The increase in investments stemmed from the rise in the amount raised by Israeli venture capital funds themselves. These were estimated to have raised some $2.5 billion in 2000, compared to $1.6 billion in 1999. Over the last decade, Israeli venture capital funds have raised a total of $6.5 billion, some $3 billion of which is still available for new investments." Certainly the figures could still be seen as being part of the the Seven Fat Years.
At the time, Zeev Holtzman, Giza chairman, estimated that since follow-up investments represented nearly half of the total amount managed by the funds, $1.5 billion was available for first-time investments in new startups.
In the middle of July 2002 the accounting and consulting firm Kesselman &Kesselman PricewaterhouseCoopers, announced the findings of its Money Tree Survey. The startlingly bad news was that only $ 217 million was invested in Israeli high-tech companies in Q2. In the preceding quarter, Q1 2002, $ 344 million was invested. According to presenter Joseph Fellus, a partner in the accounting practice, in the first half of 2002, high-tech companies raised an aggregate of $ 561 million, a decrease of 37% as compared to the corresponding period in the previous year and 60% down compared to the first half of 2000. One of the individuals present was the chief financial office of a venture capital fund. "It will be another four years when we can expect to cash out of our investments by means off public offerings". he opined. If his prediction is correct that means that 2006 would mark the end of the Seven Lean Years.
If that is not enough to worry, then one can consider the sorry plight of start ups and their dwindling prospects for obtaining seed funding. Only 40 startups were launched between January and June, compared with 160 in the whole year 2001, according to Dolev & Abramovitch Hi-tech Information. In the same period of time 70 venture-backed startups collapsed, compared with 292 in all of 2001.
More on Israeli Venture Capital and Private Equity Industry
Investing in venture capital funds was not a major capital market priority in the United States in H1 2002 as the industry adjusted itself to supporting its portfolio investment companies and in general delayed committing funds to new investments. Yet in the second quarter a total of $4.6 billion was raised, $2.5 billion of it by E.M. Warburg Pincus & Co. Clearly, the dramatic slowing in the pace of investment is related to a drop in the valuation of companies. The underlying concern for the venture capital companies is the level of valuations that they will ultimately attain when they take their portfolio companies public.
The process of returning money to investors also continued with $3.0 billion as the generally accepted industry figure for Q2 2002. Charles River Ventures of Menlo Park, Calif., led the list of downsizing funds by returning $750 million to its limited partners. For the year 2002, American venture capital companies are expected to obtain between $100 billion and $120 billion in venture commitments, down from $200 billion raised in 2001 and $249 billion in 2000. 2004 is the earliest time when resumption in capital raising is expected.
Israeli BRM Capital LP. early in July, became the first Israeli venture fund to announce that it was reducing the size of its fund from $253 million to $150 million. BRM Capital is a seed- and expansion-stage venture capital firm that invests funds primarily in Israel-related infrastructure companies in the communications and software domains.
Joint BRM Capital CEOs Nir Barkat and Menashe Ezra were quoted as saying "that the change did not come about through pressure from investors. Only three of the 48 investors in the fund approached us with a request to reduce the size of the fund and we received the blessing of our investors and clients who said that they appreciate the move and will take it into consideration when whenever raise our next fund".
So far, BRM has invested $60 million in eight companies. $90 million remain in the fund, sufficient, according to Barkat and Ezra, to invest in eight more companies.
Venture capital funds that have raised substantial sums of money and remain uninvested, are have the dilemma of facing up to growing investor dissatisfaction since the management firms continue to collect hefty management fees on these funds.
Venture capital firms are not alone in experiencing hard times as investment bank Roberston Stephens responsible for raising several billions of dollars for Israeli high-tech firms has closed its Tel-Aviv office. The San Francisco-based investment bank, which specializes in underwriting technology offerings, began operating independently in Israel about four years ago. Prior to that it had joint ventured in this country with the Evergreen Group. The RS annual conferences were the best of their breed as more than 100 companies were presented in the span of two days, to investors from all over the world. FleetBoston wound up owning RS after buying the Bank of Boston, which had bought Robertson Stephens in 1998 for $800 million. Robertson Stephens led more than 30 issues by Israeli companies on Wall Street including CheckPoint, Amdocs, Tower Semiconductor, Zoran, AudioCodes, Optibase, Galileo Technology and in the past two years Verint Systems , Verisity and Given Imaging, the first Wall Street IPO after the September 11 attack on NYC.
Robertson Stephens, once a highly profitable investment bank, has seen its revenues sink by 71% in 2001, for which it posted a loss of $61 million, compared with netting $216 million in 2000. FleetBoston cut the bank's staff by 39% to 950 and subsequently decided on its closure.
We understand that Andrew Kaye General Manager of the Israeli unit, should a management buyout succeed in the US, will try to maintain the local operations as a representative office.
Another harbinger of things to come was the announcement, in early July, of the merger of two Israeli venture capital companies.
Neurone Venture Capital and Platinum Venture Capital signed an agreement in principle to merge. The new entity will be called Neurone-Platinum Ventures. This marks the first merger in Israel's venture capital industry, which is expected to undergo massive consolidation and relocation overseas in the coming years.
Under the agreement, Neurone and Platinum will manage their portfolios independently. Each will allocate $30 million from their latest funds to establish the first joint $60 million fund. Neurone-Platinum Ventures will be managed by Neurone Ventures managing partners Amiram Dotan and Yigal Livne, together with Platinum Venture Capital managing partner Yehoshua (Shuki) Gleitman.
In January 2001 we were able to report that: " Israeli startups raised more than $3.2 billion from venture capital funds in 2000 - three times the amount invested in 1999. In the last quarter of 2000 Israeli startups will have raised more than $800 million. The figure was reached notwithstanding the sharp drop in Nasdaq, the drought in the Initial Public Offerings market and the security situation in the country. It also represents a decrease of less than 20 percent from the preceding quarter, when investments in Israeli startups exceeded $1 billion.