Israel venture capital is nervous about US trends

US venture capital surveys show a slowdown. How does that affect Israel?

On one hand the MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) reported a decline in investments by venture capital funds in the first quarter of 2008, compared to the first quarter of 2007 and the fourth quarter of 2007. Total investment fell 5% to $7.1 billion in the first quarter, from $7.5 billion in the corresponding quarter, and down 8.5% from the fourth quarter of 2007. The decline was attributed to slower economic activity, which may not bode well for future investments in a slowing US economy. On the other hand, there was also an increase in the number of deals to 922, compared to 861 deals in the corresponding quarter of 2007.

Figures published by the NVCA, PwC, KPMG, and other sources leave little room for doubt of a slowdown in high-tech and venture capital, though the decline is still minor. Yet it is too early for apocalyptic predictions, as the MoneyTree Report states, "Despite the decline, the first quarter was well within recent quarterly investment levels and the fifth highest quarter since 2001."

Although the first quarter figures are higher than any quarter in 2005 and 2006, what happens in the US often, sooner or later, happens in Israel. This is a nail-biting time in Herzliya Pituah, the bastion of Israeli venture capital, as venture capitalists try to guess how badly the crisis will affect the local venture capital industry. While no one may be immune, no one knows how severe the contagion will be. Since the crisis would spread with a bit of a delay from the US to Israel, Israelis can take preventative action.

The closing of the US capital market to IPOs can hurt local industry. Israeli high-tech has a number of companies with strong performances that have already announced plans to go public, but are currently holding on those plans. Wintegra Inc., CopperGate , Eye Blaster and even Oberon Media are just a few examples of companies sitting on the fence while they slowly check the waters.

A survey by KPMG indicates that US venture capitalists are pessimistic about the impact of the financial crisis on their business in the short term. Respondents predict a slowdown in venture capital, fewer IPOs, and lower valuations in any fundings actually held. However, a large majority of respondents are optimistic that the market will recover within a year.

As in previous crises, the first victims of the present crisis will be early-stage start-ups. US venture capitalists apparently currently prefer making follow-on investments. The MoneyTree Report states that $1.64 billion was invested in 294 first-time deals in the first quarter, 18% less than the $2.2 billion invested in 330 first-time deals in the fourth quarter of 2007, and 4% less than the amount invested in these deals in the first quarter of last year.

These figures definitely presage something about the venture capital future in Israel if the crisis in the US worsens, as Israel is best known for its ability to create early-stage technology companies. In Israel, the presentation becomes the company, which grows and develops, and in later stages attracts large US investors or is sold. Therefore, the figures suggest a darkening future for local industry. Nonetheless, there may be a silver lining to the storm clouds by pushing local companies to reach later stages and to establish large corporations.

If that happens, an unscientific overview of the US surveys indicate that although the US economy is slowing, not frozen, venture capital is at somewhat of a standstill. Nonetheless, though wallets are being opened much less easily, 294 first deals were still made in the first quarter. The US venture capital industry has not closed down like in 2001. Venture capitalists are wary, but continue to invest.

Published by Globes [online], Israel business news - www.globes-online.com - on April 22, 2008

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