Microsoft chairman Bill Gates gave an interview to the Hebrew press in which he expressed his appreciation for Israeli technological brainpower and said that his company was firmly committed to their operation in Israel and planned to continue their operations in the country. This quote was translated into English and placed on the Bloomberg News Service. The high-tech world took note of Gates’ vote of confidence, as reflected in this article in Red Herring from February 3, 2003.

LIFE ON THE FRONT LINES

By Anthony B. Perkins

I am contemplating an invitation by Chemi Peres, chairman of Pitango Venture Capital, one of Israel’s largest venture capital funds, to speak at the annual Israeli Venture Association meeting in Tel Aviv in April. Chemi and his father, Shimon Peres, are two of my closer friends from Israel, so it is a difficult invitation to turn down. But, of course, there is that other thing to consider, war, which might be even bigger in scale by the time of the meeting.

Fortuitously, my dearest Israeli friend, Jonathan Medved of Israel Seed Partners, was in town recently to brief me on the state of Israel. Jonathan’s brother Michael Medved (formerly of Sneak Preview) is a leading political radio talk show host based in Seattle, and lively commentary skills run in the Medved family.

“When did World War II start being called World War II?” Jonathan began. “What’s going on is beyond a skirmish; it’s a titanic struggle of good vs. evil.” To support this view, he noted terrorist events in Kenya, Bali, Moscow, Tunisia, and New York. “It is pretty clear we are in World War III, and Israel happens to be on the front lines.”

Despite the turmoil in the region, however, venture capital investment in Israeli companies has fallen far less steeply than in the United States and Europe. For example, at the height of the Internet bubble in 2000, the $3.1 billion in total annual VC investment in Israel was roughly 5 percent of the U.S. total of $60 billion. In 2002, a time when the war on terror was in full swing, Israel’s $1.2 billion of VC investment was 10 percent of the U.S. total.

Much of this money is coming from top-tier U.S. VC funds like Accel Partners, Benchmark Capital, Greylock Ventures, and Sequoia Capital; all of which have been expanding their presence in Israel. Even European venture capitalists (in contrast to their political leaders) have been stepping up their bets on Israel. Alice, Alta Berkeley Venture Partners, Partech International, TL Com, and other funds on the other side of the Mediterranean have hired VC partners charged with focusing on Israel.

Why is Israel so hot? “Technology and entrepreneurship are about courage and fostering a change-the-world culture,” explained Jonathan. “Silicon Valley was built not on natural resources, but on human resources. Israeli entrepreneurs are simply better trained and equipped to navigate their businesses during difficult times.” He also pointed out that in the post-bubble era, entrepreneurs have to make a lot of a little. “We have a national predisposition to capital efficiency,” Jonathan observed. “It is also a given for an Israeli entrepreneur that you have to go global and sell your product in faraway places to be successful, which is good training in times when you have to strain a little harder to find revenue.”

Smart venture capitalists are also back to investing in real technology companies, rather than in business models, which plays into Israel’s hand. “Israeli entrepreneurs have always been about producing hard-core technology,” noted Jonathan.

He went on to point out every major tech powerhouse–including Cisco Systems, IBM, Intel, Microsoft, and Motorola–has a major operation in Israel, which fosters the country’s strength in core-technology development. Bill Gates recently said Microsoft is committed to Israel and will be growing its businesses there.

Three good examples of promising companies spawned in Israel are Business Layers, Chiaro Networks, and DealTime, all of which are still private and may well go public in 2003. Business Layers is a security-software-and-service play experiencing triple-digit revenue growth.

Backed by $210 million in venture capital (led by Sevin Rosen Funds, which backed Ciena), Chiaro is a stealth company that boasts the world’s fastest router. Run by Ken Lewis, an ex-Alcatel honcho, Chiaro just beat out Cisco Systems and Juniper Networks for a big U.S. government contract. DealTime is a comparison-shopping service for consumers that currently ranks fifth among the most-visited e-commerce sites on the Web. That status is boosted by original equipment manufacturer deals with Alta Vista, EarthLink, Google, iWon, and Lycos. The company also has a seasoned CEO, Dan Ciporin, who was previously vice president of card member services at MasterCard.

While brave Israeli entrepreneurs may still be cranking, the landscape for seed investors backing them remains challenging. “If you want to be successful seeding companies in Israel, you need to be prepared to stay the course or you get crammed,” said Jonathan. In other words, just because you put money in a deal before everyone else, doesn’t necessarily mean you are going to see an uptick in your value in the next round. As is currently the case in the United States, Israeli seed investors, therefore, need to be prepared to fund their companies as they go along, so they can be sure to maintain their ownership positions. It may be wartime, but a deal is still a deal.