Zeev Holtzman, founding partner of Giza Venture Capital and founding member of the Israel Venture Association (IVA), cautioned that “Israel’s venture capital and startup industry is heading for collapse. The industry, which is the economy’s growth engine, is liable to be irreversibly damaged“, in a recent interview to the Venture Capital Journal (subscribers can access here).
The Israeli VC decline by the numbers
While Israel still prides itself as the nation with the highest ratio of startups per capita in the world, Israeli venture capital fund raising dropped from $2.8 billion in 2000 to ZERO in 2010. Most Israeli funds had negative results for their LPs in 2010, and about 50% of the funds made no new investments in 2010. Active number of funds fell from approximately 100 active VC firms in 2000 to about 20 in 2010, according to the Israeli Venture Capital Research Center (IVC).
The change in focus
During the bubble, Israeli VCs made a lot of investments (and returns) on capital intensive businesses such as security, semiconductors and network/switching equipment. Not only expensive, these opportunities are now few and apart. Nowadays, the focus has shifted to more “capital-efficient” businesses in Internet, media and mobile apps.
The bright side
The article mentions that there’s a bright side too – Israel is starting to get traction in consumer Internet and mobile products, the biggest ‘train’ missed by Israeli startups so far. Israeli startups are often accused of being good in technology but bad in marketing and usability, causing them to miss the consumer boat. Recently however, several consumer startups originated in Israel are making headlines: from Snaptu which was sold to Facebook for $70 million, to BillGuard and Do@ making headlines at Techrunch Disrupt and startups like Wibiya (recently sold to Conduit for $45 million) reaching 200 million users in a short time. Another example cited is 11 year old MyHeritage which is currently beating its US competitor Geni.
What’s next for Israel’s VC industry?
Fact – as weak VC funds wind down, less capital is available for Israeli startups by local VCs. However, funding levels are going up as the latest MoneyTree report shows. Israeli VC funds are sitting on over $1 billion of cash that needs to be deployed and foreign venture capital investors are actively looking for deals in Israel: Sequoia, Greylock, Index, Accel, Benchmark, Globespan, etc… they’re all monitoring the market and making serious investments. In short, there’s a problem for the Israeli funds, but the startup industry as a whole is finding its own solutions.
New opportunities: Sadara Ventures, a new VC fund led by Yadin Kauffman and Saed Nashef, completed the raising of $28 million, out the $50 million it plans to raise. Whatever the outcome of the peace process may bring, we’re talking about a potentially new attraction for VCs to invest in Israel.
Innovation levels remain high. As showcased in a recent post on VC Cafe (10 new Israeli startups, hear them roar), the diversity and creativity of Israeli entrepreneurs hasn’t gone down as a result of the retooling Israeli venture capital funds are going through. Ask insiders, and they will tell you that it’s too late to start a fund in Israel. But talk with entrepreneurs and you will find that there is still a funding gap, especially in the very early stage levels of seed and pre-institutional seed. The gap is currently filled by angels, but I believe that more angel capital and micro funding could be put to work in Israel. If you’re an angel and you would like to get exposed to early stage investment opportunities in Israel, please get in touch by email or DM me on Twitter @ediggs.