Helping Israeli innovators bring fresh tech, ideas into the market

Steve Rhodes

By Repps Hudson, Special to the Light

Steve Rhodes, chairman and CEO of The Trendlines Group, a start-up incubator in Israel, stopped by the Jewish Light’s office earlier this fall after attending an investors conference at the Danforth Plant Science Center. A native of suburban Chicago, Ill., Rhodes, 57, made aliyah to Israel in 1985 and lives in Shorashim, in the Galilee area about 15 miles south of the Lebanese border. He and his wife have three adult children. He graduated from Harvard in 1978 with a bachelor’s in Jewish history and philosophy and from the University of Chicago with an MBA in 1984.

What does The Trendlines Group do?

ADVERTISEMENT

We are an early-stage investor. We create companies based on technology. We invest in two areas: medical device technology and agricultural technology.

Give me examples.

We do cardiology, including valves, surgical tools, orthopedics, everything. It’s across the board.

Is your company catching the wave of “Start-up Nation” [by Dan Senor and Saul Singer] we’ve heard about? That book says Israel has an edge on certain kinds of innovation and technology.

We started as a business development firm. Over the years, we evolved. We realized the services we were selling to young companies could be a lot more profitable if we invested those funds in our company. We started investing in young companies about seven years ago. Five years ago, we bought two incubators. We have been working at investing ever since.

The incubator system in Israel is not new. It’s been around about 20 years. It’s a big part of the high-tech ecosystem in Israel. A lot of the young technology companies originate in incubator companies before they become part of the start-up nation, raise money and hit the market. 

How does an incubator work?

In Israel, an incubator is a place that’s privately owned. In addition to office space, incubators provide value-added services. When we start a new company, we invest about $650,000 directly into the company. It’s for everything: salaries, the subcontractors, to develop a product and help to bring that product forward.

We also invest a significant amount in support services. The company is physically located in our facilities. We provide a range of services: bookkeeping, legal, accounting. We supply support services that increase the chances of succeeding, like business development, strategy consulting, investment banking, technology consulting. Everything we do is about mitigating risk. We invest at the very earliest stage when the risk is the highest.

How many companies do you have in the incubator stage?

We start between eight to 10 companies a year. We have 60 companies in the portfolio. Of those 60, 17 are in early revenue, two are publicly traded on the Tel Aviv stock exchange. There’s a range from companies that are very, very young to companies are that are already selling. Eventually we hope to monetize the investment through a public offering.

How many companies like Trendlines are there in Israel?

Twenty-three government-licensed companies like ours. Part of the risk mitigation we have is the funding we get from the government. If we invest $650,000 into a company, 85 percent comes from the government as a grant. We also invest another $330,000 to $350,000 indirectly in the support services we provide. That comes out of our pocket. 

You’re privately held and don’t have to report your earnings, but can you give your annual sales?

Our goal is to sell two companies a year. If we can sell two a year, we will be extremely profitable. We are only now getting to the stage where we can begin selling companies. Last year, we had our first exit.

You aren’t getting much return yet?

We’re living off the capital we’ve raised.

These companies haven’t been tested in the market.

That’s right.

Where do you find investors?

Some people invest in Trendlines itself. Most of our investors are high net worth individuals. Most are U.S. based. We have some Israeli investors. Many invest because they believe they’ll realize a very nice return but also to have access to our portfolio companies, to get an early look at our portfolio. That’s the second source of money we raise. We are also constantly raising money for our portfolio companies, which are very thirsty for capital. Invariably, after 12 to 18 months, companies are back in the market to raise additional money. At that point, we become very involved in helping them raise the capital. We go to strategic investors, private equity firms, angels, wherever we can find investors. 

Are your shareholders primarily Jewish?

They are, but I don’t think anyone invests in us because it’s Israel. These are sophisticated investors. They evaluate the investment like any other they would make. We have some non-Jewish investors who are familiar with the industries and like what we are doing. They see us as a platform that gives them access to a lot of technology easily.

How receptive are people in Middle Eastern countries to investing in your and similar Israeli companies?

There’s no simple answer. In the commercial world, for example, in Turkey there’s a lot of trade, despite the politics. There’s a lot of trade between Israel and the [Persian] Gulf states. On the other hand, it’s more difficult than it used to be. In today’s environment, many people think it’s too risky. For an Arab person looking to do business with Israel, I don’t think the risk is with Israel. It’s about their domestic politics and what being identified with doing business with Israel will do to them.

Makes the future sound kind of grim, doesn’t it?

We are always optimistic. In terms of international business, we don’t see any reluctance. This year, I’ve met with two or three dozen multi-billion dollar companies that want to have an Israel strategy. In the medical-device industry, studies estimate that one third to one half of all medical-device innovation comes from Israel. If you’re a company in medical-device industry, if you’re not exposed to what’s going on in Israel, you’re missing a lot of the innovation. 

Do you worry about patent theft?

Not really. The world is a big place. Most of our company sales are to Western Europe and the United States. If a Chinese company were knocking us off, there’s still enough of a market in the United States and Western Europe. There’s a steady stream of Chinese businessmen coming to Israel looking for technology. They realize they’re really good at engineering and production, but they are not very good at innovation. They are looking to develop partnerships with folks like us.

What accounts for innovation in Israel?

Part of it has to do with the government having withdrawn from the economy in a big way. When I moved to Israel in 1985, the government controlled 75 percent of the economy, directly or indirectly. There was no venture capital at all. In the early 1990s, the government did several things that jump-started the economy. It withdrew from controlling the economy. It provided financial incentives to create, overnight, a venture capital industry. The government was a seed investor for venture capital funds, to reduce risk and get funds established. The government provided incentives to draw investors into this early, high-risk investing.

Part of it is that we’re a nation of immigrants, and we’re a very small country. We don’t have a domestic market. We are very externally focused. When we start a company, the business plan from Day One is 100 percent export focused. We are very into cooperation, strategic partnering, leveraging what we do well, which is innovate, with what other people do well, which is market and bring product to the world. 

Does compulsory military service have an impact on young Israelis’ readiness for the workforce?

The army has an important role because it teaches young people to take initiative. Young people at a very early age get tremendous responsibility. They learn to experiment and even to fail. You have young people when they get out of the army and go to university have experience managing teams of 30 to 40 people. It’s an easy transition into civilian commercial leadership.