"I have no way of predicting when it will end. There is a lot of uncertainty on the capital markets and credit market. The entire investment banking sector was closely connected with the credit market, and the whirlwind has had the effect of causing a chain reaction of casualties in different geographic regions and areas. On the other hand, I think that if you look at it from the global perspective, the venture capital community is well placed and can survive this storm."
This is the optimistic outlook of Professor Paul A. Gompers of the Harvard Business School. Gompers specializes in research on entrepreneurship, venture capital, and start-ups. In addition, he is a partner in Spur Capital Partners, a fund which invests in venture capital funds worldwide, including Israeli VC fund Gemini Israel FundsGompers spoke to "Globes" ahead of his visit to Israel this month to lead the 2nd Israel Venture Association Venture Capital Executive Workshop on November 18-19. IVA chair Dr. Orna Berry, who is organizing the conference, says that it is of the utmost importance that the venture capital community stays up-to-date and informed of the latest developments in the industry. Participating in the workshop will be senior executives from Israeli investment institutions and, naturally, venture capital and private equity investors. "This will be an opportunity for all sides to learn together about new trends in venture capital in Israel and internationally," says Berry. Representatives from the Yale University Investments Office will also attend the workshop.
Gompers' optimism does not mean he isn't worried by the current situation. He certainly is, but he believes that some fields will be affected less, and some will survive the crisis. If you're a member of the venture capital community, he is less concerned about you.
Globes: Who will be hit hard?
Gompers:"Obviously those who invested in companies targeting the financial market with software, services, and applications. They will have to make a change in their business."
Optier, an Israeli company which sells software to banks, has actually raised $60 million.
"I don't know Optier, but there are still opportunities in the financial sector, despite the uncertainty."
How do you see the situation of the industry in Israel?
"Large companies will find it difficult to move forward. On the other hand, I think there are companies in Israel which are developing products and services for which there is a demand, products with deep IP. This will be to the benefit of the local industry in the long-run."
Gompers' confidence in the venture capital model is almost unshakeable. "Venture capital funds are investing today in companies that will be successful in six years time or more," he says. "There's no reason to stop the investment now. What's more, every crisis brings with it a wave of renewal. Until recently, most of my students at Harvard wanted to work in the financial market. Today, the preference has changed, and I believe that we'll actually find more people choosing to go into entrepreneurship. The whirlwind is not good for companies looking for liquidity, but for those with patience and for long-term investors it most certainly is a good time to be in this business. In a certain sense, maybe even very good."
Wouldn't it be better to invest in private equity funds, which are less risky?
"If you look at the buyout field, the question is where do you want to put the money and where can you earn returns at a reasonable risk over the long-term. Venture capital undoubtedly continues to be attractive. In buyout funds, for example, there were those that had leveraged deals and they will need to generate a five to eightfold return on investment. Everyone realizes that the buyout funds can't deliver returns like these, and the same goes for hedge funds."
So will institutional investors now be opting for venture capital?
"First of all you need to remember, and it is clear today, that even the public market is not without risk. There may be those who will take a step back and scale down the level of their investment in alternative instruments, but I don't believe there will be investors who'll decide to quit the sector. What happened at the end of the 1990s is not going to happen again, and I believe we won't see significant changes in the coming months in the level of allocations by the big institutional investors."
Does that mean we can relax?
Of course not. We're seeing funds in Israel struggling to raise capital for new funds. There will be difficulties in the short-term because of the uncertainty abroad."
Gompers believes that mature Israeli companies are the hope of the local industry and they will be the ones attracting capital from US investors looking for good opportunities. That said, no company will find it easy to raise finance. "There are a lot of US funds looking for good opportunities, and Israel has some excellent companies which need a bridge to liquidity. I believe those are the sort of deals we'll see," he predicts.
The bottom line for Gompers is that Israel will survive the crisis. "The local industry is 15 years old, and has already been through the crisis of 2001-2002," he says. "There are a lot of experienced professionals in Israel. The market works in cycles and my reading of the situation is that the strong funds will survive."
Published by Globes [online], Israel business news - www.globes-online.com - on November 9, 2008
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