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Business It’s Morning Again in Israel: High-tech Investment Booms Anew

January 27, 2004
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An annual report on venture-capital investment in Israel seems to confirm that Israel’s high-tech sector is emerging from the doldrums and regaining its solid footing.

Israeli high-tech companies raised $1.01 billion from domestic and foreign venture-capital firms in 2003, managing to stay above the $1 billion mark for the fifth straight year.

Although the figure is 11 percent below the $1.138 billion raised in 2002, 20 more private Israeli companies — a total of 372 — raised money in 2003.

Moreover, $529 million was invested in the second half of 2003 — the best second half for venture-capital flows to Israeli high-tech since 2000.

According to the annual survey conducted by the IVC Research Center, a division of Giza Venture Capital, investment in seed-stage companies tripled in 2003 from the year before.

IVC polled 125 venture investors, of whom 66 are Israeli management companies and 59 are other, mostly foreign, investment entities.

Ze’ev Holtzman, IVC’s research chairman, is optimistic about 2004.

“We foresee an increase in the pace of technology investments in light of the more buoyant capital markets in Israel and abroad,” he said.

Israeli officials are equally as optimistic.

“Israel’s economy in general, and the high-tech sector in particular, is picking up,” said Liana Foksheananu, an economic officer with the Israeli Embassy in Washington. “Bilateral economic relations between Israel and the U.S., and even European as well as Asian countries, are progressing well. We fully expect this momentum to carry into 2004.”

Foreign investors directly accounted for nearly 60 percent of the venture-capital investment in private Israeli companies, injecting $589 million into the high-tech economy in 2003.

Israeli venture-capital firms — which also manage funds raised largely from abroad — invested $421 million in local high-tech companies. Ten have begun raising new funds for future investment.

“Despite, or perhaps even because of, our continuing war against terror, Israel continues to grow its technology base,” Jon Medved, co-founder of the Jerusalem-based Israel Seed Fund, told JTA.

Medved noted a recent delegation from the U.S. Department of Homeland Security that included several congressmen and senators and more than two dozen business executives seeking partnerships with Israeli companies. An upcoming mission bringing 25 leading venture capitalists is scheduled for March, and a major health-care mission is planned for the summer.

“While the level of visits is still not back to what is was before the intifada, the unofficial travel boycott seems to have ended,” Medved said.

According to Medved, 2003 was a good year for Israeli high tech, and 2004 should be even better.

“With over $1 billion invested in almost 400 different companies, Israel has again demonstrated that our Silicon Wadi truly is the world’s second Silicon Valley,” Medved said. “I expect that 2004 will bring more of the same.”

Medved points out that Israel now outranks Europe when it comes to venture-capital investment from the United States, Europe and Asia.

“Whereas we used to be about 20 percent of the total invested in all of Europe in 2000, we are now over half of the total invested in Europe,” he said. “If you compare the total invested in Israel relative to an advanced country like Holland, we had 50 times the per capita investment in high-tech startups than they did.”

Israel’s reputation as a technology superpower belies its apparent isolation in international politics.

“What is remarkable is that despite the cool winds that sometimes blow from Europe, it is still Israel’s major trading partner,” Medved said. “Israel’s growing high-tech sector is an obvious part of our lifeline to the world. Strong ties with India, China, Korea, etc., are all heavily influenced by our economic relationships.”

In fact, Medved said, Israel now ranks third worldwide — after the United States and Russia — in exports of defense technology and products, according to Jane’s Defence Weekly.

The California-born Medved says the U.S. Jewish community can play an important role in stimulating Israel’s high-tech sector.

“The major challenge facing our industry will be the need for Israeli venture funds to raise more capital, somewhere between $1 and $2 billion,” he said.

“The Jewish community in the U.S. can play a role in this important drama by making sure that community endowment funds take a proper position in these venture funds, both helping themselves to earn good returns on their investments and building Israel’s future at the same time,” he said.

Another hopeful sign for Israeli high tech is the resurgence in investment in seed companies. These earliest-stage startups attracted $58 million, or 6 percent of the total, after wary investors had risked only $23 million, or 2 percent of the total, in 2002.

In the fourth quarter of 2003, 14 seed companies raised $10 million, twice the amount raised by just five companies a year earlier. Early stage and mid-stage companies together attracted $220 million, 20 percent more than in the final quarter of 2002.

“The rise in seed investments, along with stability in first investments in 2003, indicates that the Israeli high-tech sector has begun to emerge from crisis conditions,” Holtzman said.

Another trend shows an increase in the popularity of the life sciences sector, comprising biotechnology and medical devices and diagnostics.

In the fourth quarter of 2003, the communications, software and life sciences sectors raised approximately equal amounts. Previously, communications had outpaced all other sectors.

The life sciences sector showed the largest jump in capital raised in the fourth quarter — a 180 percent increase from the third quarter — to $64 million.

The Internet sector, meanwhile, suffered a sharp decline in investment. Fourteen Internet companies attracted only $41 million — just 4 percent of the capital raised — in 2003. By way of comparison, at the height of the Internet boom in 1999, 102 Internet companies raised $330 million, or 33 percent of the total.

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