In late March, 35 U.S. venture capitalists and fund investors made a trans-Atlantic trip to Israel on a three-day mission to meet the technologists, financiers and government officials behind private equity investment in Israel.
The group, which included representatives from Lightspeed Ventures and the California Public Employees’ Retirement System (CalPERS), are hoping to ensure that the recent spike in both Israeli venture deals and fund-raising doesn’t stop.
Last year 372 Israeli companies raised $1.01 billion in rounds of venture capital, and 37 of those were seed-stage companies according to the IVC Research Center in Tel Aviv. (IVC’s survey is based on reports from 125 investors, including 66 Israeli venture capital firms and 59 foreign investment groups.)
While that’s a sharp decline compared to 1999, when 513 startups raised $3.09 billion, it is as good as last year’s figures of $1.15 billion raised by 352 companies – an indication that the slump is nearing an end as investors are coming back to scout emerging Israeli technologies.
Fund-raising also moved into positive territory last year. Israeli venture capitalists raised $118 million for new investment funds in 2003, bringing the amount of venture capital available domestically to Israeli companies up to $1.15 billion.
The IVC estimates firms will succeed in raising up to $2 billion by then end of 2005.
Of the $1.15 billion currently available, about $750 million, or 65%, is earmarked for first-time investments in new companies, the IVC Research Center estimates.
Another 12 Israeli firms plan to go knocking on doors this year. Evergreen, a Tel Aviv-based early-stage technology fund, held a close of $46 million on a fourth fund that is expected to reach $140 million.
“Last year marked the beginning of new fund-raising after a long, difficult dry spell in the industry,” says Zeev Holtzman, chairman of both IVC and Giza Venture Capital in Tel Aviv.
Intel – which is the most active foreign investor in Israel – plans to make as many investments there this year as it did last year. In 2003, Intel Capital – the chipmaker’s venture capital arm – made 35 new investments in Israel, according to the IVC (see story, below).
Especially hot in the coming year will be new opportunities in MEMS and nanotechnology, wireless and broadband access technology, and enterprise platform and digital home technologies, says Keith Larson, director of Intel Capital’s European and Israeli investment operations. Intel Capital’s first nanotech investment, in fact, was a Hebrew University spinout called Nanolayers.
Intel Corp. runs a special program for early-stage deals, called I3C, or the Intel Israel Innovation Center. And since the middle of last year, Intel has announced investments in three new Israeli startups.
Intel is not alone. Accel Partners has earmarked part of its $510 million European fund for Israel. Motorola Ventures put a man on the ground in Israel last year, and so did Nokia Ventures, leading to one new investment. Siemens Venture Capital plans to also setup shop there (see story, page 7).
Communications and IT startups are expected to receive the bulk of new investment capital, though the biotech and medial device sectors are heating up as well. Since 2003, communication, IT and software have accounted for more than 75% of venture capital investment, IVC reports, while life sciences companies account for 7% of venture investment in Israel.
Some 36 six life science companies were formed in Israel last year, and investors expect as many new life science companies to be formed in 2004.
Vitalife Life Sciences Ventures, a Savyon-based firm, last year closed its first fund with $50 million and earlier this month announced a $2 million seed-stage investment in a medical device company, Beta O2.
Israel’s is a technology growth curve not likely to be slowed down. The question now is how long this boom will last, and if venture capitalists can build a sustainable investment model in Israel. IVC research indicates that the capital raised by tech companies in Israel mimics the Nasdaq composite index. It peaked in 2002, hit a low in 2002 and is slowly rebounding.
What happens next will depend on bringing new, long-term investors into the market. Last month’s trip to Israel, sponsored by the California-Israel Chamber of Commerce, is just the beginning.
The “Tech Tour,” a group that includes 40 companies and investors, is making its first foray out of Europe and into Israel later this month.
The positive trends are likely to continue through the year. Despite the constant threat of political instability in the Middle East, Israel is a country with all the factors that drive entrepreneurship and create a fruitful environment for venture capitalists.
Israel has 145 Ph.D.s for every 10,000 people, compared to a ratio of one for 85 in the United States. Plus, one-fourth of Israel’s workforce is employed in technical fields, and the nation spends $260 million annually on academic scientific research, according to Israel’s Ministry of Foreign Affairs.
Add corporate and government research programs into the mix, and altogether, Israel spends 2.3% of its gross national product on research and development.
More than 60% of that goes into the electronics industry, which includes telecommunications, data communications, medical electronics, defense systems and software.
In addition, the nation pours millions into its military for research and development – inventions that eventually trickle into the market with commercial applications.
RichFX, a startup backed by investors like Morgan Stanley Private Equity, RealNetworks Inc., Polaris Venture Capital and Veritas Venture Capital, uses video compression technology developed for the military to entice consumers to buy sandals at Neiman-Marcus’ online boutique.
The combination of talent and government-supported research has not gone unnoticed by the world’s technology companies. Intel maintains a research facility in Israel, as does Hewlett-Packard Co. and IBM. In fact, Intel’s Centrino wireless chipset was developed by an Israeli team.
Morgan Stanley calls Israel a “technology hotbed” with particular strength for developing semiconductors, software and wireless infrastructure.