While Israel continues to struggle on the road to peace, the country's venture capital investors seem to be having much more success. For a country with a population smaller than Sweden's, Israel delivers quite a wallop: Venture capital available for investment in Israel today is estimated to be $1.15 billion (€940 million), according to the Israel Venture Capital Research Center (IVC). The number is the remainder of the $5.2 billion raised by Israeli funds between 2000 and 2003, including heavy hitters like global private equity firm Apax Partners, which garnered $600 million for its two Israel funds and two Israelinvesting European funds.
In addition, the IVC also reports that funds raised by Israeli technology companies from both domestic and foreign venture capital investors came to $338 million in the second quarter of 2004, inching five percent upwards from the previous quarter's $323 million total.
Indeed, these numbers signal good things to come, say industry participants, as fundraising by start-ups has steadily been increasing since the industry's low of $205 million in the final quarter of 2002. (At the peak of the tech bubble, in the third quarter of 2000, venture capital support for Israeli tech companies had peaked at $1.08 billion.)
GPs and LPs are also shrugging off the spectre of terrorism that the media portrays as looming over the country. “Terrorism was more of a hurdle two years ago than now, and the situation is under control,” says Bruce Crocker, a partner at Herzliya, Israel-based Pitango Venture Capital. “It's still a difficult and challenging part of the world, but in some regards sitting in an office in Herzliya is safer than sitting in an office in Manhattan. Business and life go on.”
Equally reassuring are recent news that venture capital firms are looking to step up their activity in the region. In July, Germany's Siemens Venture Capital announced the “extension of its activities in Israel” with the opening of a new office outside of Tel Aviv.
Fundraising is also back on the agenda: in May, an SEC filing confirmed that Giza Venture Capital was in the midst of raising its fourth fund; the Tel Aviv-based investor had already secured $30 million of its $275 million target. In June, Herzliya, Israel-based Gemini Israel Funds hired a new venture partner as it also prepared for a first close on its fourth fund targeting $150 million to $250 million.
And at the end of July, Pitango closed its fourth fund on $300 million, bringing its funds under management to more than $1 billion in capital committed.
The IVC predicts that Israeli VCs will raise between $1.5 billion and $2 billion in 2004 and 2005.
YOZMA KINDLES THE FLAME
Most industry observers peg the beginning of Israel's venture capital industry in 1993. At that time, the country had no indigenous venture fund community, despite its rapid transformation since 1948 from a predominantly agrarian society into a technological powerhouse as reflected by the presence of large international technology companies IBM, Motorola and National Semiconductors.
In 1993 the Israeli government sponsored the Yozma programme to prompt venture capital investments in the country, which were non-existant, creating the first venture fund, Yozma I. Over the following three years, the Yozma group, with $100 million, operating as a sort of venture capital fund-of-funds, established ten socalled “drop-down” funds with a number of foreign partners, each capitalised with between $20 million and $25 million, while making its own direct investments in startup companies as well. The funds that came out of the Yozma programme, including Pitango (then called Polaris Venture Capital), Gemini Israel Funds and Vertex Venture Capital, JVP and Star, are considered to be the backbone of venture capital in Israel.
Yozma founder, chairman and managing partner Yigal Erlich, considered by many to be the grandfather of the Israeli venture capital market, says the success of the programme was as much based, beside the good tech start-ups, on capital funding as it was on bringing executive talent from abroad to teach Israeli management teams the tricks of the trade.
“At the beginning it was difficult: we couldn't find enough experienced people,” Erlich remembers. “We took some bets on people that came from outside the VC industry with some experience in other related fields. We were hopeful that our partners on the American side would coach them in the beginning. By teaching management here how to manage funds and investments, the industry took off.”
Erlich says that after the first three to four years, the established firms started their second funds, and at that time in the mid-90s the climate was ideal for fundraising as interest in technology investing approached a fever pitch; realisations from these successor funds coincided with the tech peak.
ARMY OF ENTREPRENEURS
The success of the Israeli high-tech sector isn't an historical accident. The blend of a highly entrepreneurial culture and a large number of technically savvy individuals has made the country a leading technology exporter, particularly in the areas of software and security, semiconductors, communications including wireless, consumer applications and medical devices.
“Israel is similar to Silicon Valley in many ways, and sometimes Israeli start-ups might even look at technologies that are more on the edge,” says Isaac Applbaum, a partner at Menlo Park, ([A-z]+)-based Lightspeed Venture Partners. “These entrepreneurs are very creative and motivated. And many of them aren't done after the first attempt – you'll see a lot of repeat entrepreneurs in Israel.”
Part of that entrepreneurial culture is a result of the military's influence. As all Israelis are required to serve for three years in the country's armed forces, many technically gifted individuals are handpicked work in the military's elite technology units. Pitango's Crocker says that the experience of having so many responsibilities and being required to solve real-world problems at such a young age gives these men and women a sharper focus once they leave military service and enter university. By the time they finish their schooling, these individuals have superior skill sets and technical backgrounds with which to successfully start-up their own businesses, Crocker says.
For example, firewall company CheckPoint Software, one of Israel's earliest venture-backed IPO success stories, was started by three founders who came out of a unit in the army that connected computer systems to one another. Likewise the founders of VocalTec, an Israeli-based Internet telephony company, came out of an army communications unit.
Industry observers also attribute the success of Israeli tech to the large influx of Russian-Jewish immigrants following the collapse of the Soviet Union in 1989. Between 1990 and 2000, almost 900,000 thousand residents of the former Soviet Union emigrated to Israel, according to government statistics; 1990 and 1991 alone saw more than 230,000 people cross the borders of a country whose population was approximately 4.5 million at the time. These immigrants brought with them a wealth of knowledge capital, as a high percentage of them held advanced degrees in technical and engineering fields.
EUROPE'S “SILICON VALLEY”
One of the challenges of operating in Israel facing both VCs and entrepreneurs has always been the lack of a large domestic marketplace for technology goods and services. (The country's population is currently estimated at about 6.2 million; compare that with the slightly more than six million individuals that were estimated to have lived in just the six counties comprising Silicon Valley in 2000.)
With regard to fundraising, therefore, it is no surprise that the vast majority of capital sitting in venture capital funds comes from abroad – the US itself accounts for roughly 70 percent of Israel's available venture capital, with the remainder coming from Europe and to a lesser extent Asia and Israel itself.
The country's small size also affects Israel's technology startups. Because they are forced to look abroad for a customer base, hightech companies often operate as “mini-multinationals” right from their inception.
“In Israel, you really do have to play in a global market from day one,” says Pitango's Crocker. “Israel is very small. To have a successful company, you have to address a need that your customers are global and located in the US, Europe and Asia, and you have to be positioned from the start to take advantage of that.”
The Asian focus is prompting many Israeli venture capital firms to ramp up their business development activities in the Far East. Jerusalem Venture Partners is one example: the firm, which has offices in Jerusalem, New York and London, a business development specialist in Tokyo, and has a telecom investment in Beijing. Global private equity firm Walden International, based in San Francisco, also leverages its presence in Southeast Asia to provide its Walden Israel venture capital team with contacts and partnerships.
“As opposed to the Israeli market where VC investing is so well-established and has been so successful, investing in Asian markets and cooperating with Asian funds is still in its infancy as far as Israeli funds are concerned. We still need to test the waters with regard to our involvement in these markets,” says Gemini principal Jonathan Saacks.
TECH DOLLARSTotal net capital raised by Israeli venture capital firms including uninvested capital returns
|(in millions )|