Bombs Yes, But No Crash in Israel

By David Lipschultz
Wired News
May 21, 2002

Bloody turbulence is not driving away technology investors in technology-mad Israel.

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 quickly.

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."