Greylock goes to Israel

Though the current Israel-Hezbollah conflict may be creating political turmoil in the Middle East, investors are apparently making the distinction between the violence on the ground and the fundamental stability of Israels tech industry.

Last week, Greylock Partners announced it closed a $150 million dedicated Israel fund and has sent partners Moshe Mor and Yoram Snir to Hertzelia, a city north of Tel Aviv. The new fund announcement comes as the areas VC organization reports that venture investments in Israeli startups increased in the second quarter.

Greylock spokesperson Mary Kae Marinac said the firm would not be making its investors available for comment on the new fund. Mor and Snir will join Erez Ofer, who had been stationed in Israel for some time. The new fund, Greylock Israel, is the firms first dedicated Israeli fund.

The funds official announcement comes as Israeli investors have had little interruption in their daily lives from the conflict on the northern border. Most of the Israeli tech industry is located south of the city of Haifa.

But some startups are feeling the effects. UCLT, a semiconductor startup based in Karmiel, Israel, has had to relocate most of its operations to be closer to bomb shelters, says investor Yoni Cheifetz of Lightspeed Venture Partners. Lightspeed gave the firm $8.7 million in its first round of institutional investment in January. The startup has had to postpone visits from foreigners concerned for their safety, Cheifetz says.

Meanwhile, the biggest strain on Israeli VCs has been personal. Cheifetz says he has taken in friends from the embattled northern region just so they can get a decent nights sleep.

Israel has been undergoing a quiet rebound in venture interest from U.S. firms that the current violence seems unlikely to staunch. In April, Norwest Venture Partners Promod Haque said his firm would increase its presence in Israel with its $650 million tenth fund. In June, Opus Capital launched its inaugural $280 million fund and has made a strong commitment to Israel, as General Partners Isaac Applbaum, Dan Avida and Gill Cogan each have strong ties to the region and plan to invest in Israeli companies.

Lightspeed, which lost some of its partners to Opus, reaffirmed its commitment to the area in June by poaching Cheifetz from Star Ventures. The firm has made four investments in Israeli startups already this year.

Firms that raised Israel funds last year havent slowed their investing pace so far. Sequoia Israel, a $200 million vehicle, has made three investments so far this year. Benchmark Israel II, a $250 million fund managed by Menlo Park, Calif.-based Benchmark Capital, has similarly backed three startups since January.

Meanwhile, VC investments in Israeli startups in the second quarter increased 12% over the first quarter and 4% over the second quarter of last year, according to information released last week by the Israel Venture Capital Research Center (IVC).

The center, which issues quarterly reports, reported that 109 tech companies raised $404 million in the second quarter from Israeli and worldwide investors. Israeli technology companies raised $360 million in the first quarter and $387 million in the second quarter of 2005.

Its uncertain if the investment trends will hold up when the third quarter numbers are tallied in three months. But theres certainly no shortage of cash in the region. The IVC report stated that the percentage of foreign capital coming into Israeli startups was up as well, as Israeli investors accounted for only $154 million, or 38%, of the investment dollars coming into new companies. The remaining $250 million came from foreign investors, mostly from the United States.

Non-Israeli-VC investors are showing more interest and involvement in Israel, said Guy Holtzman, general manager of IVC. We are experiencing a reawakening in the activity of Israeli investment companies and private investors as well as that of foreign investors.

Hershkovitz told the nonprofit Israeli website Israel21.org that it was too early to tell whether the current situation between Israel and Lebanon would have an effect on future investments.