In recent months, there have been reports that a growing number of start-ups have closed down. However, it is not clear that this is the case, or if the reports merely reflect self-fulfilling prophecies of a slowdown so that every item appears to be a harbinger of doom.
According to IVC Online, 35 start-ups have closed down since January: 24 companies in the first quarter, six in the second quarter, and five in July-August. For the sake of comparison, 228 companies closed down in 2007 as a whole and the number that closed in 2006 was about the same.
Therefore, basic math that looks only at the numbers indicates that Israel is in excellent condition. Obviously, there is also a story behind the numbers, which can be read by looking at the bottom lines. It is worthwhile examining whether the companies that closed down did so because they failed to raise money or because their concepts failed to work out. This issue is harder to resolve.
A breakdown of the companies that have closed down so far in 2008 indicates that 17 were engaged in the Internet, and it can be assumed that they were based on ideas that failed to catch on. Such companies usually closed down in the early stages after a limited investment. Seven life sciences companies, including medical devices companies, have also closed.
By this comparison, too, 2008 appears to be a pretty good year so far. In 2007, 33 Internet, 59 IT, and 52 life sciences companies closed down. However, although far fewer companies have closed down in 2008, there is a catch: most of the companies that closed down in 2007 were early-stage companies, whereas this year, well-known companies that had raised more than $10 million have fallen by the wayside. Data center technology and services developer Qlusters Inc. and home networking systems developer Enure Networks Ltd. are two such examples.
It is hard to know whether any conclusions can yet be drawn as to whether Israeli high tech is heading for hard times. For one thing, there is still four months to go to the end of the year.
It appears that investment in next four months will be limited, in part because $1 billion has already been invested in start-ups so far this year. 2008 is unlikely to be a record year in terms of fundraising by companies, and an additional $500-600 million will probably be invested in start-ups during the rest of the year. If that is the case, some companies will probably come up short and close down. The numbers may not reach those of last year, but many companies will close down this year, and in contrast to 2007, many of them will be companies that raised a lot of money from venture capital funds.
Published by Globes [online], Israel business news - www.globes-online.com - on September 3, 2008
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