market-claustrophobic. In an attempt to keep the VC ball rolling, Israeli capitalists are foraying into new and emerging economies like India. And in the recent years Israeli engineers who were paid 70 percent of their US counterparts were dropped for Indian and Chinese engineers to cut cost nearly by 40 percent.
All these hindrances have impelled Israeli VCs to turn abroad and trace the American trail of investing in foreign lands where the return on investment could be significant.

Leading Light
As Israeli VCs explore the Indian market, they are witnessing a trend wherein U.S. VCs are compelling their portfolio companies to execute R&D work out of India. Today there are more then 60 U.S VC funds operating in India and it is estimated that the U.S fund commitments for India are over $2 billion. In the last one-year alone, five U.S. VC delegations visited India to gauge the talent and test the compatibility of research works.

Following the American footsteps, today, Israeli VCs are also pushing their portfolio companies to setup R&D centers in India. “There is a serious need to model a start-up as a true multinational from the first day of activity. By doing so, some of the R&D stages of young companies will take place in India itself, which is where the products will be channeled to,” comments Peres.

The strategy to wed Israel’s technological skills with Indian technical talent pool seems to be working. Today, there are at least eight technology companies in India, which are funded by Israeli VCs (see table). The eight companies put together employ 3000 Indian engineers.

To lose or not to Lose
Although the Israeli VCs have made the first step towards investing in foreign lands, it is believed that business between India and Israel is not possible, but needs to be proved viable in the coming years.

“Israeli companies have established a base in India with clear intentions of leveraging the business processes and this can help both countries to boost their revenue and compete in the global market,” said David Keynan, Managing Partner of Intel Capital, in a recent siliconindia VC summit.

Albeit Israel’s small market, Indian IT industries can still sustain a good return through Israel-related free trade negotiations in the Asian continent, by which, India can deliver its services across the major markets in Asia and the world.

Currently Israel has had a series of discussions with the Government of India to set up this fund that will focus on technology companies. “So far, we haven’t had much of success in our efforts. This is because this concept is relatively new and we are putting in more efforts,” said Mouneer Agbariya, First Secretary, Embassy of Israel during his India visit. Besides, siliconindia has also learnt that VCs on both sides have drawn up blue prints for three cross border venture funds, which will be announced in the next couple of months.