In the Israel High-Tech & Investment Report June 2002 issue we noted in anrticle that The Time for Mining Gold Nuggets is at Hand. Sources in America and in Israel, 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, it 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.
Similar sentiments are voiced by veteran
venture capitalist Yadin Kaufman, and founding partner of Veritas Venture Capital of Israel.
"To summarize the spirit of the late 90s, Israel's VC community paid too much to invest in too many companies that spent too much cash. These so-called "best of times" were, I would argue, a terrible period to be putting money to work. Flash forward to 2002, to what looks like the worst of all possible times to be a venture capitalist. The VC party is over: Only $18 million has been invested in seed-stage companies in the past three quarters combined - compared with $126 million in the last quarter of 2000 alone. IPOs and profitable merger and acquisition transactions are virtually non-existent and the only exits these days are by managers leaving VC firms.
The gloomy diagnosis is, however, unwarranted. The reality is that today is arguably the best time in the last decade to be a venture capitalist in Israel. Valuations of companies have shrunk back to realistic levels. Cash burn rates have shrunk, too, with the decline in salaries and with the awareness of how difficult it will be to raise the next round. For the investor, this means much-improved odds of reaping significant returns. Slower cash burn means less dilution, and low entry price means that even an exit at a valuation of $100 million-rather than $1 billion can provide a 10-fold return.
And, while there are fewer startups today, they tend to be better startups. In today's environment, only "true" entrepreneurs, with great ideas and often with one or more exits under their belts, dare to pursue high-tech dreams and start a company - and these are the kind of people VCs dream about investing in.
Now is the time to support startups with exceptional, seasoned teams of entrepreneurs, with low burn-rates and cash requirements to break even, accompanied with modest valuation expectations.
Today's climate is likely to prevail for at least the next 12 months. The easy money is gone. Yet the good news is that this is the environment in which great companies are created. Venture capital is a cyclical business, and investments made during the dry seasons - when it's hardest to raise funds and start companies - tend to produce the best returns.
In many respects, we are back to the early 90s - with the critical difference that today we have many more experienced entrepreneurs and VCs, and we've had a full decade of mistakes (and some successes) from which to learn.
Investors who took the plunge back then, despite the Gulf War, poor exit environment, and geopolitical instability, were rewarded very handsomely indeed. So, too, will the investors of the early 2000s - these best of all possible times for early-stage investors".
Yadin Kaufman and his partner Gideon Tolkowsky identified ESC Medical, now called Lumenis, and their fund became an early stage investor. The "cashing out "was one of the more bountiful results in the history of Israeli venture capital industry.
The Kesselman & Kesselman Pricewaterhouse Coopers Money TreeSurvey, for the third quarter of 2002 inicates that venture capital backed investments in high-tech companies were stagnant in the third quarter of 2002 . 72 high-tech companies raised $ 221 million in the third quarter of 2002 which was nearly identical to the $ 217 million invested in 70 companies in the preceding quarter.
Over the past seven quarters , beginning with Q1 2001 three out of 10 venrtures capital funds made no investments. In the past quarter the figure was above the average as 27 of the 73 funds surveyed did not make a single investment. Nearly half of the companies that raised venture capital investments obtained some funding from the Office of the Chief Scientist of the Ministry of Industry and Trade.