Bombs Yes, But No Crash in Israel
By David Lipschultz
May 21, 2002
Bloody turbulence is not driving away technology investors in
According to a recent analysis by the Israel Venture Capital Research
Center, since the Palestinian intifada began in September 2000,
Israel has actually fared better than both Europe and the United
States in attracting funding to its technology startups. Total dollars
to technology startups fell 64 percent in the United States from
2000 to 2001, while in Europe they dropped 46 percent. Israel saw
only a 36 percent drop.
True, those numbers only go up to the end of 2001, but even after
Israel invaded the West Bank in April it appears the trend has continued.
Earlier this month, four Israeli companies -- SkyBox, a network
security provider, semiconductor company Terachip (http://www.tera-chip.com/index.htm),
software-maker Cardonet (http://www.cardonet.com/) and broadband
multimedia company BigBand Networks (http://www.bigbandnetworks.com/)
-- raised a combined $50 million from prominent VC firms such as
Benchmark Capital and Intel Capital Ventures. In February, Chiaro
(http://www.chiaro.com) , an optical core router company, closed
an $80-million round, and Atrica (http://www.atrica.com/), an optical
ethernet company, received $75 million.
This may come as a huge surprise after seeing the continuous carnage
on TV, but Israeli technology leaders have a simple answer.
"Right now, Israel is in a better position in the technology
world than it was during the dot-com days," says Jon Medved,
a partner at VC-firm Israel Seed Partners. "The reason is that
we have always been best at hard, proprietary technology -- optical
networking equipment, data security and storage."
This is not to say the political crisis has had no bearing on business
in Israel. For one, tourism is down over 35 percent from this time
last year, and the Israeli shekel has fallen 12 percent against
the dollar in the past year. Ironically, that's a positive for many
tech companies that have lowered their labor costs.
To be sure, some businesses have lost customers because of the
political climate. The CEO of Israel-based, software-developer Radis
(http://www.radis.com), Dov Shoham, said a European company pulled
out of a deal with his company, apparently for political reasons.
Many VCs also say that would-be new venture investors are balking
at getting into Israeli deals.
"It's become a much harder sell to investors who haven't invested
there," says David Cowen, a partner at Bessemer Ventures in
Silicon Valley who has three deals currently in Israel. "I
definitely think it's not based on fundamentals, but more pure psychology."
Because seasoned investors say the conflict has yet to cause real
material fundamental shifts in the tech economy, they appear to
be staying put. In fact, Star Ventures, a large German-Israeli VC
firm, closed a $400-million round, its ninth solely devoted to investing
in Israeli technology companies.
"This climate isn't new to these people, they know how to
deal with adversity and are proceeding with business as usual,"
says David Helfrich, a partner at the venture firm Comventures.
Helfrich's company currently has investments in two Israeli companies.
One of them, P-Cube (http://www.p-cube.com), an IP engineering company,
closed a $40-million round in April. "With the quality of technology
there, the opportunity clearly outweighs the risk," he said.
But even still, it's hard to ignore the risk, especially in a country
where nearly everyone is eligible for the military and can be called
up at any minute. The prospect that skilled workers may leave to
fight certainly doesn't sit well with investors who have bet on
the now well-regarded Israeli ability to get products to market
However, even amid the violence, military service has yet to be
a factor, says Elan Zivotovksy, an analyst in Jerusalem for Goldman
Sachs. He says that less than 3 percent of the workforce has been
called up at any one time -- less, in fact, than the normal absence
due to vacation leave.
"If you actually look at the size and price of the recent
top 20 venture deals," says Helfrich, "it seems like it's
actually easier to get Israeli deals financed than Silicon Valley
deals right now."