Multi-year research indicates that the venture capital industry is cyclical. At a recently VC conference
held at the plushy Sea Island, Georgia resort, Philippa Malmgren, a senior White House economic adviser
said, "it is a cyclical business ... and one shouldn't forget that some of the very best deals happen at the
low points."
The Time for Mining Gold Nuggets is at Hand
Josh Lerner of the Harvard Business School, has openly stated that "While we've seen dramatic cycles in
terms of the dollar value of venture capital being provided, when it comes to the things that we as policy
makers, really care most deeply about is: what is the impact on innovation? it's likely to be much more
modest". Israeli academics rarely go on a limb to predict the impact, that venture capital flows have on
this country's economic performance, and its future influence on its economy.
Israeli venture capitalists are not known for openly detailing the performance of their investments. Sand
Hill Econometrics, tracks the performance of American based venture and other private equity deals.Their
index shows that private equity deal values, doubled from 1992 to 1996, tripled from 1997 to 1999 and then
began a sharp decline, prior to the precipitous falls that began in spring 2000.
A similar situation prevailed in Israel. According to VentureOne, a leading source of statistical information
on the American venture capital industry, it obtained commitments of $87 billion, for investment in 2000
and $47.6 billion in 2001, a net loss of 45.3%. In Israel according to IVC Research Center, the Israeli venture
capital industry obtained $3.7 billion in 2000 and $1.4 billion in 2001 for a net loss of 62.1%.
Chinks and Cracks are Beginning to Appear
Attempt at Retrieving Uninvested Cash
At the time Tamir Fishman Ventures II aimed at raising a total of $150 million from private investors, and up
to an additional $50 million through the floatation of Tamir Fishman Ventures II Ltd. on the Tel Aviv Stock
Exchange ("TASE"). Then IHTIR wrote that "the new fund's value should benefit from making investments at
lower price levels than at the outset of 2000 when deals were high priced at a premium over current levels".
However, two years later, our positive expectations had not been realized. Israel's business daily wrote
recently " Institutional investors, including Ilanot Batucha, (Ilanot Betucha is the largest investment
house in Israel), have claimed in the past that there is no justification for the existence of a fund that sits
on NIS 167 million ($34 million at current rates of exchange) in cash, with investments only in 11 portfolio
companies that amount to just a few million dollars. The money is therefore not invested as venture
capital at all, but managed by Tamir Fishman's management company, which draws NIS 5.5 million in
annual fees for its trouble". Ilanot Betucha, a substantial investor in the shares of Tamir-Fishman, entered
into an a consultation agreement whereby it will receive part of the management fees earned by the fund.
What remains to be seen, is whether other investors will sit quietly on the sideline and contemplate a
nearly 60% erosion in the value of the publicly traded Tamir-Fishman shares.
Our conclusion is that we will be hearing of the demise, or near demise, of the less nimble VC funds.
Mergers are a possibility, as individual funds suffer cash problems, while others are criticized for sitting
on hoards of cash
A sharp decline in Israel's venture capital activity over the past 24 months, has raised serious concerns
that an important source of innovation and economic growth, so critical to many Israeli companies, has
evaporated. Probably, these concerns are vastly exaggerated and popularly held perceptions of the
venture capital industry, are mostly in the category of myths.
Sources in America and in Israel, in a populist manner, proclaim that the venture capital industry is ailing.
Yet more than one voice can be heard stating that some of the best venture capital deals may be currently
in the early germination stage. In the last decade we have noted, in times of prosperity or recession,
during "bull or bear" markets, that there are gold nuggets strewn across the Israeli technology landscape,
and that savvy investors will identify them even while Israeli entrepreneurs scramble extra hard for
investment funds.
Investors in Israeli high-tech made fortunes before the decline of the NASDAQ. So why the discrepancy in
percentages? A small part of the drop can be attributed to the current political instability or the "Nablus
Effect". Internal structural problems within the Israeli venture capital funds are the main culprits.
Consequently many may find themselves forced to merge, close shop or return money to investors.
A case currently being tried in Los Angeles Superior Court, is developing into a trial balloon for investors'
rights, as the wealth, created during the dot.com boom has spiraled down into devastating losses.
Investors in venture capital funds, also known as limited partners can't recover the losses of the past two
years, but many may seek to retrieve some of the money still in the hands of the venture capitalists. The
above case, relates to a company named Idealab, which attracted massive interest. Dozens of investors
poured in one billion for a 10 percent stake in Idealab at the height of the Internet craze in early 2000.
Idealab pioneered the concept of high-tech incubators - entrepreneurial communes. The founder of the
company has said that the incubator is in great shape, with $360 million in cash and other liquid assets,
as well as a batch of promising high-tech startups. The investors feel otherwise. A venture fund exists
legally as a limited partnership for a specific period of time, typically on the order of seven to ten years.
Over a period of time it is expected that the general partners will invest the fund in accordance with any
guidelines established at the fund's inception, and will diligently monitor the performance of the fund's
investee companies.
For their services as intermediaries, the general partners typically receive an annual management fee of a
few percentage points, in most cases 2.5% of the fund's total assets and a carried interest, or "carry,"
specified as a fixed percentage, typically on the order of 20-30%, of the capital gains realized at the close
of the fund. At the termination of the fund's (limited partnership's) life, all proceeds from the investments,
less the carry, are distributed to the investing partners.
If the investors can force the liquidation of Idealab it could well embolden investors among the poorly
performing Israeli venture capital funds, to insist on getting their money back, or whatever is left of it. The
local Tamir-Fishman VC Fund may be on the brink of facing action to return cash, a percentage of which it
is collecting as management fees. More than two years have gone by since its Public Offering on the Tel
Aviv Stock Exchange.