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Foreign investors key to technology industry growth01/01/2006. Source: Israel Venture Capital Journal. Zeev Holtzman, Chairman & CEO, Giza Venture Capital
 Foreign investors appear poised to up their stake in Israeli companies. In this Israel Venture Capital Journal article, Zeev Holtzman, Chairman and CEO of Giza Venture Capital, explains why.
Investments in Israeli technology companies appear poised to reach the $1.3 billion to $1.5 billion range for 2005. Most of the investment - 57-60 percent - will come from non-Israeli investors. The remainder will be from Israeli investors, mostly venture capital funds. The numbers are similar to those for 2004.
Healthy high-tech industry
The numbers at these levels are strong proof that Israel has a credible and healthy high-tech sector, especially when one considers that most of the capital is flowing to early stage companies. The long-term viability of Israel's technology industry is closely tied to these early stage investments. On the flip side of the coin, we are seeing that investors are very selective. Screening companies is a time-consuming process, and investors are no longer willing to make the fast decisions that were at times poorly supported and researched as they did in the gold rush of 1999-2000. Will foreign investment activity increase in the future?
Non-Israeli investors are likely to grow beyond the 60 percent level. Growth will come about partially due to the overhang of capital in the United States and the simultaneous shortage of capital in Israel. We are currently experiencing greater foreign interest, especially by US venture capital funds. Their exposure is growing gradually but steadily, and there are sufficient Israeli opportunities to fulfill their appetite. Which foreign investors are in the forefront?
US investors are clearly spearheading the foreign investor procession, although there are some European investors making investments in Israeli companies, too. Unfortunately, European investor activity has declined in the last few years as Europeans are giving their highest priority to the US for investments outside of their home continent. Asian investment, never particularly high, has been slipping as well.
VC capital raising continuing
We can expect to see the phenomenon of Israeli VC capital raising for new funds continuing for the next one and a half years. Almost all will try to raise follow-up funds, but success rates will vary. For US venture capital firms with dedicated Israeli funds, such as Sequoia or Benchmark, investors can be identified and commitments gathered in the course of a few months. In contrast, capital raising for Israeli funds involves a much longer, more complex process in terms of meetings, time and due diligence.
Some Israeli funds will decide that the results are not worth the demanding effort and will not come to market for additional capital. Israel Seed, Concord and Harvest, for instance, have decided to shelve capital raising plans for the time being. At the end of the day, there will be much fewer active Israeli VC funds in the market than there are currently.
Private equity funds gaining relative strength
The advent of private equity funds has brought a new dimension to Israeli investment. At a time when Israeli VC funds were struggling to locate investors, two private equity funds raised about $1 billion. - Markstone $750 million and FIMI $250 million.
This is an indication that Israel is becoming like more developed countries where private equity investors dominate and VCs account for only 25-30 percent of overall investment.
The expectations for private equity encompass good growth in the coming years. The firms will take advantage of an abundance of attractive situations in the future emanating from appealing family-owned businesses, as well as from privatization efforts of the government and from other sources. Israeli venture firms are becoming a fraction of total alternative assets activities and not the dominating one as they were two to three years ago.
Changing focus
It will not be surprising to see an increased focus on IT investments, as only a small number of the general technology Israeli funds, such as Giza and Pitango, make investments in the life sciences. Just a few - Medica and Israel Health Care Ventures - have a policy of targeting the sector exclusively. This lack of interest is surprising, as the life sciences - specifically medical devices - have experienced some of the most lucrative exits of the last few years. Given Imaging, X-Technolgies and Syneron are prime examples. The number of investments in the life sciences is declining, which may offer opportunities for the remaining venture capital players in this area.
We are seeing more and more investors looking to identify late stage/expansion stage investments. Most are foreign. This is healthy, since Israelis are looking mostly at early stage situations. We expect that more late stage investors will become active in the Israeli market.
In the life sciences, we see a shortage of capital in the future, especially for biotechnology. Most foreign investors are looking at communications and software. Only some are seeking investment in biotech. There is no question that Israeli biotech offers an excellent opportunity, but unless there is a change in government and investor attitudes, the investments and the sector may well disappear.
Zeev Holtzman
Chairman & CEO, Giza Venture Capital
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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