Gov?t Pumps Up Israeli Start-Ups

Silicon Wadi, the Israeli high-tech corridor once flush with venture dollars, is once again dry. Though seed- and early-stage companies in the region last year drew more than $168 million in venture funding, this year the figure has shrunk to only a fraction of last year?s total ? just $43 million in total funding has wended its way into the region.

Moreover, demand for hi-tech workers in Israel has fallen 83% over the last year, according to Israeli Manpower Information Technologies, and unemployment hit a high of 9.4% in October. And last week, the IMF lowered the country?s growth forecast to 1.7% for 2002, a figure it had pegged earlier at 2.2%.

Heeding the ominous signs, the Israeli Ministry of Industry and Trade earlier this week said it would partner with the nation?s venture firms to push an additional NIS 50 million ($11.7 million) into the seed-stage technology marketplace. Over the next two years, the government ministry plans to match seed-stage venture investments with loans of up to NIS 4 million ($939,000) for each technology-focused company, thus doubling the value of the initial investment.

“There?s a real sense in Israel and a growing recognition that the high-tech sector, which has been an economic jewel, has come under some stress and duress and they?re making efforts to improve the situation,” said Bruce Crocker, managing director at Pitango Venture Capital?s Silicon Valley office. Pitango, formerly known as Polaris Venture Capital, has invested more than $153 million in Israel since 1995.

Pitango, and other venture firms active in Israel?s technology arena ? Concord Ventures, Giza Venture Capital, Israel Infinity Fund LP, Medica Venture Partners and Vertex Investment Management ? will source deals for the government, but will not act as limited partners in the fund. Instead the program will be financed with funds from the budget of the Ministry?s chief scientist, Carmel Vernia, and will operate under his supervision.

The government loans must be repaid to the Ministry, whether by the company or by its venture backers, within three years. If they are not repaid, the government?s loan will convert into equity ownership of the company.

Carolina Braunschweig can be contacted