Deloitte Israel VC Indicator Survey: Surging optimism

Israeli venture capitalists predict better chances for exits, higher returns on investment, and an easier time raising new funds, especially from foreign investors. It's already possible to talk about a trend.

Deloitte Brightman Almagor published its Israel VC Indicator Survey for the fourth quarter of 2003 today. The quarterly survey looks at expectations for the upcoming six months. The current survey is the ninth. The results reflect the responses of partners and investment managers at 45 venture capital funds in Israel.

The survey found that 68% of venture capital managers predict at least a three-fold increase in investment returns over the next six months, 81% expect that the source of money for the next funds will be the US, and 85% expect an increase in investment in Internet and e-commerce.

Survey director Ilan Birnfeld CPA, head of Deloitte Brightman Almagor's high-tech group, said this was the third consecutive quarter in which venture capitalists expressed positive sentiment. They were optimistic about the economic situation and the chances that funds and companies would be able to raise capital. Birnfeld cited some numbers. 72% of fund managers expect the economic climate to improve, compared with 54% in the third quarter. The respondents predicted an improvement in both the economic climate in general and in the condition of the venture capital industry in particular. 41% of respondents believe it will be easier for companies to raise capital from funds, and 57% believe there will be no change, for an aggregate total of 98%. The corresponding figure was 91% in the preceding quarter and 73% in the fourth quarter of 2002. 96% of the respondents believe that ability of funds to raise capital will be easier or unchanged, compared with 88% in the preceding quarter and 43% in the fourth quarter of last year.

67% of the respondents believe the capital market recovery will be the main factor accelerating the rate of investments by funds, compared with 57% in the preceding quarter. 29% of the respondents said the main factor would be increased investment in IT systems by large enterprises. Only 4% said technological innovation would be the main factor, compared with 13% in the preceding quarter.

Investment managers said the funds' most important criteria for determining company value before investment were completion of development, orders backlog, and sales.

Venture capitalists were more cautious about the capital market: 24% of respondents believe that the issues market for technology companies would recover in 2004, double the number of respondents in the preceding quarter. 56% of respondents believe that the issues market would resume normal activity only in 2005. Only 20% predicted a recovery in 2006, compared with 30% in the preceding quarter.

In view of the fact that quite a few firms are in varying stages of financing rounds for new funds, the following figures reflect a further slight improvement: 78% of fund managers said they would raise capital in 2004-05, compared with 73% in the preceding quarter. 45% said the next round would be held in 2005, compared with 38% in the preceding quarter.

Another higher number that possibly reflects the funds' cautious optimism is the 68% of respondents will not be satisfied with a less than threefold return on their original investment in their portfolio companies, compared with 49% in the preceding quarter. Only 2% of the respondents said they would be satisfied with a negative return. 24% said they would be satisfied with a return of one to three time the initial investment, compared with 49% in the preceding quarter.

71% of fund managers believe that the most pressing business issue confronting their portfolio companies in the next six months would be seeking new alliances or business convergences, while 29% said it would be seeking new growth engines.

A surprising finding was that 85% of respondents believe that investment in Internet and e-commerce companies would increase over the next six months. Venture capitalists are also optimistic about other sectors. A majority of respondents predict higher investment in Internet, homeland security, medical devices, and software. A majority of respondents predict that investment in biotechnology, nanotechnology, and wireless and communications will decline or remain the same over the next six months.

The following findings conformed with expectations: most venture capitalists do not pin any hopes on the latest developments in Israel's private equity market. They believe these developments will not have any effect on capital-raising for new funds. 81% of the respondents said the majority of new investors would come from the US, only 7% said the majority of new investors would come from Israel, 10% from Europe, and 2% from Asia.

Birnfeld said what everyone else knows. "In the recent period, the weight of institutional investors in the Israeli private equity market has grown, but the process has only just started, and is directed more toward real estate, industry, and finance, and less toward venture capital. In contrast, in the US, there is a tradition of institution investment in venture capital."

Published by Globes [online] - www.globes.co.il - on December 24, 2003

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