In the pioneer days of Israeli VC (the early '90s), the Tel Aviv Stock Exchange (TASE) was an important source of liquidity and valuation benchmarking for technology companies. But a four-year TASE bull run came to an abrupt halt in a February '94 crash from which the market has not yet recovered. Oded Akselrod, general manager of the Israel Growth Fund (IGF), says that the lack of liquidity on the TASE makes it an unwise vehicle for IPOs by Israeli companies. While the crash temporarily depressed valuations of Israeli venture capital investment, a quick recovery was achieved when American stock markets demonstrated their desire to participate in portfolio companies.

With over 80 companies, most of them in high technology, Israel ranks third behind the U.S. and Canada in number of listings on American stock exchanges. The continuing attractiveness of Israeli companies is evidenced by this year's venture-backed IPOs by LOGAL Educational Software, Nice Systems, NUR Advanced Technologies, and VocalTec. In '94 and '95, acquisitions by foreign companies joined IPOs as an important exit method for Israeli venture capital investments. 3Com, America Online, Intel, Madge Networks, and Siemens have acquired VC portfolio members over the past two years. In most deals the multinational is trying to enhance its position in a leading edge technology as 3Com did by buying ATM switch vendor Nicecom. IGF's Mr. Akselrod supports such acquisitions adding, "When Israeli companies reach $15 million in revenues, it gets very tough to increase sales further. It is particularly difficult to set up the foreign operations necessary to get bigger, and acquisitions at high valuations can provide a very profitable and much safer method of continuing growth than going it alone."

Will the bubble burst? Israel's venture capital coffers have been boosted by confidence in the ability of VCs and technologists to eliminate the $15 million revenue barrier. If goals are not met, the implications are disastrous for a VC industry that has emerged rapidly. Half a billion dollars under management cannot be profitably invested in a small research and development outpost that fails to bring its own products to market. Israeli technology valuations have been shaken before, but now there is more to lose. The recent assassination of prime minister Yitzhak Rabin and terrorist suicide bombings in Jerusalem and Tel Aviv serve as reminders of the fragility underlying growing national prosperity. One challenge for Israeli technology companies is competition faced within their own borders. Israel is a small country which has developed particular expertise in several areas through the chosen priorities of the military, technical universities, and foreign companies. Some sectors have seen the rise of multiple startups including digital printing, Internet security software, and multilingual word processing. STAR's Mr. Shoham admits, "We may have too many entrepreneurs for a country our size but ambition is in our nature. People here would rather have their own company and risk the competition than be a vice president for someone else."

Another potential pitfall is the reliance on high valuations achieved on Nasdaq. While the number of Israeli companies publicly traded in the United States is impressive, on closer inspection many may not be ready for prime time. The vast majority have sales below $20 million and more than half are not profitable. Eager to gain a foothold in the country, American investment banks are prepared to manage IPOs for Israeli companies that have not yet achieved the financials that would be expected of similar American companies looking to go public. The vulnerability inherent to this situation is demonstrated by the experience of Indigo. The high profile, but still unprofitable, Israeli digital printing company saw its stock reach $64.75 per share after a '94 IPO. A string of disappointing quarterly results has since brought the share price as low as $7. A broader collapse of Israeli stock valuations on Nasdaq would seal the exit on which VCs are currently relying for their investments.

Despite the risks and challenges that face the Israeli VC industry, a strong sense of optimism persists. As a people, Israelis are not easily frightened. Theirs is a nation that established itself surrounded by enemies, turned desert land into agricultural abundance, and now seeks to complete a regional peace that was recently unimaginable. Similarly impressive is the rapid establishment of a venture capital industry from the single firm of five years ago. Despite the challenges they face, Israeli VCs are confident that they will be the pioneers who take their country to its next stage as a global technology powerhouse. - Red Herring Magazine

1. Apax Has a team of over 120 private equity investment professionals in 12 ventures offices across Europe, the USA (operating as Patricof & Co.), Japan (operating as Apax Globis Partners), and Israel. Over eighty of these professionals are based in Europe.

2. e-srael.net Over sixty venture capital funds listed here in alphabetical order.

3. Garage.com Connects Israeli startups with U.S. venture investors.

4. Gemini Israel Gemini Capital Fund Management Ltd is a private equity investment firm managing a balanced portfolio of Israeli high-tech companies in stages ranging from start-up to pre-public.

5. Genesis Partners Invests in high-growth Israeli or Israel-related technology companies in communications and wireless, Internet infrastructure, enterprise software, Internet software, and other industries.

6. Giza Venture Capital: Giza Giza Venture Capital has been investing in Israeli technology companies since 1992. Manages more than $258 million.

7. Israel Science and Technology Homepage: Startup Funds in Israel Venture Capital funds for Israeli startup companies.

8. Israel Seed Partners Heavily focused on broadband-fiber optic communication, Internet infrastructure, digital imaging, and e-commerce investments. Israel Seed Partners makes initial investments of $250,000 to approximately $3,000,000 in seed and first round venture capital.

9. Jerusalem Global Ventures A $200 million group of seed-focused venture funds that invests in or initiates Israeli and Israel-related high-tech companies.

10. Jerusalem Venture Partners An international venture capital partnership that concentrates on investing in early-stage companies in five core areas: optical networking, data communications, wireless communications, e-commerce infrastructure, and Internet service infrastructure.

11. Polaris Venture Capital Polaris Venture Capital is the largest venture capital management group originating in Israel, managing over $700 million.

12. Star Ventures Focuses on investments in early-stage high-tech companies located in the U.S., Europe, and Israel.

13. THCG, Inc. Provides full range of venture development services to targeted group of clients wishing to build businesses in e-time. Concentrated on earliest stages of a company's life cycle: Pre-Development, Development, and Deployment. Also operates in Israel. - See Hoover's Company Capsule

14. Vertex Venture Group: Vertex Management Vertex has invested more than $450 million in 180 companies around the world in the seed to mezzanine stage of financing in various high- tech industries.

15. Walden Israel Venture Capital: Walden is one of the first Israeli venture capital funds dedicated to investing in early-stage start-ups. Our team comprises experienced entrepreneurs and our international affiliation spans twenty-five years of experience in building four hundred early-stage companies.

16. Wired 8.07: Venture Capitals A detailed assessment and ranking of the Israeli technology sector and venture capital opportunities.

17. Yazam Funds seed-stage startups with its own capital in conjunction with a network of private investors, V.C.s, and strategic partners. Focuses on Internet and technology companies. - See Hoover's Company Capsule

18. 1st Line Capital focuses on Israeli based technology ventures that are seeking US venture capital for their first round investment initiative.

19. Cukierman & Co. Investment House ltd., is the prominent Israeli investment banking firm operating in European markets.

Leyden Communications (Israel)
International Public Relations / Marketing