The risk of war with Iraq and the uncertainty as to its timing have
resulted in havoc and near hysteria conditions on the global stock
and currency markets. With each "breaking news" announcement
a wave of sellers is followed by a wave of buyers. A speech by
President George Bush, interpreted that war is more imminent is
followed by a rush of exiting investors, heavily plunging stock
prices and a falling dollar. An anti-war declaration by France or
anti-war demonstrations have the opposite effect. Investors are
emboldened to undo their Euro or Swiss Franc holdings and buy
into dollars. Stock prices and the dollar rise only to fall again as
both the risk of war and the uncertainty as to its start, further
unsettle the frenzied investors. Experienced investors, and there
seem to be too few of them, in unsettled periods just move to the
sidelines.
Private equity investors, whether wealthy individuals, venture
capitalists, heads of foundations or university endowment funds,
let there be no doubt it, represent the life blood of young
companies. These may be in the quest of developing a newer and
smaller chip, or a novel pharmaceutical with which to cure one of
the ills that plague mankind or just a plain "better mousetrap". To
move their dreams forward from the laboratory to the market place
they need cash. However, it is not always clear which sources of
capital should be tapped.
The only substantive data as to the flow of capital to seed stage
companies comes from the venture capital industry associations.
These companies have been reporting since the middle of 2001 a
sharp drop in obtaining these investments. Venture capital
sources have recently begun to predict that 2003 will herald a
renewal of seed stage investments. Their stated rationale, behind
these assumptions is tied to expectations that these companies
will reach maturity concurrently with a recovery of the capital
markets in 2004-2005.
That would indeed be good news for young companies.
Yet, the venture capitalists who often say that theirs is a cyclical
industry, this time they are functioning in a new world. An
unchartered world that has come into being in the aftermath of the
bursting of the dot.com bubble. We would like to suggest that the
needs and capabilities of the venture capitalists are far different
today than from the period of two or three years ago. Some venture
capitalists have made ghastly errors by committing funds to
enterprises that have foundered and have disappeared from sight.
It could well be that their own call in the guise "for cash for new
funds for young companies" is more than partly tinged by their
need for capital to support the older companies in their portfolios.
Maybe not a bulls eye on our part, but certainly not altogether off
the mark.
We believe, that it is grossly over-optimistic to assume that as
early as next year Nasdaq will present a bullish investment stage,
a must for IPOs. If our assumptions are even partially correct, it
would behove young Israeli companies be be highly selective
when negotiating with Israeli venture capitalists.. They have to face
the very unhappy thought that when they need second stage funds
the venture capitalists may have run out of steam and have placed
the marriage of convenience at risk of dissolution.
Perhaps, if any advice is to be tendered to Israeli entrepreneurs it
is --- "look both west and east, and maintain a healthy air of
scepticism when faced with home-grown promises" from those
who would like to trade a portion of you equity for badly required
cash.
An extra effort may be needed! An extra trip to San Francisco, New
York or to Singapore. Very few good ideas, backed by a sound
business plan fall by the wayside. It is in the nature of the
entrepreneurial spirit to find the very best of backers.