Israeli VC funding drops in Q4, but 05 was hot

Venture capital funding for Israeli companies declined last year by 8%, according to research released last week by the Israel Venture Capital Research Center (IVC). But despite the decline, the state of the venture industry and tech startups in Israel is very healthy, with some observers even calling 2005 the best year ever for Israel’s tech industry.

Last year, 378 Israeli tech companies raised $1.34 billion from investors, an 8% drop from 2004 when Israeli companies raised $1.46 billion. But last year was still 32% above the country’s 2003 levels.

The IVC credits the drop to a slow fourth quarter. In Q4, 88 Israeli tech companies raised $264 million, a 21% decline of from the previous quarter’s $336 million, which was raised by 90 companies. In Q4 2004, 113 companies raised $366 million.

IVC Director of Research Efrat Zakai says that the Q4 2005 drop is “only a temporary decrease,” and he expects funding levels to return to previous quarterly levels.

Among startups funded last year, communications companies took the largest share of the investment in Israel, as 112 companies raised $469 million, or more than one-third of all venture dollars invested.

Life sciences companies raised $284 million, or more than 20 percent. Software companies were the next highest investment sector with 17% of the 2005 VC investment dollars.

While an 8% drop in overall yearly VC funding is unwelcome news, there has been enough good news for the Israeli tech industry this year to easily overshadow it.

Saifun (Nasdaq: SFUN), a Netanya, Israel-based developer of nitride-read-only memory technology, launched a $117 million IPO on Nov. 9. And in December, Intel announced it would invest $3.5 billion to construct a chip manufacturing plant in the Israeli town of Kiryat Gat.