The Impact of the Dollar Devaluation on Israeli Startups
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This year alone, the Dollar dropped 20% against the Shekel, causing startups to run out of money quicker than what they expected. In the article “Start-ups stuck in winter doldrums“, Globes interviews Erez Shachar, a managing partner at Evergreen Venture Partners, and touches on the influence that the weakening of the dollar (hence the strengthening of the Shekel) has on Israeli startups.
Here’s a recap of the situation:
* Israeli companies raise money in Dollars, but pay operating expenses in Shekels.
* Effectively, their burn rate is higher the weaker the Dollar gets.
* Salaries, estimated at 70% of the startup’s operating expenses, are the biggest cash spender.
* As a result, the quickly disappearing cash reservoirs that startup companies relied upon, force the startups to initiate financing rounds again sooner than expected.
* Venture capitalists and company managers already realize that an exchange rate of NIS 3.70/$ can quickly become NIS 3.40/$, and are preparing accordingly.
In his comments, Erez Shachar says that the problem is acute with Evergreen’s portfolio companies:
“This is why we’re encouraging companies to look at other markets, such as Europe and Asia as a kind of hedge against the exchange rate situation. It’s the right thing to do in any case. The market orientation of Israeli companies has always been the US, and the time has come to look at other markets. There’s no reason not to sell to and hook up with Asians and Europeans.”
It’s common sense to know that if the US falls into a recession, the value of the dollar will fall further. Michael Eisenberg, a partner at Benchmark Capital, gives a few measures to deal with the situation in his post “Open Letter to my CEOs and Israeli Entrepreneurs“. Worth a read.
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By N2H
This is an interesting comment on some financial issues in the Israeli economy. But overall it does not take into account the much higher investment and trade with Israel. Take a look at the amount of foreign exchange increase I wrote about (http://israeltomorrow.blogspot.com/2008/02/foreign-currency-trading-volume-and.html) — the trick just like it was 10 and 20 years ago, it to show some sales as quickly as possible. It seems to me that the emphasis on “burning rate” should be moved to “getting to the market”. All the real successful start-ups I know, both in Israel and in the US have done that. Crying about something so far beyond our control is absolutely silly. And also gets start-up founders distracted from their main task: making products that will be bought! I will look at the amount of shekels traded in dollars with respect to the total US and hopefully the world dollar exchange amount. If it is more than 1 ~ 3% we should all “eat our hats” and start worrying. Take a look at the Tel Aviv blog about living and working here:
http://israeltomorrow.blogspot.com