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Angels are fearlessly treading again in Israel21/02/2007. Source: IVCJ. Zeev Holtzman, Giza Venture Capital
 Angel investors have begun returning to the Israeli investment scene, finds the IVCJ. Zeev Holtzman, Founder and Chairman of Giza Venture Capital, describes their recent fate and how their return serves a higher purpose.
Angel investors – high net worth individuals generally investing from $50,000 to $250,000 to jumpstart fledgling companies – almost disappeared from the Israeli market following the crisis of 2000-2001. The shakeout in the technology industries, especially among Internet and communications companies, severely impacted the many private investors who put money into seed and pre-seed situations.
In those heady investment days, there were some observers who classified angels as belonging to one of two groupings – wise angels and foolish angels. Wise angels were seen as the high-tech entrepreneurs that previously made money through one or more exits and believed that they had the right formula for the next high-tech success. Moreover, they were sure they would supply added value to the target company through their superior industry knowledge and bulging phone book of contacts.
The foolish angels ostensibly consisted of wealthy individuals who made their fortune in old economy businesses – in diamonds or construction, for example – and expected to make a bundle in high-tech as well. Their high-tech knowledge was very limited, but they invested anyway, with many putting their money into garage-type situations.
The end was similar for both groups. Virtually all angels lost money. So who was wise and who was foolish? These are questions we are still asking.
Angels are part of the food chain
My intention is not to make light of the unfortunate fate of these investors, who lost very significant amounts of money. The disappearance of private investors from Israel’s investment scene, on the heels of their big losses, very negatively impacted Israel’s high-tech industry. Angels played an essential role as a part of the investment food chain.
They supplied capital and provided support to entrepreneurs until a prototype could be put in place or other milestone reached, enabling the entrepreneur to raise venture capital. By adding to the pipeline of new companies, angels contributed to the critical mass of options required for investment in high-tech industry. The effect of angels disappearing from the market was especially felt in the 2002-3 period.
The number of new companies had declined as the venture capital funds were reluctant to invest, and angels were out of the loop entirely. In 2005-6, angels began to return. The resuscitation of angel investors came in response to rising successful exits for private companies and greater stability in the high technology area.
Limits on angel funding capacity
In today’s environment in Israel, there are startups and other early-stage companies that prefer not to seek venture capital funding because of the long lead times for investment and fear that VCs might not deliver the support that they promise. These companies are content to raise capital from private investors. This approach is fine when seeking $1 million or even $2 million. Yet, the angel market is generally not prepared or able to fund requirements in the $10 million plus category. With rare exception, angels are not the answer for companies seeking large amounts of capital.
Favorite angel targets
In Israel, there has been a tendency for angels to invest in Internet, software and the life sciences. Angels generally prefer to invest in businesses that they can understand, even if the workings of the technology itself are beyond their comprehension. The investment decisions of some angels are not always strictly governed by the profit motive. For example, investment in the life sciences is favored by some because of a potential societal benefit that could result from a life saving drug or medical device being successfully brought to market and the wish to be a part of that effort. Israeli companies sometimes benefit from the affinity to the State of Israel shown by private Jewish investors based overseas. These investors have a desire for Israeli companies to succeed, not just their own investment.
Who are the angels?
Sometimes new entrepreneurs are fortunate enough to have able investors among family and friends – often the first people turned to for seed investment. Where these are lacking, the fund raising challenge becomes considerably more difficult.
There are well known angel investors – individuals whose names often appear in the media – mainly among those who have in the past founded successful businesses. Some boutique investment banks have databases of private investors, and angel groups, generally organized by a lead investor, also exist in Israel. Whatever their source, the importance of angels cannot be overemphasized. As a complement to the VC industry, angel investors clearly have a key role to play in the future success of Israel’s technology industry.
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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