Israel at 60

Tonight we celebrate Israel’s 60th birthday, Yom Haatzmaut. And there certainly is a lot to celebrate. Israel today is stronger and better positioned than it ever has been – security-wise, culturally, and certainly economically.

Focusing on the latter – Israel’s stock market has been one of the world’s best performing markets of this decade, up double-digit percent in each of the last five calendar years. One shekel invested in the TASE 25 index on January 1, 2003 would be worth 3.25 shekels today. Israel’s “new” tech economy keeps growing and growing, attracting each year more and more of the world’s leading VCs and global tech companies (Microsoft didn’t close on Yahoo, but it has closed on two acquisitions of Israeli tech companies so far this year – topped only by IBM’s three acquisitions in just the first four months of 2008 totaling more than $500 million).

Israel is on its way to OECD membership, with a strong currency, low inflation, healthy growth rates, falling debt, rising credit ratings (now A1/A after recent upgrades by Moody’s and S&P), and an educated and motivated workforce. When we arrived in Israel just a month after Israel’s 50th birthday, per-capita income was about $16,000 – in developing country territory. It is now above $30,000, placing Israel among the 30 richest countries in the world.

The Mishna (Ethics of Our Fathers 5:25) teaches us that “At 60, you attain seniority (literally, Zikna)”. There are a few political commentators out there (as very correctly pointed out by Caroline Glick of the Jerusalem Post yesterday) who have apparently misinterpreted Zikna as Zaken, or old age, feeling that Israel is on some sort of economic or demographic downslope. I highly doubt that any of those commentators have spent much time in Israel lately, have any Israel business interests, or have seriously vetted the (incorrect) data on which their assumptions are made, as Ms. Glick points out.

Certainly there remain challenges and a lot of work to do – in the security realm there always will be, as some of our wonderful neighbors remain focused on destroying what we have rather than building what they could have. (In my view, peace will indeed come to our region if and when that fact ceases to be correct). And economically, while Israel has established a wonderful and diversified economic base in just 60 short years, there remain serious issues of economic and geographic inequality, religious divide, infrastructure, and environment (among others) to deal with. But we’re now dealing with them from a position of strength. And like most mature and successful countries, our main problems and issues are increasingly internal ones. The proper use of our Zikna, or intellectual maturity, at this stage of Israel’s development will determine our direction in the next decade, and beyond.

In the next decade – as we say in the business – go “long” Israel! I don’t think you’ll be disappointed.

This time, a protective tech bubble???

Many in the VC community, certainly in Israel, seem to be operating nowadays in something of an assumed protective bubble from the troubles on Wall Street and the overall economy. VC firms in the US raised more than $34 billion in 2007 for their new funds – the most since 2001 – and will likely be pouring that money into startups over the next few years. A similar story in Israel – new funds have been recently raised by Carmel Ventures, Plenus, Gemini, Pitango, Evergreen and others (by our count more than $1.6 billion in the last year), and several more (including Genesis Partners, two new cleantech funds……) are planning on raising as well. And the money keeps on flowing to startups, with Q1-2008 humming along nicely with nearly $400 million in VC investments in Israel (see www.leapcap.com/IsraelTechVCReview.html), slightly above 2007’s average quarterly activity.

This is all happening in an environment where economists are debating whether or not we are in a recession or just heading toward one; supposedly blue-chip Wall Street firms are writing off huge sums and raising emergency funds (or selling themselves or their assets for pennies on the dollar) to stave off bankruptcy; and the public new issues (IPO) market for VC-backed companies has all but shut down for the foreseeable future.

In the “real world”, there is some real belt tightening going on. Some of high tech’s largest customer groups – financials, communications companies, global tech giants to name a few – are seeing shrinking revenues and margins and are acting as one might expect them to react: by cutting personnel, cutting costs, and becoming more conservative in all kinds of decision making. This is not a good environment to be selling “stuff” to these kinds of companies – certainly not for smaller tech companies.

Perhaps we should be encouraged that VCs are indeed taking a long-term view and planning for the long haul, by continuing to invest now for exits down the road once conditions in the economy and capital markets presumably improve. That is certainly true for early stage investing. But for companies doing later stage and “pre-IPO” rounds, there will be a lot of pressure to perform (and to keep climbing burn rates in check) in a very tough business market while chasing exits that may or may not develop in the foreseeable future. Israel tech’s pace of a company-sold-per-week during Q1-2008 was quite spectacular, but without an IPO alternative most companies ready to exit will not have much leverage in negotiating with potential acquirers.

The point? – companies (and VCs) will have to keep a very close eye on preserving cash, diversifying funding sources and moderating burn rate at a time when the business and exit environments remain uncertain. We don’t live in a bubble protecting us from the troubles of the economy as a whole. And acting otherwise could have dire consequences.

Ice Hockey in the Desert

For those of you who happen to be up in northern Israel later this week, we’d love to see you at the second (almost) annual International AK Hockey Tournament, Jan 30-31 at the Canada Center (or should I say “Centre”?) in Metula. Thanks mainly to the tireless efforts of Danny Spodek and my brother Ernest, we’ve brought about 25 hockey players here from North America to play against some of Israel’s best. As anyone from Israel’s north will tell you, it has been a long but successful road to recovery from the damage inflicted in the summer of 2006. So come on up and support us and our friends in the north, enjoy some great schwarma, and see some great ice hockey.

Nothing Stands Still Here

Well, it has been all of (almost) 24 hours since we published our annual report on Israel hi-tech and VC (see www.leapcap.com/IsraelTechVCReview.html), and we're already somewhat out of date. In the first week of 2008, already two more Israeli tech companies (XIV and Onaro, both in data storage) have been acquired (by IBM and NetApp) for more than a combined $420M. What's more interesting than the amounts these companies have brought to their investors is the amount of money that went in to create that $420M -- less than $10M total was invested in either company. Once again, Israeli managers have shown that you don't need to bring your burn rate up to millions-per-month to create a real company with real technology and real clients and real partners............. I wonder what Week 2 will bring.