RealTime IT News

Israel Tech Sector Facing Funding Crisis

Venture capital flow into Israel's celebrated high-tech sector has hit a downward spiral, raising fears the ongoing political tension could dampen interest in the industry but many investors blame the dwindling numbers on the state of the economy in general.

In and around Israel, the political conflict is matter-of-factly described as 'The Situation' and many feel the continued unrest will squeeze the life from the technology industry there but, if VC backers have their way, money will continue to flow into companies with large-scale research and development facilities there.

"Israel has its own VC industry. There are still billions of dollars in available cash to invest in Israel and we aren't going to be affected by the (political) situation. If you look at the latest VC numbers, you'll find Israeli companies being funded everyday, whether at seed level or later stage," said Ogen Perry, a partner at Vertex Management Israel, which manages three venture funds with a total capitalization of $250 million.

By nature, Perry said Israeli start-ups were export-oriented, which helps to avoid the economic perils of political conflicts. "The first thing we worry about is the state of the market. For the average Israeli hi-tech company, the markets are elsewhere, usually in the U.S. or Europe," he said.

Sliding Investments
Even as Perry remains bullish on Israel, historically a hotbed for tech start-ups (mostly in the data security space), the latest statistics show a southward slide in investments. The Israel Venture Capital Research Center, which tracks money flowing into the country, reports that 80 start-ups raised $376 million in the first quarter this year, a 19 percent drop-off from the previous quarter and a whopping 41 percent less than the same year-ago quarter.

"The first quarter of 2002 was characterized by a decline both in capital raised by Israeli high-tech companies and in total investments made by Israeli VCs," the Center said, adding that 98 Israeli venture capital funds invested $138 million in high-tech companies, an 18 percent decline from Q4 2001.

While those numbers compare favorably with the depressed state of venture capital infusion into U.S.-based companies, one Israel tech expert isn't masking his pessimism. Yigal Erlich, chairman of the Israel Venture Association, doesn't expect local funds to raise even $200 million this year, quite a dip for an industry that raked in a record $3.7 billion just two years ago. While fund raising and investments declined in 2001 because of the death of the dot-com industry and the slowing U.S. economy, Erlich is predicting the political 'situation' will make things even worse this year.

"In 2001, there was an uprising, but somehow foreign investors got used to it...In 2002, it intensified nearly to the level of war, and that certainly makes people less willing to come to Israel and to invest. Even veteran investors don't come if they don't have to," Erlich declared.

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