Investors Fight Through Israel’s Troubles

Although Middle Eastern tensions boiled over last week with Israel invading the Gaza Strip, VCs don’t seem to be any less interested in investing in the region. If anything, venture disbursements to Israeli firms have been on a slow, but steady, upswing since the fighting resumed there in earnest eight months ago.

Since last October, 74 Israeli companies have pocketed $668.58 million worth of venture dollars, just a tad more than the $659.26 million VCs doled out to 68 firms during the previous eight months, according to our VentureXpert database.

Also, the sheer number of VC firms foraying into Israel has shown a definitive incline since October. Approximately 106 firms have made investments in the country in the past eight months, up from 92 VCs from February to October 2000.

So what does this hint of heightening activity mean? To be sure, the VC community has historically been undaunted by the recurring political strife between the Israelis and the Palestinians, and this most recent outbreak is no exception.

“The political situation hasn’t been good there for the last 52 years,” said Scott Tobin, a general partner with Battery Ventures. “There are certain times when it’s more tense than others, and now happens to be one of those times that, for some reason, those forces opposed to peace are trying to egg on Israel’s government. I think what the average American household sees is a war-torn country that is being pummeled both internally and externally… those are gross distortions of reality. The reality is that you’ve got a greater chance of being hurt in a car accident in Israel than you do of being hurt by a terrorist bomb.”

Tobin, who is based in Battery Ventures’ Boston office, is not alone. Even the venture capitalists who have actually witnessed the violence first hand agree that the tensions in Israel have only a miniscule effect on venture investing and entrepreneurial activity there.

“There is no doubt that the impact on us from the political situation is very small,” said Eddy Shalev, a managing general partner with Israeli firm Genesis Partners. “On a scale of 100%, I’d say [it only affects us] about 5%, maybe 10% at most.”

Indeed, as a testament to its lack of trepidation, Genesis has already pumped $10 million into a few Israeli start-ups in the first quarter alone.

If anything, traditional venture fundamentals such as fund-raising abilities and exit strategies have more impact on a start-up’s ability to raise money in Israel than does the country’s perpetual border squabbles with its Palestinian neighbors.

Nasdaq, Not Attacks, Is Trouble

Additionally, since Israel doesn’t have a stock market of its own, the Nasdaq’s daily performance is often of greater interest to Israeli entrepreneurs than the military maneuvers happening in their backyards.

“When two Israelis run into each other in the elevator or at the water cooler and one says to the other Did you hear about the trouble?’ the trouble is [a down] Nasdaq market,” said Alex Balkanski, a general partner with Benchmark Capital.

He’s certainly in a position to know. Back in November, Benchmark decided to ignore the political fighting and launched a $200 million-targeted fund focused on Israeli start-ups. As expected, that fund held its final close in March, although Balkanski said that an official announcement regarding the specifics of its final capitalization is still a few weeks away. However, the fund was oversubscribed and Benchmark’s limited partners seemed enthusiastic about the wealth of investment opportunities in Israel, he added.

The fund also has made several investments there, although Balkanski declined to say which companies received financing or how much the firm has invested so far.

Growing Maturity

Indeed, there is a plethora of deal flow awaiting adventurous VCs with enough capital to invest in Israel, especially in the communications, wireless, semiconductor, networking and data storage spaces because the strongest talents of its entrepreneurial workforce seem to lie in these areas, Tobin said. Moreover, the management teams at Israeli start-ups continue to show unfaltering gains in maturity, especially since, like Silicon Valley, the nation is starting to see an influx of second- and third-time entrepreneurs coming back with fresh ideas to start new companies.

“It’s important to remember, however, that [Israeli start-ups] often require more work than U.S. start-ups,” Balkanski cautioned. “Although things are getting better, the best start-ups in Israel are still not at the level of maturity of the best start-ups in the U.S.”

In other words, outside investors looking to back Israeli companies should be prepared for unforseseen obstacles such as the inherent challenges of trying to set up operations and research and development centers in the U.S. and Israel, respectively, as Benchmark often does with its start-ups.

“It makes for a greater level of involvement and effort, which is natural to Benchmark, but it’s truly hard work,” Balkanski said.

Interestingly, Odeon Capital Partners, which has looked to Israel for possible deal flow in the past, has not made any investments there in the first quarter. However, Jeffrey Finkle, a managing partner with the firm, said it has nothing to do with the nation’s political strife.

“We’ve been more internally focused working with our own portfolio companies and, as a result, we’ve been less proactive in [pursuing] deal flow,” he said. “I’d be more afraid to invest in New York new media than I would [to invest] in Israel. I think there’s more risk here.”