VC in Israel: It's Business As Usual, Despite Violence
With violence in the Middle East dominating the news, Israel once a hot spot for venture capitalists, would seem like a place to avoid.
Not so, says Erel N. Margalit, a managing partner and founder of Jerusalem Venture Partners. Israeli companies are coping-after all, they've been through this before.
"The venture capital boom began when the first intifada and smell of strife was still in the air" in the early 1990s, Mr. Margalit said. "You can still get things done in Israel, probably a lot faster and cheaper than anywhere else."
He recently returned to the United States from Israel, where he addressed a meeting of the nation's venture capital association. He said he called for Israeli and Arab business leaders to help achieve a regional settlement to the Palestinian dispute.
Begun in Israel, Mr. Margalit's firm is based in New York and has offices in Jerusalem and London. Last fall, it closed a $400 million fund, its fourth.
During the last three years, it was one of the top U.S.-based investors in Israeli companies, according to VentureOne. (See table).
Assessing the effect of the Palestinian conflict on Israeli technology companies is difficult because of the worldwide slowdown. Many companies that started in Israel are now international enterprises, with headquarters in the United States or Europe and manufacturing and research operations in the homeland.
Mr. Margalit said Israeli start-ups continue to meet their targets, as they did during the Gulf War. At the moment, he said, it is the global economy, not the violence that is affecting these companies, but that could change if the fighting continues.
Jordan Levy, a managing partner at Seed Capital Partners, a Buffalo, N.Y., affiliate of Japan's Softbank Corp. that has invested heavily in companies with operations in Israel, also said that despite the violence, it's still largely business as usual there.
The biggest problem for those companies for the last year, Mr. Levy said, has been recruiting executives. Mr. Levy said a couple of Seed Capital portfolio companies are looking for CEOs. "You're not going to get a U.S. guy who's going to take that job right now because they don't want to go to Israel once a month."
But the hurdle is not the insurmountable. Sheer Networks, whose backers include Jerusalem Venture Partners and Nortel Networks, recently snared Sultan Zia as CEO. He was vice president and general manager of Compaq's carrier business unit. Before that, he was with Digital Equipment Corp.
Sheer, which sells network management technology, has research and development operations near Tel Aviv. It recently moved its headquarters from Sunnyvale, Calif., to Framingham, Mass.
Messers. Levy and Margalit said they continue to see strong deal flow from Israel. Jerusalem Venture Partners in March led a $12 million second round for Cyber-Ark Software Ltd., an information security company with headquarters in Dedham, Mass., and its R&D team in Israel. Seed Capital was an early backer of the company.
But while Israel remains a breeding ground for promising companies, Mr. Margalit said, the combination of the global technology bust and the local violence will make raising venture capital to invest there difficult.
Top U.S.-based Investors in Israeli Companies
2001 Deals 1999 Deals 2002 Deals Total Deals
Intel Corporation 3 10 9 22
Jerusalem Venture Partners 4 8 5 17
Apax Partners 6 9 2 17
Sequoia Capital 4 5 2 11
Mezam Capital Funds 5 3 1 9
TDA Capital Partners 3 3 2 8
Cisco Systems 2 4 2 8
Lucent Venture Partners - 2 5 7
JPMorgan Partners 1 4 1 6
Johnson & Johnson Development 1 4 1 6
Defta Partners 2 4 6
Lightspeed Venture Partners 1 3 1 5
GE Capital 3 1 1 5
Coral Ventures 2 2 1 5
BRM Capital - 3 2 5
Benchmark Capital - - 5 5
