They invested in 512 companies, out of a total of 2500 existing companies. "Of those, 1,200 will have closed their
doors by the end of the next 12 months," somberly predicted Eran Mordechai, Research Head of IVC-Online.
A case in point, is the Israeli banking industry which claimed many years ago, that obtaining foreign dollar deposits
was the route to create a stable banking industry. As a result of pressure applied by a strong "lobby", the banking
sector received the approval of the Finance Ministry and the Income Tax Department, to exempt foreign institutions
and foreign private investors from tax on the interest earned by such deposits. According to the Bank of Israel, these
deposits stood at $20.8 billion at the end of 2000. We estimate that the total loss of income to the Treasury in 2000,
was about $26.0 million. Israelis who maintain dollar deposits in Israeli banks, by contrast have a 25% tax levied on
interest earned on these deposits.
Even my barber Moshe recently moaned that maintaining dollar deposits due to the low interest rates, and the tax
levied on interest earned, made a dollar deposits an unattractive investment for his hard earned savings.
Another well known tax break favoring foreign investors is that of the Eisenberg Law, originally passed by the
Knesset, Israel's Parliament. The late international businessman, Shoul Eisenberg, obtained tax free status for 30 years
for the activities of his various companies, many of which were transferred to Israel and became based here.
Had the VC industry, two years ago, pointed to its achievements and then suggested that taxes be dropped so as to
obtain even better results, they would have had a prima facie case. Under today's high-tech global conditions it is less
certain.
Israel's venture capital fund industry, in recent years, has enjoyed an incredibly buoyant period of prosperity. In the
four years ending with 2000, the Israeli venture capital funds have raised an all time record figure of $6.5 billion. To
the credit of the local industry, Israeli high-tech companies have raised $5.1 billion where at least one investors was an
Israeli venture capital company. While local venture capital funds do not publish profit and loss figures, one can expect
parallel figures to those results achieved by their American counterparts. These, according to a study of 1,400 US
venture capital funds in the five years ending March 31, 2001, have realized an annualized return of 43.4%, according
to American Venture Economics. The Israeli VC industry, could seek a solution to its tax problem, by collecting a
contribution of $15,000 from each of Israel's more than eighty funds for lobbying the Government. It is not
unreasonable to assume that a $1.0 million pool of money
would suffice to finance a strong lobby which could pursue the industry's vital interests. After all, it is undeniable that
the future prospects for the return of healthy growth for Israeli high-tech industries are related to its ability to pinpoint
sources of capital which will see them through their early stages of development.
Israel's venture capital industry sees itself embattled as it faces new situations not previously encountered in its decade
old history. Over a five-year period ending in 2000 the Israeli venture capital funds raised no less than $6.1 billion
dollars, peaking at $3.29 billion in 2000.
The highly negative investment atmosphere is accerbated by more than a year of a falling Nasdaq stock market.
Locally, many Israeli high-tech companies are closing their doors, while others sharply reduce the numbers of
employees. Several industry sources predict that 1,200 high-tech companies will close their doors in the foreseeable
future. Additionally, eleven months of violence against Israel has not made it easier to raise capital from overseas. The
question is why has the Israeli Venture Capital Industry chosen now, at what some consider an inappropriate time, to
ask for tax relief? We always figured that the venture capitalists generally considered as down to earth, hard-nosed lot,
could have predicted that the dot.com bubble would burst. And that it would be followed by a period of dearth of
capital for investment and few windows of opportunities open for early "exits".
("Exit" is the industry's jargon for the cashing out of an investment by way of an initial public offering or by way of a
merger or acquisition)
In that sense the VC industry appears to have been no less naive then the masses of investors who were hypnotized
by the hype of the Alice in Wonderland make believe world, of escalating stock prices and the mountains of cash
being pushed into the coffers of the venture capital firms. Inevitably the money flowing in was accompanied by the
command: "invest it as quickly as possible". And so they did: pouring in an all-time record $3.1 billion of investments,
and this sum was picked up by the Israeli high-tech sector in 2000. In retrospect, if some concern for the future would
have been manifested, psychologically it was then the best time to plead for Government tax alleviation. Today the
time is less than propitious. The Israeli Venture Capital Industry has only most recently approached Finance Minister
Silvan Shalom with a request to cancel, for a limited period of time, the capital gains tax currently levied on foreign
investments in Israeli venture capital funds, revealed Yigal
Erlich.
The Israeli venture capital industry has a credible case to present to the Government. While we are not suggesting that
Israel is a top ranking tax haven, nevertheless it is a country that traditionally favored the "outsider over the insider".