March 14, 2004

It seems as if the new heyday of the hi-tech boom is just around the corner. The Israeli economy was described, during the course of the last three years, as one that is suffering from the “Nasdaq-Nablus effect.” This term was coined to describe the vicious combination of events that has scared foreign investors away in the wake of the burst of the global hi-tech bubble and the outbreak of Palestinian violence.


Venture capitalists frequently used the “Nasdaq-Nablus effect” as the sole explanation for all their miseries blaming it for the fact that the local industry came to a near standstill. It was unclear, however, which part of the equation had a stronger negative impact on the local hi-tech sector. On the one hand, it was clear that at a time when buses are exploding in the middle of Israel’s largest cities, no foreign investor would risk his life to take a closer look at a promising start-up. On the other hand, things weren’t much different in other and less troubled parts of universe and young technology companies all over the world were faced with lower funding as investors rushed to return to old economy companies.

Now, however, it seems as if the impressive recovery of Nasdaq has all of a sudden pushed aside foreign investors’ fears of coming to this terror-ridden state.

“Over the past month I have met with more foreign investors than during the entire last three years,” a partner in one of Israel’s leading venture capital funds told us earlier this week. “The terror threat hasn’t disappeared yet, but the same investors who where refusing to hear about visiting Israel are all of a sudden here.”

This observation is shared even by the management of El Al, which stated recently that demand for flights to Israel, mainly from North America, has increased to the extent that the national carrier is considering increasing its fleet in attempt to meet growing demand. This is also reelected in the fact that venture capitalists don’t need anymore to fly frequently to London to present promising companies to potential investors as a growing number of overseas funds are willing to come and visit them here.

So, for instance, a delegation of 25 venture capital funds from California is expected to arrive here next week. Even the Tech Tour, which was canceled twice before because of the security situation, is scheduled to arrive here later this month bringing 40 companies and investors to the Tour’s first foray outside Europe.

Apparently overseas investors are not the only ones who are visiting Israeli companies these days. A little bird has told us that a delegation from Nasdaq has just paid a visit to a half a dozen Israeli companies they believe have the potential to go public on the exchange.

Judging by the optimism of Nasdaq’s people, it seems as if the new heydays of the hi-tech boom are just around the corner.

“For Nasdaq’s people it is enough to hear that an Israeli company is considering an initial public offering and they will approach it,” said a source who met with the delegation and described it as “very enthusiastic.”

The question is what has changed in reality? It is true that the number of terrorist attacks has declined but unfortunately the threat hasn’t been removed yet. Prime Minister Ariel Sharon’s separation plan has also contributed to growing optimism that a political solution may be reached soon. It is clear, however, that while reality hasn’t changed much the only thing that has really changed is investors’ perceptions. As it is well known, when the market is booming investors’ memories get hit first.

The old saying outlines that investors are moved by two things: greed and fear.

Obviously right now greed is taking over. This goes to the extent that investors have not only lost fear to invest in risky but potentially rewarding technology companies, but are also willing to ignore their families’ and friends’ advice and come and visit this part of the world in the hope of making few bucks.

Growing optimism has also led to an increase recently in investments by local venture capital funds. Cynics note that the rise in investments is not only a result of improving market conditions but is also influenced by the fact that the majority of large Israeli funds need to raise money soon and are desperate to show how active they are to their potential investors.

It should also be noted that despite the fact that foreign interest is growing, it hasn’t been yet translated into increased investment. All those funds which are looking to raise money these days should pray that the rise of Nasdaq will continue, at least until they close their funds. Otherwise they may very well discover that when Nasdaq is falling, Nablus all of a sudden seems to be much more terrifying.

(Reprinted from The Jerusalem Post)

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Jason Harris

Jason Harris

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