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Today’s 'big 5' challenges for Israeli VCs31/10/2007. Source: IVCJ (Israel Venture Capital Journal). Zeev Holtzman
 Maintaining the vitality of the local VC industry will not be accomplished easily in today's changing environment. In this IVCJ article, Zeev Holtzman, founder and chairman of Giza Venture Capital, pinpoints the challenges that must be faced.
There are several significant challenges ahead for the venture capital industry in general, but with a base far removed from the heart of world's VC industry - in the US - Israel faces these issues with its own unique flavor. Below are what I identify as the major issues with which Israeli VC funds must contend in order to assure the continuation of a vibrant and successful industry.
1. Coping with globalization
Conventional wisdom holds that venture capital activities are basically domestic and that Israeli venture capital is essentially a domestic industry - locally based funds that invest in local companies - mainly under the influence of microeconomic factors. Still, investors in Israeli funds are 97 percent non-Israeli institutions and, due to the limited size of the domestic market, portfolio companies must be globally focused from inception. The local VC industry, however, cannot bury its head in the sand.
The activities of funds elsewhere have a significant impact on where institutional investors put their money, as well as on competition facing the Israeli VC funds and their portfolio companies. The trend toward globalization placed a new paradigm in front of Israeli management companies. And Israeli managers were forced to examine how to continue to attract leading global institutions to invest in Israeli VC funds and determine the sectors on which to focus in today changing markets. The above assumes that the basic investment thrust of Israeli funds should continue to be Israeli companies. This is their strength, and limited partners are not looking for an Israeli VC fund to become a global one.
Leading US funds have started to become global, with activities stretching to Israel, India, China and Europe, etc. Some have local branches seemingly everywhere, and some have dedicated domestic funds. The effect of these moves on Israeli funds, including the intensified competition and impact on current strategies, needs to be examined. A key question is how Israeli companies can continue to be attractive to overseas (co)investors in the face of global competition.
Realistically, Israeli VC funds will continue to be essentially domestic, and while some funds may dabble in far off lands, I don't believe we'll see an Israeli VC fund becoming a global organization, but we will see more and more non-Israeli VC funds increasing their activities in the Israeli market. The best approach for Israeli funds, therefore, is to cooperate with global VC funds through alliances and co-investments in later stage rounds.
The case of Giza Venture Capital is a prime example of how cooperation can become a win-win situation for both the Israeli and the global fund. Giza has established an alliance with 3i, one of today's largest and most successful global VC and private equity investors. The relationship allows 3i to benefit from Giza's all-sector exposure to the Israeli market and tap into Giza's well developed network and databases. Among the advantages for Giza is assistance in due diligence via an organization that is positioned in multiple markets. The challenge for these two organizations is to reach a high level of cooperation and mutual confidence in order to leverage the benefits of the joint pact. It is a process that takes time and needs the attention of management and the senior investment professionals.
2. Determining the right strategy.
Israel has developed a reputation for innovation and as a cluster for advanced technology in certain niches. Managers will need to decide whether to test the waters in today's fashionable sectors such as cleantech or whether to invest in formerly hot areas such as homeland security and nanotechnology. Is the resurgence in the Internet sector a mirage, or is it ripe for investment? The "right" sector approach may vary from fund to fund. Israeli VC managers will need to determine what is best and examine how to leverage their strengths, while minimizing weaknesses.
Stage of investment is another parameter. In today's world, competition for the best deals starts at the pre-seed stage. Management must learn to cope with the challenges of seed investments such as intense management attention required for young companies, higher risk and the need to support companies for longer time periods. VC management will have to decide if it is a supermarket - doing seed, early and expansion stages at the same time - or whether a more focused approach is most appropriate.
3. Achieving lucrative exits
Maximizing returns to limited partners can result from optimizing exits. The IPO was the key exit method in the past. Today, mergers and acquisitions have become the major route. In either case, a prerequisite to achieving a lucrative exit is to build strong companies. In this regard, vintage 2000 was very disappointing. Did VC managers learn their lesson in creating and nurturing their vintage 2004-5 portfolios? It's still too early to tell, but one thing is certain: limited partners will look carefully at the quality of portfolios and their potential exit value in determining future limited partner investments.
4. Understanding the perspective of limited partners
Israeli managers that are successful in obtaining investment demonstrate an understanding of limited partner needs. Limited partners will compare Israeli funds to US and European funds and look for the following:
1. a focused and consistent investment strategy
2. a team built to last
3. an internal succession process
4. risk diversification regarding sectors and portfolio
5. timing of expected exits
6. an explanation of how management adjusts its strategy to meet changes in the investment environment
5. Management succession
Most Israeli funds started in the early 1990s and are currently facing questions of succession. Only two - Evergreen and Giza - have been through the process. Now others must devote their energies to this process over the next few years. Will it be done in a clear, orderly and transparent way or under pressure from limited partners?
This article 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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