Israeli VC Continues to Plummet in Q3

Just like its United States ally, Israel’s venture scene was hoppin’ in early 2000. However, the dancing in Israel stopped later in the year as spending in the technology and communication sectors almost fizzled completely.

Here’s just how bad the fall has been: In the third quarter of 2000, communications companies in Israel raised just over $554 million from venture capitalists, local and foreign, according to quarterly data from IVC Research Center, a venture capital/high-tech research center located in Israel, which puts out its data in cooperation with Israel Venture Association. In Q3 2002, communications companies only picked up $80 million in venture funding, an 86% decrease from just two years ago.

Unfortunately, the decline in communication spending is only the tip of the iceberg for Israel. During the third quarter, 92 Israeli high-tech companies raised $266 million from both local and foreign venture investors. That’s a 9% drop from last quarter and a 48% fall off from the previous year. While the number of companies raising money remains unchanged, the average financing round in the third quarter was $2.9 million, compared to the second quarter’s $3.2 million.

Terrorist activity plaguing the country only adds to its difficulties. “The global crisis in the high-tech industry and the political situation in Israel continue to have strong influence on investment activity, resulting in the investment falloff continuing in the third quarter,” says Zeev Holtzman, CEO and chairman of Giza Venture Capital, an Israeli-based VC firm that is opening offices in New York in 2003.

Perhaps the increase of terrorist activity in the region explains why non-Israeli investors in the area only invested $148 million, 10% less than the quarter before.

Racheli Er-el, director of research at IVC Research Center, says “since the beginning of 2002, foreign investors have tended to reduce their involvement in the Israeli market.”

However, despite the numbers, Holtzman says U.S. investors are still friends of Israeli companies. “We still see $1 billion or $2 billion coming from U.S. investors like Intel and Cisco. There is a decline, but investors still come here because they have made money here. No new investors are coming here, but there are no new investors anywhere,” he says.

The software sector is certainly the favorite of investors. A total of $89 million reached the sector, a sharp increase of 170% from the previous quarter. The communications was next line although it only raised $80 million, which is down 26% from the previous quarter and 41% from the same quarter last year.

Moreover, in Q3 2002, capital raised by mid-stage high-tech companies beat out their counterparts. Mid-stage company fundings increased by 59% for a grand total of $169 million. Consequently, their share of the total raised jumped to 64%, versus 37% in Q2. However, late-stage companies fell 82% from Q2 levels for a total of $6 million or just 2% of the total raised in the third quarter. Early-stage companies managed to raise $85 million, down 42% from Q2 and accounted for 32% of capital raising, against 50 percent in the prior quarter. In comparison, capital raised by seed stage companies remained at $6 million, 2% of total amount raised in the quarter.

Contact Danielle Fugazy