The once robust Israeli venture capital industry is fast becoming a casualty of the current Mideast violence. Spooked by the bloodshed and the threat of all-out war in the region, foreign investors, pension funds and large corporations are feeding less money to Israeli VC firms. And many U.S. venture firms that recently expanded into Israel are now reconsidering their positions.
This year, Israeli VC firms will be lucky to raise a combined $500 million, in contrast with 2000, when Israeli VC fundraising reached a record $3.7 billion, according to the Israel Venture Association. Much of that money came from foreign sources. But at the Israeli Venture Association international conference, held in Israel April 13 through 15, the mood was somber as foreign VCs and investors, who in previous years flocked to the annual gathering, stayed away in droves.
Moshe Mor of U.S. venture firm Greylock, which just announced plans to invest in Israel nine months ago, says that today’s scale of Palestinian terror and Israel’s massive military response “is not something that can be accepted by investors over the long term. This kind of political risk will cause many investors to sit on the sidelines and put off any kind of transaction.”
Nomura Pulls Out
Earlier this month, Japanese investment bank Nomura International sent shock waves through the industry when it pulled out as an investor in Israeli VC firm Delta Ventures, which has $62 million under management. Nomura would not comment on why it abandoned Delta Ventures. Delta Ventures, for its part, did not return phone calls.
However Nomura spokesman Cameron Walker insists the company remains committed to the region and stressed that Nomura has other investments in Israel, including active positions in venture firms Israel Seed Partners and Vertex Israel. “Nomura is not withdrawing from Israel,” says Walker. “Like anyone else, we are watching the current situation very closely, but we continue to have clients across Israel. We do not have any intention at the present moment of pulling out.”
How long such postures can be maintained depends on what happens next. The continued presence of Israeli troops in the Palestinian-occupied West Bank, unconfirmed reports of Israeli massacres and continued Palestinian suicide bombings all combine to make a peace settlement further off than ever.
As a result, Israeli VCs for the first time are starting to question the very survival of their industry. Whereas a few short years ago the future of the industry seemed guaranteed, today VCs like Erel Margalit of JVP (formerly Jerusalem Venture Partners) sound less convincing when they say they are “sure the Israeli venture industry will continue.”
The VC industry in Israel came alive between 1995 and 2000. Heartened by years of relative calm and stability, foreign investors flooded into Israel. And they were handsomely rewarded. Israeli startups such as Checkpoint Software quickly became Wall Street darlings and greatly enhanced the prestige of the local venture firms that nurtured these companies.
But even those who are raising money this year are getting less than anticipated due to the heightened tensions between Israel and Palestinians. Walden Israel recently closed a $90 million fund, though it had originally targeted $120 million. Founding partner Roni Hefetz blamed the shortfall on the “geopolitical situation in Israel,” among other reasons. For the most part, says Hefetz, foreign investors with experience in Israel remain committed to the region, at least for now. But he concedes that attracting new investors is a near impossibility.
Of course, the global venture industry is going through the same tough times. Even here in the U.S., fundraising is down dramatically, investors in VC firms are reneging on their commitments, and the firms themselves are being forced to dramatically cut the size of their funds. It would be hard enough if Israel only had these macro-economic issues to contend with, but many believe the latest Israeli military offensive, and its repercussions, could prove a fatal blow to the Israeli VC industry.
“Up till now the industry wasn’t terribly effected by the political situation,” said Lucy Marcus of Marcus Venture Consulting, a London-based consulting firm with a number of Israeli clients. “It just meant the VCs in Israel would have to travel to the U.S. or Europe because nobody would go there. But with the recent escalation in terror and fighting, outside investors have become much more nervous. There is now little doubt that the political climate is affecting the economic climate.” As the conflict grows, she says, so will investor unease. The result, say many observers, could be a massive withdrawal of funds from the Israeli venture market.
Still, some Israeli VCs steadfastly deny the current Mideast crisis is having any impact on their business. “People invest in Israel because it has some of the greatest technology startups in the world,” says Tali Aben, a general partner with Gemini Israel Funds. “People will continue to invest in Israel because Israeli startups and venture firms make them money. This has nothing to do with the political situation.”
Meanwhile, U.S. venture firms that have established a strong presence in Israel, such as Accel Partners, Sequoia Capital, Benchmark Capital and Greylock, all says they have no intention of packing their bags. But increased violence-or the real possibility of a full-blown war-would certainly force them to back away from the market.
These firms are willing to tolerate a moderate level of tension in the region, so when Greylock first announced its intention to take an active role in Israel some nine months ago, its limited partners-the pension funds, endowments and wealthy individuals who invest in VC firms-were comfortable with the idea. But the situation today is clearly more volatile that it was then. “We are careful to update our limited partner base on how we see things, and so far they are fine,” says Greylock’s Mor. “But if the [bad] news out of Israel continues for months, not just weeks, then all bets could be off.”
Erel Margalit of JVP is also sensitive to his limited partners, especially since more than 95% of his firm’s $400 million fund came from investors outside Israel. Israel prospered in the late 1990s because everyone from Japanese conglomerates to the government of Singapore to pension funds from Scandinavia felt the region was steadily moving toward a lasting peace, he says. Now it is imperative that some sort of settlement be put back on the table, he explains. “Our investor don’t care when exactly the peace agreement gets signed, but they do need to know that we are in fact moving in the direction of peace.” At the recent Israel Venture Association conference-which was attended by Israeli prime minister Ariel Sharon-Margalit and other leading VCs expressed their concerns, and their desire for a negotiated peace settlement, directly to the prime minister.
Ever hopeful of peace, the venture community is pressing ahead. Deals are still getting done and fundraising efforts remain in overdrive. But investors both inside and outside the region are starting to wonder how much longer business can continue as usual.