Despite ongoing news reports of layoffs and cuts at start-ups, 2008 is turning out to be an excellent year for Israel's high-tech industry in terms of raising funds.
Funds raised in the third quarter of 2008 rose 45% compared with the corresponding quarter of 2007. Until the industry has to deal with the fourth quarter of 2008, and with 2009, it can enjoy the figures released by the Israel Venture Capital research center's third quarter report.
According to the report, $600 million was raised in the third quarter, by 124 companies, an increase of 29% over the second quarter, and an increase of 45% over the third quarter of 2007, when $414 million was raised.
In the first nine months of 2008, Israeli high-tech companies raised $1.68 billion, an increase of 34% over the corresponding period of 2007, when firms raised $1.25 billion. The implication is that even if fourth quarter figures are weak, 2008 still looks to be the best year since the technology company bubble.
When taken in regard with the fact that Silicon Valley firms have already laid off 50,000 employees, it is a bit surprising that at Israel's start-up centers such as Hertzliya, the term sheets continue to be signed. A good explanation is that apparently the decreased role of Israeli venture capital funds and the increased role of US funds in the local industry, as US funds seek places, such as Israel, where the crisis has not yet fully hit.
In the third quarter, Israeli VC funds invested $206 million in Israeli start-ups, compared with $172 million in the third quarter of 2007, and $161 million invested in the second quarter. The Israeli VC share of the total amount invested in Israeli high-tech was 34 percent, with the remainder of capital coming from foreign investors as well as non-VC Israeli investors.
The communications sector led capital raising in the third quarter with $134 million or 22% of capital raised, followed by the Internet sector with $126 million or 2% the highest Internet share since the fourth quarter of 2000.
Companies that are being hit are new companies, as most investments went to existing firms. Only 28% of investments by Israeli VC funds were first investments in new companies, compared to 51% in the third quarter of 2007, and 22% in the second quarter of 2008.
Canaan Partners venture partners Izhar Shay was not completely surprised by the results, saying, "rumors of the demise of Israeli high-tech were apparently too early". Yet Shay is not complacent, explaining, "The report confirms what we have been hearing, that this is an excellent time for investments in start-ups, and that there are opportunities."
Globes: So will the crisis pass us by?
Shay: Absolutely not. I believe that the major effects will be felt in 2009. Currently Israeli VC funds are investing from funds that were already raised. When the money runs out, it will be a problem. Sources of funds, especially in the US, are being depleted and I am sure that if we don’t have an emergency plan in the drawer, there will be a dramatic effect on Israeli high-tech already in 2010.
Published by Globes [online], Israel business news - www.globes-online.com - on November 10, 2008
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