Israeli high-tech emerges from recession

TEL AVIV, April 18 (JTA) — The handshakes, smiles and deals are beginning to return to Israel´s high- tech shores. Venture capital investors are back in Israel shopping for the next big thing and Israeli start-ups are feeling the welcome buzz of momentum as the tide has begun to shift following three hard years of a global economic downturn compounded by the Palestinian intifada. “The current feeling is that there is a change in the general atmosphere and it applies to Israel too,” said Joseph Ciechanover, president of the venture capital funds Etgar I and Etgar II, which together have raised $240 million for investment in Israeli companies. “And it is here, more than anywhere else in the world, that is a cradle for new investors and new initiatives.” With Israel´s position as a leader in information technology, the Jewish state stands to benefit from increased corporate spending in the United States on technology research and development. Long-time Israeli companies, Israeli start-ups and Israeli divisions of foreign companies are beginning to feel the benefits. Technology companies and investments have been an integral part of Israel´s economic growth since the technology boom of the 1990s. But during the technology slump of the last few years, companies in Israel have been hit hard, sometimes even more so than their counterparts around the globe because of the Palestinian intifada. Now, however, there are signs of recovery in Israel. High-tech exports from Israel increased 0.8 percent in 2003 compared to the previous year, totaling $8.9 billion. “Economic prospects within Israel depend upon the external environment,” Jacob Frenkel, chairman of Merrill Lynch International and a former Bank of Israel governor, was quoted as saying at a recent conference in London. “The international environment is improving. I am optimistic about the world economy.” A group of some 10 Israeli venture capital funds are hoping to raise about $1.5 billion this year for start-up companies, and money managers say fund-raising prospects look better now than they have at any time since 2000, the financial news service Bloomberg reported. At a conference held earlier this month sponsored by the Association of Venture Capital Funds, the theme was, “On the Threshold of a High-Tech Renaissance” and the mood was decidedly upbeat. Blue-and-white balloons festooned display booths and participants were addressed by top figures in Israeli business and politics. Finance Minister Benjamin Netanyahu´s address to the conference would have worked at an economic pep rally. He spoke to an overflow crowd about the steps Israel has taken under his watch to liberalize the country´s economy. “If we want to compete, we have to have a national economies,” Netanyahu said, describing cuts in the public sector in Israel and creating incentives for Israel´s private sector. “Israel is undergoing the most rapid liberalization process of any country anywhere.” Netanyahu said that the process — which some critics say is moving too quickly, and others bemoan as maddeningly incremental — coupled with Israel´s innovative technologies provides exceptional opportunities for investors. “We are sitting on the silk routes and the spice routes of antiquity” and can now become a regional hub for technology, Netanyahu said. W. Robert Genieser, managing director at Vertex Management, a British company, who was among those attending the conference, is just the kind of investor Israel is trying to attract. “Israel is the closest one gets to Silicon Valley from Europe,” he said.”As a global investor, you cannot ignore the Israeli market.” He said the returns on investments in Israel are “on par” with Silicon Valley, in California. Israel´s technology industry has its roots in the country´s defense industry. Genieser said the private sector and venture capitalists benefit from investment in research and development that already has been made by the Israeli government. That translates into profits for businesses, he said. Today, Israeli technology is less linked to the military and covers a wide array of industries, from software development to network, search-engine and database technology. Genieser said he also is impressed by the “tremendous spirit” in the country. “The combination of a nice grounding in technology and an entrepreneurial spirit makes it possible to get worldwide investment,” he said. Daniel Kahn, a lawyer from Paris, recently was in Israel leading a group of French investors on a tour of Israel´s high-tech landscape — from army bases to small start-ups. He was juggling two challenges: on the one hand, trying to convince investors that Israel´s political situation is not too volatile to preclude investment, and on the other trying to market Europe to Israeli companies as a place to base themselves internationally. “It´s a big market and it´s next door,” said Kahn, noting that at the moment most Israeli companies are registered in the United States and tend to bypass Europe. Aliroo, an Israeli company based outside of Tel Aviv that specializes in encryption for e-mail, fax, and other data files, has its international headquarters in Rochester, N.Y. Meir Zorea, Aliroo´s president, founded the company eight years ago. Last year, it reported its first profits and has grown by 100 percent since. Capping its success, the company just closed a major deal with Eastman Kodak to secure their e-mail traffic related to the health-care industry. Among the company´s innovations is the development of a method to safely send and receive medical prescriptions by e-mail. Zorea said the Israeli companies that survived the recent economic recession are the stronger for it. “The companies are now leaner, more effective,” he said. “The atmosphere is positive. The political issues have some impact, but practically, more depends on what is happening inside the country,” Zorea said. “If you are good and selling, people are ready to invest.” The question of how much violence here affects investment remains open. It appears easier to raise funds now than two years ago, but the violence is down just as the global economy is up. Investors still appear jittery both about coming to Israel to investigate companies and about how the country´s long-term security situation could affect their investments. “There is no question that many executives of investment firms are not coming to Israel, and if they are not coming to Israel, they are not meeting companies and that is a problem,” said Menachem Feder, partner in a major Tel Aviv law firm, which represents venture capital funds and start-up companies. Yoram Eshel, a physicist who together with his partner, a plastic surgeon, are developing an alternative to liposuction — a device that uses high-frequency ultrasound waves to break down body fat — say they are seeing a marked improvement in the investment climate. “There is a real change in the last two months,” Eshel said. “People are starting to talk to us with the intention of investing,” he said. “A year ago people did not want to invest at all.”