Down but not out
In 2001 some 300 startup companies in Israel disappeared from the list of local VC funds portfolio companies, according to data compiled for the Israeli VC industry¿s yearbook, published Monday by the IVC research company and the Israel Venture Association (IVA) the umbrella organization of VC funds. The 2002 edition lists just 850 startups, 83 of which enjoyed investments from VC funds, compared with 1,000 startups in the 2001 edition. In 2001, some 150 new startups raised capital from VC funds.
Zeev Holtzman, chairman of the Giza VC fund and president of IVC, told a press conference IVC estimates that in the first quarter of 2002 investments in startups will total over $400 million. He added that he did not anticipate any great drop in the scope of investments compared to investments in the last quarter of 2001, in which $464 million were invested.
"We estimate that total investments in 2002 will reach about $5.1 billion," said Holtzman. "It is clear that we won¿t return to the levels of 1999-2000, but estimate that the investments during each quarter will be much higher than in the parallel quarters in 1998. We also feel that investments will recover toward the third quarter of 2002."
All in all, Israeli startups raised $2 billion in 2002, compared with $3.1 billion in 2000. Despite this dramatic drop, the damage to the Israeli industry, relative to the drop in investments in the high-tech industries of other countries, is considered very low. While investments in Israel fell by 36%, for example, Western Europe recorded a decline of 46% in investments and Israel¿s ranking for total investments relative to other countries also remained high.
VC investments in Israel are higher than in any other country in Europe. In 2001 high-tech startups in Britain, for example, raised just $699 million from VC funds. In France they raised $633 million and in Germany, $566 million. Compared to the states in the U.S., Israel ranks fifth. As is to be expected, California heads the world list, with $15 billion in investments, followed by Massachusetts, with $4.1 billion.
¿The weight of foreign investors in the Israeli VC industry has dropped in the past year, and constituted 40% of capital,¿ said Holtzman. ¿I expect this trend will continue.¿
In response to a question regarding the effect of the crisis on the market values of startups, Yigal Ehrlich, chairman of IVA, said that there is not always a correlation between the drop in the amounts of capital raised and the drop in startup company valuations and that sometimes the drop in the amounts of capital raised is greater than the decline in the valuations of the companies.
Monday¿s press conference was a chilling sight. 10 of the invited VC fund managers did not show up so that they would not have to report the write-offs of the past year. Consequently, only two fund managers were in attendance, Yigal Ehrlich of Yozma and Zev Holtzman of Giza, both of whom hold official positions in the IVA.
Funds ask for $250-million state guarantee
The IVA has presented the cabinet and the finance minister a program that calls for the allocation of $250 million in state guarantees that would serve as a lever for $1 billion in VC funding from institutional investors. The yields of the VC funds are still high,¿ explained Ehrlich. The institutional investors can make do with a 1% yield on the capital they manage. At this stage, pension funds continue to show no interest in VC investments, though there is some positive movement from insurance companies and provident funds.¿
Ehrlich explained that the VC industry needs government assistance because of the lack of foreign investors and the funds¿ failure to attract Israeli institutional investors.At the press conference Ehrlich lashed out at the management of the Ministry of Industry and Trade for Chief Scientist Carmel Vernia¿s resignation.
¿I don¿t know why he resigned,¿ said Ehrlich, ¿but it is regrettable because he was doing excellent work. The Ministry of Industry and Trade apparently doesn¿t understand the chief scientist¿s role and the importance of the his office being run independently.¿ Ehrlich himself has held the position of chief scientist.
Ehrlich also said he regretted the lack of progress in the establishment of the government VC fund for seed investments. ¿We had hoped that over the past year there would have been some progress in this initiative, but nothing has happened,¿ he lamented.
Holtzman also expressed his disappointment at the lack of progress in this project. ¿If the fund had invested its planned NIS 50 million [budget] in seed-stage companies, new technology companies could have been founded,¿ he said.
