The role of venture capital, as is well known, is to invest capital in risky start-up companies. However, what happens when the venture capital funds don't have capital, and aren't prepared to take risks?
In Israel, known as a start-up country, the cessation of risk capital is liable to shut down the engine of growth and end the country's start-up epoch. It looks as though that is what is currently happening, at least according to IVC's latest report.
According to the figures, high-tech companies raised just $1.26 billion from venture capital funds in 2010, 40% less than in 2008. Only 30% of this sum was raised from Israel VC funds, the lowest percentage for a decade.
More worrying is the figure for VC investment in seed companies, companies just starting out. Only 45 seed companies obtained venture capital investment, raising the miserly sum of $38 million, the lowest amount since 2004, and less than $1 million per company on average.
Moreover, only about 3% of total VC investment was in seed companies, compared with 7% in 2009.
The conclusions from these figures are clear: the venture capital industry is without capital, and without readiness to take risks by investing in seed companies.
A veteran venture capital investor said, "The venture capital funds' money is invested in veteran companies in their portfolios, so that they won't die, and so that the funds will not need to swallow losses and write companies off their books. Many of the portfolio companies are corpses, and the money flows to them at the expense of young start-up companies with potential."
This phenomenon is reminiscent of the Japanese syndrome. For years, after the real estate bubble burst there, Japanese banks poured money into loss-making companies, to keep them alive, and refrained from lending to young, vibrant, profitable companies.
Angels required
The Ministry of Finance must act immediately to encourage the supply of capital to seed companies. The ministry's director-general, Haim Shani, has a rich past in high tech, chiefly in Nice Systems, and he should initiate the revival the venture capital fund Yozma.
Representatives of many countries come here to learn how Israel set up a government venture capital fund that shared risks with private companies and thus pushed the industry forward. The Yozma fund was privatized. In my opinion, it is worth considering reviving it, and letting it focus on seed investments.
In addition, we must encourage angels, private investors who may have set up a seed company, and made a lot of money in an exit from it, and now themselves invest in start-ups. Incentives should be offered in the form of tax breaks. Let's say to them: You made money? You've invested in start-ups? Take a substantial tax benefit.
Check Point founder Gil Shwed obtained investment from Nir Barkat in 1993, from money Barkat made in the exit from BRM. As an angel, Barkat was ideal. He brought Shwed not just money, but experience in building a global high-tech company.
Thirdly, seed companies need to be taught how to operate without the money. It's hard, but possible.
At present, the lack of attention to the venture capital crisis is liable to harm economic growth, because without high-tech "births", there will be no global Israeli companies in the future as growth engines for the economy.
Shlomo Maital is a senior research fellow at the Samuel Neaman Institute, the Technion Israel Institute of Science and Technology.
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2011
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