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Zichron Yaacov, Israel--For Israel's venture capital industry- there has certainly been better times- yet worse times as well.

From 2002-2003, Israel took a double beating with the tech crash came. It’s success in high tech was directly related to the froth on Wall St. and the ability for US tech companies to buy Israeli start ups. Without the “Nasdaq exit” that used to take place, and as few technology companies from the US are making M&As in Israel a very high priority, the local Israel private equity market no longer looked like a compelling opportunity.

The outbreak of violence that began in September 2000 didn’t help matters- but it really isn’t the main reason for the downturn in the attraction of Israeli high tech for foreign investors. To be sure, until very recently, very foreigners relish the thought of traveling to Israel (even through the security in the majority of the areas where high tech development takes place is as safe as it was pre-September 2000). Going forward it is difficult to see how Israeli fund managers will equal the 30% in IIR that they did in l996-l999. Or put another way, it is very likely the investors in earlier funds will give back any profits they made there to offset the losses they will incur on the later Israeli funds from l999-2001.

But the main issue today is not how high the returns will be- but the future of overall future of Israel's start up and venture capital industries. Before 2000, 80 funds raised the $4. A recent report by the Organization of Economic Cooperation and Development (OECD) states that venture capital investment in Israel from 1999-2002, as a proportion of GDP was higher than in any OECD member state.
However that was then. Today is a new reality.
Says Zeev Holtzman of the Giza venture fund: "In the 1999-2000 time frame, total investment in Israeli venture funds reached $1.2 billion. The active funds in recent years raised capital before 2000, and their first five-year period is due to expire this year. We know that the funds raised $4.5 billion. If we deduct $2 billion in management fees, reserves, and allocations for follow-on rounds in companies, we're left with $2 billion available for new investment. The funds invest $400 million a year. If the funds fail to raise money, the rate of investment will shrink drastically. But if the funds manage to raise $700 million to $1 billion this year, there's a chance of maintaining the regular rate of investment."
Holtzman and his colleagues needn't worry. The Israeli government has come to the rescue.

It has approved a plan to allocate $325 million to two government-backed funds: $200 million for Yozma B, which will invest directly in Israeli venture capital funds; and $125 million for Yozma C to guarantee institutional investors' private equity investments.

It is believed that if Israeli institutional investors channel just a fraction of the shekel (the Israeli currency) reserves that they invest in safer and more conservative instruments to private equity, and more specifically to venture capital, it will reignite the industry.

Top institutional investors sources say it won't be easy, and will certainly take time- but that overall- it is the right approach.

Israel Foreign Trade Risks Insurance Company deputy general director Amir Barkan heads the new funds program at Ministry of Industry. He claims that US institutional investors invest 8% [of their capital] in private equity and European institutional investors invest 4%, but Israeli institutional investors invest less than a thousandth.

Says Barkan: "The common denominator of the two funds is that the government is not a party to decisions about capital allocation decisions; it leaves that to the experts, i.e., the venture capital and other private equity funds, such as mezzanine and venture lending funds. We're applying the US model, which has been operating successfully since the 1950s."

The government will guarantee the institutional investor's private equity investment, up to 25% of the capital raised. For each dollar the government transfers to a fund through a guarantee to an institutional investor, the institutional investor will have to invest $3, which are not guaranteed.

Says investment banker Yehoshua Gleitman, a former Chief Scientist: "Without this type of financing, Israel won't have a high-tech industry. "Israeli institutional investors don’t understand this kind of investment. Israeli institutional investors never specialized in diversified investment portfolios, like their counterparts around the world. It's very hard for venture capital fund managers to explain to foreign institutional investors why Israeli institutional investors won't invest in them."

What is different today than as recent as last fall,- is that foreign companies and investors are back in Israel meeting local VCs combing the industrial parts for investment opportunities. Until last September-October- most of them refused to take the risk of visiting Israel- let alone make any investments here. Today, the situation is different.

In late March, a 'European Tech Tour" that was to have taken place last November but was cancelled- is being planned. More than 30 top managers in venture capital and technology companies from around the world have registered.

Other high tech leaders such a Microsoft CEO Steve Ballmer, Intel's Craig Barrett, and HP's Carly Fiorina- and senior executives in large multinational corporations such as Eastman Kodak, Royal Phillips Electronics, BMC Software and EMC Corp., all have plans to visit Israeli companies this spring to look for investment opportunities and new technologies in Israel. A delegation of US VC funds, comprising Venrock Associates, Accel Partners, Bessemer Venture Partners, Lightspeed Venture Partners, Matrix Partners, and US Venture Partners- is also expected to be in Israel in mid-April.

Some local high tech analysts believe that the change in heart has less to do with foreigners overcoming the fear of being blown up in a terrorist attack and more with the fact that the main overseas alternative to Israel is Europe- and that has disappointed in recent years. More and more Americans and Europeans looking for technology and investment opportunities are turning to Israeli companies for lack of a better alternative- irrespective of politics.

BAR STORY
For the best Israeli start ups- they don't have much trouble weathering the storm waiting for the return of the IPO market and large M&A buyouts.

These include:

PowerDsine The company leads the fast-growing Power over Ethernet (PoE) technology that allows power to be transmitted over the same network cable as data. It is profitable, has tens of millions of dollars in annual sales, and controls 70% of the market.
Schema: The company has developed a unique approach to network planning and optimization, enabling wireless operators to simultaneously increase capacity, enhance network performance and improve capital efficiency by maximizing the value of existing network resources. The firm is profitable, has a large amount of cash, and has successfully penetrated the US market.
Saifun Semiconductors:: The company has developed a Non volatile memory (NVM) technology for flash memory processors for mobile devices In 2004, it plans to expand and increase sales of Saifun and its partners' technology to between $500 million and $1 billion. It recently created a joint subsidiary with Germany's Infineon Technologies for flash memory development and production.
Wintegra: The company's product is a single chip solutions enabling communications infrastructure equipment providers to migrate their product lines to the next generation of access networks. It will be profitable in the second half of 2004 with sales of $15 million.
Shopping.com: The company's product is price comparison technology for e-commerce. More than $75 million has been invested in the company and sales this year should reach $70 million.