How we're banking on start-ups
Israeli newcomer Asquith is returning to the old-style merchant banking, priding itself on the Rothschild model
Israel needs a new way of banking if it is to progress beyond its position as a start-up nation. Such a sentiment is sounded by Michael Freedman, founder and executive director of Asquith Israel Merchant Bank, a new addition to the Israeli banking scene.
Israel is well-known for its innovative start-ups - it has more than any other country outside of the US - but there is a lack of money to help them grow into developed businesses. Asquith, which intends to make its first investment this month, aims to do exactly that. It is promoting itself as the first true merchant bank in Israel, providing capital to revenue-generating small-to-medium sized businesses (SMEs) in order to drive Israel's next phase of growth.
Thirty-two year-old Mr Freedman, who made aliyah in 2009, says the Israel start-up culture "110 per cent" necessitates a different way of investing if it is to enter its next development phase.
"There is a phenomenal venture-capital culture and a phenomenal early-stage business culture but there is very little money in the market that encourages entrepreneurs to grow a business." Unlike VCs, which tend to invest early on, Asquith will invest in companies that are more mature and entering the growth stage.
Mr Freedman wants to address the "short-term mentality" of Israelis, who he says are famously very exit-driven. "It's a chicken-and-egg scenario. Funding tends to favour those seeking a quick exit by those seeking to make a quick buck, furthering the exit-driven atmosphere, and so the cycle goes on."
The bank is returning to the old-fashioned way of merchant banking, modeling itself on famous Jewish predecessors; the Rothschilds. Indeed the bank's location on Rothschild Boulevard in Tel Aviv no coincidence.
The principals behind Asquith are well-known in the Israeli business world. There is Shmuel Ben-Tovim, the former economics minister at the Israeli Embassy in London and a non-executive director at Bezeq, Israel Chemicals and Bank Leumi. And Eial Diskin, a high-tech veteran who heads International Business Development Consultants (IBDC).
In its first round Asquith will invest around $4 million in four selected tech-focused SMEs: IT security firm Gamasec; CartaSense, a sensory technology firm; agricultural company Aqua Era Farms, an operator of recirculation systems that enable production of quality, eco-friendly fish, and medical devices company Vaica Medical.
Aquith is approaching affluent Jews in the UK, US and Canada, or as Mr Freedman puts it: "middle-class investors that are pro Israel and might have a holiday home here but that is the extent of their investment in Israel because there is no other vehicle for them to do so." The minimum investment is $50,000.
Technology has made starting a business easier than ever and the Israeli start-up scene continues to get stronger. Yet Israel struggles to turn its start-ups into big companies - many sell out at an early stage. Its most promising companies are often bought by major firms in the US causing many Israeli entrepreneurs to relocate there.
But British-born Mr Freedman believes his model can stop this "brain drain" in turn breaking some of the shackles of its economic dependence on start-ups and a handful of very large companies.
"Instead of being bought and relocating we are offering entrepreneurs the option to be bought into a local company likes ours, giving them the opportunity to retain all of the jobs and create new ones locally."
Mr Freedman believes this model will improve both the Israeli economy and society. "In Israel there is not this culturally-rich middle class that we are used to seeing in the UK, and that impacts on society as many of that factors that stabilise society come from the top end of the middle-class.
"Our philosophy is to help build that and then Israel will become a better place, culturally rich and vibrant.
"When we looked into how to do this we established that a key driver is having a lot of the workforce in SMEs. The better you build that middle ground of companies, the stronger the middle-class gets and the better that is for society.
"We want to fill the gap by investing in companies that hire for the long-term - and from all sectors including Charedim and Arabs."
Is Asquith not rivalling VCs? "No. They are not good at getting involved in later businesses. The average age of those walking through our doors is mid-30s to 40s. These are people that are on their second or third company and this is the one they want to grow."
Asquith will provide capital alongside advisory services on corporate finance and business development.
Mr Freedman says investors are getting "medium risk for high return compared to relatively low risk and low returns in private equity, and relatively high risk and high returns in VCs." The bank expects to perform as well as, or better than, private equity of venture capital funds.
Mr Freedman studied at Sheffield University. He then set up a corporate finance company before moving to Israel. "The more I understood the Israeli market, the more I realised that the thing to do was create a new model.
"There is no market for being a broker here, and there is very little that happens outside the VC industry. Rather than that being a problem, it showed there was an opportunity to create a new investment product."