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Despite war, experts say Israeli high tech investment to stay strong

Posted By David Brinn On July 23, 2006 @ 11:00 pm In | No Comments

‘The bottom line is that the VC business will continue to be very strong. There’s plenty of available capital, a great deal of interest among US venture capitalists and a lot of great deal flow going on.’The current Israel-Hizbullah war may be creating political turmoil for the United States, but for American venture capital funds, Israel is holding steady as a desirable location for high tech investment.

Last week, 40-year-old Boston-based VC firm Greylock Partners announced the launching of the Greylock Israel fund which will invest $150 million in Israeli technology startups. The firm, which had invested in eight Israeli companies through previous funds, said that Greylock Israel is its first fund dedicated exclusively to investments in Israel.

“This is a natural progression of the Greylock Israeli strategy and a result of both a bullish view on the Israeli venture opportunity, and the changing requirements of supporting young companies here,” said Greylock partner Moshe Mor who has relocated to Israel to run the fund from the company’s Herzliya offices. “Successful Israeli technology companies are increasingly focusing on the global markets, and are often keeping their headquarters in Israel. With the launch of a dedicated fund and the strengthening of our local presence in Israel, we are well positioned to support Israeli entrepreneurs wherever they choose to operate.”

A spokesperson for Greylock said the Israeli partners want to put Greylock’s money to work in early-stage companies in fields like information technology, communications, consumer and Internet content, and digital media. The firm’s previous investments in Israeli companies included Red Bend Software, database aggregator HyperRoll, and Siliquent Technologies, a networking company acquired by Broadcom last year. Formed in 1965, Greylock has contributed to the early-stage investments of over 300 companies, including Ascend Communications (now part of Lucent Technologies), Red Hat, and DoubleClick. The firm has assisted in developing more than 125 companies into successful, initial public offerings and, as a whole, has a current commitment of over $2 billion in capital across its investments.

“[The Greylock investment) is part of a trend," Israel Finance Ministry official Roni Hershkovitz told ISRAEL21c.

Venture capital investment in Israeli start-ups in the second quarter increased 12 percent over the first quarter and 4 percent over the second quarter of last year, according to information released last week by the Israel Venture Capital Research Center.

The center, which issues quarterly reports, said 109 high tech companies raised a total of $404 million in the April-to-June period from Israeli and global investors. Israeli technology companies raised $360 million in the quarter ended March 31, and $387 million in the quarter ended June 30, 2005.

In addition, the report stated that the percentage of foreign capital coming into Israeli start-ups was up as well. Israeli investors accounted for only $154 million, or 38%, of the investment dollars coming into new companies. The remaining $250 million came from foreign investors.

"Non-Israeli-VC investors are showing more interest and involvement in Israel," said Guy Holtzman, general manager of IVC Research Center. "We are experiencing a reawakening in the activity of Israeli investment companies and private investors as well as that of foreign investors."

Hershkovitz, in charge of overseas economic information, said that it was too early to tell whether the current situation between Israel and Lebanon would have an effect on future investments. However, he was optimistic that - based on past turbulent periods - foreign investors would make the distinction between the violence on the ground and the fundamental stability of the Israeli high tech industry.

"For example, if you take the Intifada from 2000-2005, or either of the Gulf Wars, we can see that there were certain influences, but they were never dramatic. Foreign investments, especially in the high tech sphere, kept their inflow," he said.

"Assuming that the current situation does not drag out and become a war of attrition, then I don't see any reason why high tech investments won't continue. There's a natural gut feeling for the stock exchange to drop when there are missiles flying, but in the long run, the Israeli economy always proves itself, and is always resilient. That's the rationale to keep investing in Israel; the results speak for themselves. Despite what's going on, Israeli investments are reliable and also stable."

That sentiment was echoed by Isaac Applbaum, a founding partner of California's Opus Capital. In his current position and previously as a Partner and Managing Director for Israel at Lightspeed Venture Partners, Applbaum has extensive experience focusing on Israeli-based investments.

"During the Intifada - which was way worse than what is going on now - prices on Israeli deals stayed completely stable. That means the confidence level in Israeli entrepreneurs and tech companies was as good as it was during normal times in Israel. Therefore, I don't believe the current situation will have any negative effect on Israeli high tech or the VC community," he told ISRAEL21c.

"The only caveat to that is that is that during this time, fewer people will come, which means deals might take a bit longer to close."

Hershovitz also pointed out that the global high tech situation is in a much better position than it was in 2000, a factor which bodes well for Israel's ability to weather the current storm.

"Today, compared to other time periods, the starting point of the global situation is better. In 2000, we had a global high tech crisis, a NASDAQ crisis, and the global high tech market was in a downtrend to say the least," said Hershkovitz. "That's not the situation today, and the global outlook is very important to Israeli markets in general and to the high tech market in particular."

Mark G. Heesen, the president of the National Venture Capital Association in Arlington, Va, told The Boston Globe that firms without any experience in the Israeli market may be hesitant about investing now, but that firms that have invested there in the past will probably continue doing so.

"Anything that disrupts the normal flow of things is a concern. But when has there been a quiet time in Israel? It's part of life there that there's some strife going on. Still, many would say if there's going to be another Silicon Valley anywhere outside the United States, Israel would be the ripest place," said Heesen.

Greylock's spokeswoman Mary Kae Marinac said that potential investors just have to get used to the volatile nature of the region and realize that it won't affect business.

"Venture investing is a business of measured risk. Violence is an unfortunate fact of life at times [in Israel], but it does not change Greylock’s fundamental belief in the strength of the opportunity the country represents,” she told Dow Jones.

Opus’s Applbaum, who recently brought 40 representatives of US pension funds to Israel to learn about investment opportunities, is bullish on the current and future state of Israeli investment.

“The bottom line is that the VC business will continue to be very strong. There’s plenty of available capital, a great deal of interest among US venture capitalists and a lot of great deal flow going on.”

According to the Finance Ministry’s Hershkovitz, it comes down to a difference between short-term and long-term thinking.

“If groups and VC funds are thinking about the long run, and aren’t thinking about short-term profits from one or two months, then the logic says they’ll keep on looking for business opportunities they’ll benefit from. And Israel is one of those places. It’s true for today, and for the future as well.”


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