By Josef Federman

It has been quite a ride for Erel Margalit.

Ten years ago, the Israeli businessman launched a venture-capital firm dedicated to investing in technology start-ups in his homeland. Since then, Mr. Margalit has witnessed the rise and collapse of Israeli-Palestinian peacemaking, a multibillion deal at the height of the technology boom and the subsequent burst of the Nasdaq bubble.Despite the turmoil, Jerusalem Venture Partners (www.jvpvc.com) has managed to grow. It now manages $670 million in assets with interests spread out across the U.S., Europe and Asia, after starting out with a $20 million fund a decade ago.

When Mr. Margalit decided to move into venture capital in 1993, he had been working with the Jerusalem mayor's office to bring major multinational technology companies to the country.

"I saw the next big thing was going to be not just bringing the Digitals and the IBMs and the Motorolas of the world to Israel, but actually people that will come out of those multinational companies or some other companies to start a new start-up company," says Mr. Margalit, who holds a philosophy degree from Columbia University. "It was very clear at the time that what was lacking was both capital and sort of international business guidance."

JVP, along with a handful of other firms, was among the first venture funds to focus on early-stage companies in Israel, which has produced technology companies such as security-software maker Check Point Software Technologies Ltd. and voice-mail company Comverse Technology Inc.

Among JVP's biggest winners: Chromatis Networks, a fiber-optic company sold to Lucent Technologies Inc. for roughly $4.5 billion in 2000; and Precise Software Solutions Inc., a Nasdaq-traded company sold to Veritas Software Corp. earlier this year for $609 million. JVP now maintains offices in New York, London, Jerusalem and Tokyo. Its portfolio currently consists of about two dozen companies, with a focus on enterprise software and networking, semiconductors and mobile communications.

In an interview, Mr. Margalit discussed the challenges of doing business in the Middle East, his ideas about where the global technology sector is headed, and why Israeli high-tech remains at the core of JVP's world-wide operations.

WSJ.com: Initially, JVP was involved in developing local technology in Israel. Now it seems to have a global focus.

A: It's a global focus, but still our core is Israel. Because a lot of the best and most interesting technologies come from there, and we have a competitive advantage there that we don't want to give up. Two, quite a bit of things are happening here in the U.S., many times with an Israeli connection. … In Europe, we're doing much less than Israel and the U.S., but still there are interesting projects there in enterprise software, and sometimes other areas like semiconductors and media that are very relevant for the U.S. market.

Q: Is your focus on Israel a business decision, or is there a sense of mission as well?

People are a combination of things. From a business-consideration standpoint, we think it's very lucrative to be the leading fund in the second-most significant technology market in the world, which is Israel. Once we have that position, we're not going to lose it in certain areas … like communications and enterprise software. Israel is still continuing to breed some of the most interesting innovations in security for the enterprise software space, in media and multiuser games, and semiconductors and communications…

Two, we have a commitment to the region, especially when it's difficult in the region … In the U.S., where we're very active as well, and in Europe, where we're getting more and more active, and in Asia, we apply a lot of the same discipline. And the discipline that Israeli companies bring to the table many times is the readiness to go international from the outset, because you have to.

Q: Even after everything that has happened over the past three years, are you saying the state of Israeli high tech remains strong?

A: Very strong. Because the situation is more difficult, you're seeing a lot more seasoned entrepreneurs. … Israelis have come up with some of their best innovations under hardship. I think that a lot of them today have the international connections to turn it into a business. Of course, a lot of them still need help, but we see some very interesting things.

Q: Can you give us two or three of your most promising investments?

A: There's a company called Cyber-Ark [Software] that's very typically Israeli. It's an enterprise software security company that enables two very paranoid organizations to share information in the most secure fashion that exists. It actually creates a virtual vault, or a virtual private network, that has 10 layers of security. … That company is selling big-time to the financial-services sector here and to governments in the U.S.

Another company … is a company in the semiconductor space, digital home, called Adimos, which allows the distribution of very broadband video in the home in a way that was never done before. The main application here is to be able to connect, for example, between your computer, your DVD and your flat-screen TV in a wireless fashion. … That combines wireless and video-compression capabilities, which Israelis have been very strong at. The ability to start in Israel, but build a company in the U.S. with a major Japanese market, that's what we think of doing. Coming back from China, there's a huge interest in that as well.

Q: You recently returned from a trip to China. What is JVP doing over there?

A: Israeli companies, because they don't have a local market, they have an instinct for new strong emerging markets. There's been a migration of start-ups to go and explore China, Korea, Japan and some of the other regions with Israeli companies. … They're realizing the U.S. market, while important, is no longer the only determining market. …

We found that two years ago, we put China and Asia on the agenda of our start-ups. We didn't force them to go to Asia. But we said we want you to consider it. And the result is pretty amazing after two years. Almost one half, between one-third and one half of our companies are selling significantly in one way or the other into the region.

Q: Is the Israel connection ever a liability?

A: I don't think so. People are worried about the situation there. People that don't know much about what's going on, even people that do know what's going on there, they're worried about the resolution of the region, how the region will sort itself out. That's a problem beyond venture capital.

I think there would be have been a greater flow of capital into Israel once the political situation [had been] solved. But I think those institutional investors that are there for the long run understand that Israel is a major region and want to be associated with the people that find some of the best companies there.

Q: Haven't partner companies' businesses been affected by the violence?

A: Actually no, because most of the situations are such that the development arm is in Israel, and the business arm is in the U.S. and in Europe or in Asia. There is no effect on the development schedule of companies… The thing that people are worried about is whether you would be able to attract very strong American managers or European managers for companies where part of their job is to visit Israel quite often. We were all surprised, but that has not been an issue at all.

Q: What about the Nasdaq and technology downturn?

A: That took a toll on everybody around the world. It got everybody working a lot harder for results that are not as impressive. But it also did an additional thing. It helped everybody focus on real companies with real revenues with a real business model. If you can do it in a difficult environment, you're creating a very strong vehicle that is going to be ready for the return of some major markets.

Q: So where do you see things going over the next few years?

A: What we're all doing in the venture area is really getting ourselves into strong positions in companies that are ready for the return of many sectors. …

I think you need to have a grid that includes industries and geographies. If you look at the mobile sector, for example, and you look at the added value services, I think that Asia is leading the way for smart data applications that are just going to be the next revenue generating areas for a lot of the mobile carriers. …

In the U.S., it's more the enterprise. After a cycle of purchasing many technologies, it needs the ability to be able to integrate the technologies in purchased in different departments of the enterprise into a better decision-making process. I think we're seeing that. …

Our view, it's not clear when recovery will occur in a big way in specific markets. But I think during the next year and a half, it's happening. I don't think that we're going to see new bubbles, but I think investing now is exactly the [right] time.