Study: VC investments in Israel hit lowest point since 2003

Just $1.12bn was invested in Israel's 'at-risk' venture capital sector in 2009 - a 46% decline on the 2008 total. A further slump is predicted for 2010.

The total value of venture investments in Israel dropped to $1.12 billion in 2009 – the lowest number recorded since 2003 when venture investments worth $1 billion were made in the country, a study has found.

The 2009 figure marks a 46 percent decrease on that of 2008, although the total number of deals – $1.12 billion was invested across 447 companies – declined by just 7 percent, according to a report released by the IVC Research Centre, an Israel-focused venture capital and private equity research provider.

In the fourth quarter of 2009, 124 Israeli companies raised $275 million, down 30 percent from the $394 million invested by venture investors in the corresponding period of 2008 and down 9 percent from the third quarter of the year.

And the outlook is not expected to improve in 2010 according to Koby Simana, chief executive officer of IVC Research Center.

“Even though 2009 capital raising was sharply lower than the previous year’s – consistent with our projections – a further decrease to about $800 million is foreseen for 2010,” he said in a statement, adding: “Despite talk of recovery, the effect of the economic situation continues to linger.”

Life sciences was the most popular sector for investors and received almost a quarter of the total amount invested in the country. This was followed by software and communications, which received investments worth $258 million and $219 million respectively. For the first time since 2000, the communications sector was not the most popular sector for investments.

At the release of the Q3 2009 investment totals in October last year, Zeev Holtzman, chairman of IVC and chairman and founder of Israeli firm Giza Venture Capital, labeled this period the Israeli venture capital industry’s “toughest crisis since 2000″.

Reflecting on the low volumes of investment seen at that point, he commented: “The high-tech sector – the growth engine for Israel’s economy – will experience a major setback from which it will not be able to recover. It is clear that the future for start-ups, VCs and the entire high-tech industry is at risk.”

The economic downturn has provoked crises of a similar nature in other venture capital industries around the world. In Australia, the inability of firms to raise money from a disinterested local LP base is causing some to predict the country's young venture capital  industry may be forced to consolidate before it has had a chance to prove itself.

According to an estimate from the Australian Private Equity & Venture Capital Association, around a third of  active funds in the country (representing a fifth of VC capital under management) will be wound down over the next two years – meaning that unless more capital is forthcoming, many managers will be unable to continue in business.