Deals Heat Up In Israel

Israel hasn’t been receiving as much attention as China, but judging by recent developments, it’s no shrinking violet.

Two top-tier U.S. firms have recently raised new funds targeting the small but dynamic country, and other VCs are showing interest.

The market is bustling. Israeli tech startups raised $350 million in VC in the first quarter this year, up 8% from $323 million in the same quarter last year, according to the Israel Venture Capital Research Center. The IVCRC projected that Israeli technology firms will raise $1.5 billion by year’s end, led by communications companies. Trailing in demand are software and life sciences companies.

There’s little question that U.S. investors want to stay involved in Israel, which boasts an educated engineering workforce and where security and software have long flourished and nanotech startups are beginning to emerge.

In early June, representatives from more than 25 U.S. VC firms – including Accel Partners, Bessemer Ventures, Mayfield, Menlo Ventures and New Enterprise Associates – traveled to Israel to see what was what. They liked what they saw, says Harry Kellogg, vice chairman of Silicon Valley Bank, which helped organize the trip. Kellogg says Bessemer may open an office in Israel, though a Bessemer representative did not return calls by press time.

“We did this [trip] in March of ’04, as well, but we had much more interest this time around,” Kellogg says. “The VCs mostly wanted an overview of what’s happening in the Israeli tech market, and to get to know Israeli venture investors.”

Sequoia Capital is the most recent U.S.-based firm to raise a fund devoted to investments in Israel. It recently closed on $200 million for its third Israeli fund, but it could have raised as much as $500 million, according to Shmil Levy, one of the fund’s partners.

Just two months earlier, Benchmark Capital raised its second Israeli-focused fund, capping it at $250 million.

Since the beginning of this year, more than $1.1 billion has been raised by venture firms for investments in Israel. Among the others: Carmel Ventures closed on a $200 million fund, its second; Gemini Israel Funds closed on its fourth fund, also at $200 million; and Pitango Venture Capital closed on its fourth fund at $300 million.

Even Chinese venture firms want a piece of Israel. In April, Shenzhen Capital Group, China’s largest venture firm, signed a joint agreement with Israel’s PNV-New Management Co. to launch a new $80 million VC fund. Called China Israel Venture Capital, the fund’s mandate is to identify and introduce Israeli technologies into later-stage and pre-IPO China-based companies. Its focus is communications technologies, semiconductors, enterprise software, and life sciences.

The push into Israel isn’t new. Sequoia began investing in Israel in 1999, when it established a $10 million seed fund with Cisco Systems as its co-investor. It raised a second fund of $150 million in 2001. Its 19 portfolio companies in Israel included BitBand Technologies Inc., HyperRoll, Provigent and Olive Software.

Sequoia has had five exits of Israeli portfolio companies, the largest of which was the sale of Actona Technologies to Cisco Systems for $82 million last year. The partners in Sequoia’s Israel fund are Benny Hanigal, Haim Sadger, Shmil Levy and Randy Ditzler, the former CEO of Actona, who joined Sequoia this year.

Limited partners in Sequoia’s Israeli funds are primarily university endowments. Cdb Web Tech SpA was also an investor in its second Israel fund.

Benchmark has been investing in Israel since March 2001. Its inaugural fund of $240 million currently features 20 portfolio companies, and it has achieved a handful of exits through M&A activity, including the pending $100 million sale of fables chipmaker Oplus Technologies Ltd. to Intel Corp.

Benchmark didn’t disclose the names of limited partners in the new fund. LPs in its first Israeli fund include Cdb Web Tech SpA, Cisco, Horsley Bridge Partners, Infineon Ventures and Mercury Interactive Corp.

The Benchmark Israel investment team includes general partners Michael Eisenberg, who joined the firm in June, and general partners Mark Kremer, Arad Naveh and Nachman Shelef.