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Few Bright Spots

Intifada, global downturn harm
investment in Israeli high-tech.

BUZZY GORDON
Jewish Telegraphic Agency

Los Angeles

ith the Palestinian
intifizda (uprising) con-
tinuing and the interna-
tional high-tech econo-
my still in the doldrums, private
Israeli high-tech companies in 2002
raised their lowest amount from
domestic and foreign venture capital
firms in three years.
The $1.14 billion figure also marks
the first time since 1999 that invest-
ment fell below $2 billion. According
to the annual survey conducted by the
IVC Research Center, a division of
Giza Venture Capital, venture capital
investment in Israel decreased by 43
percent in 2002 from 2001.
IVC polled 159 venture investors,
of which 91 were Israeli VC funds
and 68 were other — mostly foreign
— investment entities.
Not surprisingly, both the number
of companies raising investment capi-
tal and the average company financ-
ing were down in-2002. A bump in
the final quarter of 2001 signaled a
possible rebound, but investment in
the first quarter of 2002 plummeted
by nearly $100 million from the pre-
vious quarter, to $376 million.
Each successive quarter in 2002 saw
VC investment fall further. The low
reached in the fourth quarter — only
$205 million, the lowest fourth quar-
ter figure since 1998 — was the low-
est quarterly total since the first quar-
ter of 1999.
"The decrease in fund-raising by
Israeli start-ups reflects global trends,"
said Ze'ev Holtzman, chairman and
CEO of Giza.
"However, Israeli companies experi-
enced a smaller decline than U.S. or
European firms, indicating that there
is still substantial interest in Israeli
companies."
On the other hand, "Funds at the
disposal of Israeli VC firms are limit-
ed, and foreign investors are hesitant
to invest. This points to 2003 being
another year of reduced investment in
Israeli start-ups," Holtzman said.
"The high-tech sector is of prime
national importance, and the negative

trend will therefore be another blow
to Israel's economy."

High- Tech Impact

Israel's high-tech industry is critical to
the country's economic well-being.
High-tech exports in 2002 amounted
to $4.6 billion, or 25 percent of
Israel's total industrial exports. Due to
a general decrease in global demand,
this translates to a drop in high-tech
exports of nearly 11 percent from
2001.
Meanwhile, investments made by
Israeli venture capital firms totaled
$481 million last year — a drop of 40
percent — and represented less than
half the total amount invested in
Israeli companies.
In addition, foreign investment
without Israeli VC participation
declined by 49 percent from the pre-
vious year, to $156 million. The pro-
portion of total investment without
Israeli VC participation remained
roughly constant in both years, at
about 15 percent. This undiminished
interest by foreign investors is a con-
sistent bright spot in an otherwise
grim picture.
"Despite the global tech downturn
and Palestinian terrorist attacks,
Israel's high-tech scene is still flourish-
ing," said Jon Medved, general part-
ner of the Jerusalem venture capital
firm Israel Seed Partners. "Just a few
weeks ago, Precise was bought by
Veritas for over $500 million.
"The future bodes well because Tier
1 venture firms around the world are
actually stepping up their activities in
Israel," he said.
"Funds such as Benchmark,
Sequoia, Accel and Lightspeed are
now making more investments and
focusing more investment profession-
als' time in Israel than ever before."
The second bit of good news is the
decision by Moody's Investor Service
to continue its A2 rating and stable
rating outlook on foreign and local
currency bonds issued by the State of
Israel.
Moody's move reflects the interna-
tional community's respect for the
core strength of Israel's technological
competence, and for the country's