Investment is down, but so are valuations and burn rates for promising startups.On the face of it, Israel’s venture capital industry has collapsed from the best of all possible worlds to the worst times imaginable. Just yesterday ? 1999-2000 ? the industry seemed to be enjoying an idyllic golden age: New venture funds were raised daily to target Israeli startups, Wall Street bankers competed to lock up the latest Israeli IPO, and most bright young Israelis either were ? or dreamed of becoming – VCs or high-tech entrepreneurs.

This has been replaced, so it appears, by devastation: Hundreds of companies have already closed, many more are in trouble, there are no exit signs in sight and fund raising is nearly impossible.

In the late 90s, technology-hungry global investors identified Israel as a veritable Holy Land for technology startups. The pool of overall funds available increased 220-fold during the 90s. In the last two years of the decade alone, Israeli venture funds raised $5.5 billion, or $1000 for every Israeli man, woman and child; more than 1400 new companies were funded; 34 Israeli companies had IPOs on leading U.S. and European stock exchanges; and merger and acquisition deals involving Israeli companies generated $14 billion in value.

However, as with most booms, this one, too, brought with it significant excesses. The frothy environment led many VCs – in Israel as in the United States – to think they could make exceptions to the rules that the venture community had developed over decades. Due diligence was cast aside for fear that a competitor would beat them to the deal. The smart course of syndicating investments to spread the risk and provide a better financial base for the company was dispensed with so that the VCs could put their new piles of money to work quickly. Valuations and burn-rates skyrocketed, reflecting a belief that the company would go public very soon, which surely would more than compensate for any pricing errors and provide the next round of development capital.

To summarize the spirit of the late 90s, Israel’s VC community paid too much to invest in too many companies that spent too much cash. These so-called “best of times” were, I would argue, a terrible period to be putting money to work.

Flash forward to 2002, to what looks like the worst of all possible times to be a venture capitalist. The VC party is over: Only $18 million has been invested in seed-stage companies in the past three quarters combined – compared with $126 million in the last quarter of 2000 alone. IPOs and profitable merger and acquisition transactions are virtually non-existent and the only exits these days are by managers leaving VC firms.

The gloomy diagnosis is, however, unwarranted. The reality is that today is arguably the best time in the last decade to be a venture capitalist in Israel. Valuations of companies have shrunk back to realistic levels. Cash burn rates have shrunk, too, with the decline in salaries and with the awareness of how difficult it will be to raise the next round. For the investor, this means much-improved odds of reaping significant returns: Slower cash burn means less dilution and low entry price means that even an exit at a valuation of $100 million -rather than $1 billion – can provide a 10-fold return.

And, while there are fewer startups today, they tend to be better startups. In today’s environment, only “true” entrepreneurs, with great ideas and often with one or more exits under their belts, dare to pursue high-tech dreams and start a company – and these are the kind of people VCs dream about investing in.

Now is the time to support startups with exceptional, seasoned teams of entrepreneurs, with low burn-rates and cash requirements to break even, accompanied with modest valuation expectations.

Today’s climate is likely to prevail for at least the next 12 months. The easy money is gone. Yet the good news is that this is the environment in which great companies are created. Venture capital is a cyclical business, and investments made during the dry seasons – when it’s hardest to raise funds and start companies – tend to produce the best returns.

In many respects, we are back to the early 90s – with the critical difference that today we have many more experienced entrepreneurs and VCs, and we’ve had a full decade of mistakes (and some successes) from which to learn.

Investors who took the plunge back then, despite the Gulf War, poor exit environment, and geopolitical instability, were rewarded very handsomely indeed. So, too, will the investors of the early 2000s – these best of all possible times for early-stage investors.