Venture capitalists who invest in Israel say deal flow and fund-raising are up, and there’s enough emerging technology to sustain it.After a three year drought, there are encouraging signs for the venture capital market in Israel. And investors in the United States are standing up and taking notice.

In recent months, senior executives in large corporations, such as Eastman Kodak, Royal Philips Electronics, EMC Corp., and BMC Software; research firms like Forrester Research and Gartner Group; foreign venture capital funds and representatives of institutional investors, have been visiting Israel and are looking to do business.

Venture capitalists who invest in Israel say deal flow and fund-raising are up, and there’s enough emerging technology to sustain it.

“Despite the geopolitical issues, despite the decline in the global markets, the companies who always benefited from investing in Israel continue to invest,” Shuly Galili, executive director of the California-Israel Chamber of Commerce, told Private Equity Week.

Galili will be leading a dozen U.S. and European VCs on a tour through Israel in March – companies in the market for capital, and signs indicate they may be the first to score in Israel’s next investment boom. Funds participating in the visit include Venrock Associates, Accel Partners, Bessemer Venture Partners, Lightspeed Venture Partners, Matrix Partners, US Venture Partners, Vertex Venture Capital Group, and Vertex Management Europe.

Vertex Management Europe president Yoram Oron confirmed the trend of VCs once again looking to Israel, telling Globes, “You have to look at the big picture. Technology is fashionable again in the public markets. Venture capital has again become a legitimate investment tool in Western countries and in the Far East. Israel is still one of the 10 most important investment targets, and that requires visits.”

Gemini principal Jonathan Saacks said it’s true that quite a few foreign investors are visiting Israel, although many of them are Jews. He adds that US investors want to invest in all fields: “There are private equity funds raising money, in which people invest without doing thorough research. The venture capital field is heating up, and US funds are looking for partnerships in Israeli companies and funds. The concerns that cut back on their investments in recent years are waking up. They have to make money and high returns, and they don’t have many alternatives.”

At the height of Israel’s technology boom, in 2000, 513 companies raised $3.09 billion. That amount fell steadily over the next few years, in tandem with U.S. venture capital markets.

Israel’s Internet startups were the hardest hit. While 102 Internet companies garnered attention in 1999, raising $330 million, 14 Internet companies raised venture capital last year in rounds totaling $41 million.

Israeli investors responded in the same way as their U.S. and European counterparts – by sorting through their portfolios and sustaining only the companies that had real chances of surviving a boom-and-bust technology cycle.
In 2003, mid-stage companies attracted the most from venture capitalists, accounting for 47% of the total capital raised last year.

“First, our competitors have become risk-averse. They are still licking their wounds from the crash and are afraid to put capital at risk,” Micah Avni, a general partner with Jerusalem Global Ventures, an early-stage investor in Israel, told Private Equity Week. “Second, there is a real shortage of capital in the Israeli marketplace, so most funds are reserving what little capital they have left to support their existing portfolio companies.”

Now that the stock market is coming back and corporate spending is up, venture capitalists are coming out of the dark. This time around, investors see seed-stage opportunity.

“We are in the process of funding a company that has literally been coding in their garage for the past two years,” Avni said. “They are signing an OEM agreement in parallel to the funding. It puts the thrill back in the business.”

According to Eli Wurtman, the head of JVP Studios – a Jerusalem-based venture capital fund – the rebound goes beyond VC.

“The start-up market is picking up again, and there’s a tremendous amount of activity after a long time of being quiet,” Wurtman told ISRAEL21c. “We ran an advertising campaign – a joke really – for a week on ynet (An Israeli news site) saying ‘The road to NASDAQ starts in Jerusalem’. And we got more than a 100 responses! People are coming out of their bunkers again and the shell shock is passing.”

Last year, 372 Israeli companies raised $1.01 billion in rounds of venture capital. And among those, 37 were seed-stage companies, which raised $58 million, according to the IVC Research Center in Tel Aviv. (IVC surveyed 125 investors, including 66 Israeli-based VC firms and 59 foreign investment groups.)

While that’s a sharp decline from 1999, when about 110 seed-stage companies raised over $300 million from investors, it represents a jump over 2002 numbers, indicating that the slump is nearing an end. In 2002, seed-stage companies raised only $23 million.

10 Israeli venture firms are in the market raising new funds. “We forecast they will succeed in raising $1 billion in 2004,” said Zeev Holtzman, chairman of IVC Research. “Therefore, we foresee an increase in the pace of technology investments in light of the more buoyant capital markets in Israel and abroad.”

Motorola Ventures put a man on the ground in Israel last year, so did Nokia Ventures. Greylock is said to be making a new push into the country’s wireless sector. Jerusalem Global Ventures is currently negotiating terms sheets with three seed-stage companies. After closing four early-stage deals last year, Gemini Israel Funds is planning to close three more in the first quarter. And deal flow is picking up.

“We have not seen stronger deal flow in years,” said Tali Aben, a general partner with Gemini in Palo Alto, Calif.

Venture capitalists are seeing activity in enterprise software, network security, data storage and wireless technologies. They’re also reporting some activity in life sciences, especially in the formation of new medical device companies.

“People have been sitting on the sidelines cooking up ideas and waiting to better understand the market dynamics,” Aben said. “Now there’s an awakening in the venture capital market.”

One of the partners in the major venture capital funds told Globes that the Americans had gotten used to the situation. They don’t travel to Jerusalem, and they can usually distinguish between Herzliya Pituah and Hebron. The partner commented, “They come for a few busy days of meetings, because they have no choice the market situation forces them to. Israel has kept its status as a preferred investment target. As Dr. Yossi Vardi once said, ‘Israeli high-tech is Nasdaq-oriented, not Nablus-oriented.'”

JVP head Wurtman agrees that perceptions are slowly changing, as everyone adjusts to a different reality after three years of violence and economic uncertainty.

“In terms of the situation, people have gotten used to it on both sides. We’re working again. In Europe especially, there’s still the perception of things being unstable here, but the technology speaks for itself, and the interest is there. There are still issues but people are getting over it.”