He added: "In 2001, there was a (Palestinian) uprising, but somehow foreign investors got used to it," he said. "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."
The increase in violence is prompting foreign investors to put added pressure on Israeli high-tech companies to relocate,
Ehrlich said. Local investors will also shy from venture investments this year, Ehrlich said. Domestic banks lost money on
their technology investments and domestic institutional investors aren't receiving government incentives, such as
guarantees backing venture investments, he said.
The dearth of cash is putting Israel's high-tech sector "in a defensive posture," Ehrlich said. "I hope that this year will be the
worst year, and that next year will be better."
There was a 23% sequential quarterly rise in high-tech investment in Israel in the fourth quarter, to $464 million, but Ehrlich
said numbers for that period and the first quarter of 2002 were influenced by a few companies that raised a lot of money.
Venture Capital Investments in Seed Stage Companies Take a Plunge
Greater Biotech Share of Total Investments
IVA Sees 2002 Fund-Raising 95% Off Peak
Mr. Yigal Erlich, the chairman of the Israel Venture Association doesn't expect local funds to raise even $200 million this
year - a sharp blow for an industry that amassed a record $3.7 billion just two years earlier.
Fund-raising and investment sank in 2001 because of the collapse in the global technology industry and the slowing U.S.
economy. This year, the escalation of the Israeli-Palestinian conflict will play a much bigger role in depressing Israel's
venture industry.
As a result, the high-tech beneficiaries of these venture funds will shut down in even bigger numbers than the roughly 200
that closed last year. "Some would have closed anyway, but in good times, funds would have kept money flowing," he
added. Ehrlich wouldn't speculate how many casualties there would be.
He spoke ahead of a news conference where the IVA released its annual industry yearbook and discussed industry
developments.
The affiliated IVC Research Center reported earlier this year that Israeli venture funds raised $1.4 billion in 2001, down
from $3.7 billion a year earlier. Investments in venture-backed high-tech companies sank to around $2 billion in 2001,
from $3.1 billion the previous year.
Most of the money raised in 2002 will come from foreign investors, who traditionally have provided the bulk of Israel's
venture capital. But for the most part, foreign investors, who once saw Israel as a high-tech darling, are staying away, he
said.
The Money TreeTM Survey (Israel), which was conducted by Kesselman & Kesselman PricewaterhouseCoopers (PwC),
show a decrease in the investments in high-tech companies backed by venture capital funds (where one of the investors
in the first round of financing is a venture capital fund) in the first quarter of 2002 ($ 344 million) as compared to the last
quarter of 2001 ($384 million).
This quarter showed a decrease of approximately 10% in the total amount of venture capital investments in Israel as
compared to the previous quarter, aggregating $ 344 million. The decrease in investments (in monetary terms) was
accompanied by a yet sharper decrease of 28% in the number of companies that raised capital during the quarter (76) as
compared to the previous quarter (106) and 42% as compared to the corresponding period in the previous year (132).
The average investment per company was $ 4.5 million in this quarter, an increase of 25% as compared to the previous
quarter ($ 3.6 million). The trend of increase in the average investment per company reflects the focus of venture capital
funds on later stage rounds.
A notable finding is the decrease, for the first time since this survey was first carried out, in the number of venture capital
funds that made no investments during the quarter (neither in new companies nor in their portfolio companies): 21 venture
capital funds this quarter, as compared to 27 venture capital funds in the previous quarter, constituting 28% and 36%,
respectively, of the venture capital funds participating in the survey.
Another fact reflected in the findings of the survey is the continuing decrease (in monetary terms) in the relative weight of
local venture capital funds in total investments for the quarter (35% as compared to 38% in the previous quarter).
Another ongoing trend is the decrease in the volume of investments made by local venture capital funds: $ 122 million as
compared to $ 144 million in the previous quarter (a decrease of 15%). The remaining part was invested both by foreign
venture capital funds and by other investors.
Aside from the investments in companies that have a connection to Israel, as mentioned above, the local venture capital
funds invested only $ 11 million in foreign companies that have no activities in Israel, which constitute 8% of total
investments made by these funds during the first quarter of 2002.
IVC Launches the IVA 2002 Yearbook
The IVA Yearbook is the Israeli Venture Capital and Private Equity Directory, published by the IVC Research Center with
the cooperation of the Israel Venture Capital Association and Globes, is the most comprehensive source of information
on Israel's venture capital industry anywhere.
The IVA 2002 Yearbook includes extensive data on 83 firms managing Israeli venture capital funds (compared to 80 in the
previous edition), 38 investment companies (40), 850 portfolio companies (1,000), articles by prominent figures in the
industry, statistics on the high-tech economy and a comprehensive directory of IVA members. A new addition is a
directory of 58 firms that serve the high-tech industry: accountants, attorneys, investment banks and more. Included for the
first time in the current edition is Corporate VCs - local and foreign - which are active in Israel.
New IVC Findings
The IVC Research Center compared developments in Israel's venture industry with those in the US and Europe in
2000-2001. Four findings were noteworthy: (1) Regarding total investments, Israel ranked first in Europe and fifth in the
US. (2) Capital raised by Israel and US VC funds, showed a similar rate of decline, while European funds recorded a
more moderate decrease. (3) Capital raised by high-tech companies showed a moderate decline in Israel and Europe
compared to the US. (4) There was a sharp decrease in exits in Israel and in the US.
Israel Ranked First in Europe and Fifth in the US
A comparison of Israel with states in the US, ranks Israel fifth in terms of capital raised by high-tech companies in 2001.
California, Massachusetts, Texas and New York (descending order) each rank higher. Compared to Europe, Israel ranks
first ahead of the United Kingdom, France, Germany, Italy and Spain.
Decline in Capital Raised by VC Funds and High-Tech Companies
A comparison of Israeli trends with those in the US and Europe indicates that capital raised by venture capital funds
declined in 2001 in all three economies. The decrease in Israel and the US from the previous year (62% and 61%,
respectively) is nearly identical, the decline in Europe is more moderate (40%). Capital raised by high-tech companies in
the US fell by 64%, while European and Israeli firms fared somewhat better with decreases of 46% and 36% ,
respectively.
The biotechnology industry stood out in each of the markets. In the US, biotechnology's share of investments in 2001
jumped to 8.2% from 3.5% in 2000. In Israel the increase was to 6.0% from 3.4%, while in Europe biotechnology
accounted for 11%, up from 7%.
Sharp Decrease in Exits
Venture-backed exits saw a drastic drop during 2001. Initial public offerings (IPOs) of Israeli companies (in the US and in
Europe) plunged 92% in dollar terms from 2000 levels, while US company IPOs skidded 85%. The value of M&A deals in
Israel declined by 94%, while in the US, the value of M&A deals fell 78%.
