AltAssets, May 15, 2002
Israeli venture capital: setting the record straight

Israel has spawned some immensely successful venture-backed companies over recent years. So why isn’t it getting the credit for this, asks Jon Medved of Israel Seed Partners.

Statistics can be tricky things. They depend very heavily on underlying classifications and the resulting data. No matter how objective data-gatherers claim to be, the decision about what should and shouldn’t be included is purely down to judgment. As a result, there will always be some discrepancies between figures produced by different research houses that report on the same area. I think that we all accept this.

But imagine my surprise when I saw one set of figures (from IVC) reporting a total of $376m invested in 79 Israeli companies in the first quarter of this year and another reported by AltAssets (from VentureOne) showing just $65m in 20 investments over the same period. This huge disparity in data is far more than a minor discrepancy and needs some clarification.

With a little further digging, it has become apparent that the lower figures from VentureOne does not include some of Israel’s most successful venture-backed companies. It has a deliberate policy of counting any Israeli companies headquartered in the US as part of the US figures rather than ‘erroneously’ classifying them as Israeli, according to John Gabbert, senior director of worldwide research at VentureOne. It has therefore left out three-quarters of the Israeli deals in the first quarter and has reported less than 20 per cent of the actual funds invested (when compared with the IVC figures).

To these figures are a misrepresentation of what is actually happening in Israel and is so skewed as to defeat the object of the exercise. This methodology overlooks the most mature and successful Israeli companies. It misses the point, and ignores the unique way in which Israeli VCs have achieved scale and unfairly penalises the Israeli venture industry for its achievements.

Unfair influence
Many of our most committed investors understand what those achievements are; others less familiar with Israeli venture capital are more likely to be influenced by the scare stories of a 71 per cent decline in venture capital investments recorded by VentureOne. Some context would be useful here.

The overwhelming majority of Israeli companies incorporate their legal domicile headquarters in the US from day one for reasons of tax, governance and eventual suitability for US fund investment. Whether this is really the 90-plus per cent of our companies as many people assert or whether it is less, no one doubts that this is true for most of them. Therefore from the start, the VentureOne methodology ignores the majority of Israeli companies.

Most successful Israeli companies, especially those who succeed in truly growing and raising significant sums of venture capital, build US headquarters and hire US management teams as well as marketing and sales staff. While many retain top management in Israel, others have hired US CEOs or sent the original Israeli CEOs to sit in the US. To deny these companies their Israeli identity is to lop off many of the best and most successful of our companies. The notion that this ‘global’ identity of Israeli companies should somehow be used against us for reporting purposes punishes our industry for one of its most striking and positive attributes. Israeli companies go global from day one, but that does not stop them from being Israeli. We are in a unique position since we are such a small country with no real domestic market. Our companies have no choice but to ‘go global’ and this is a huge strength.

More than an incubator
If you exclude Israeli companies with a US base then Israel is being counted only as a venture incubator. That is unfair. The truth is that Israel has built – not just incubated – some phenomenal technology companies. Chiaro is a typical example. It started in Israel, has much of its $200m in venture funding from Israeli funds (mine included), its founder is still based in Israel and has its key optical development and optical manufacturing plant in Israel. At the same time, it has a US-based CEO, several vice presidents and the majority of its staff in the US including the system development, sales, marketing and professional services teams.

There are several other high profile examples of these global Israeli companies. Look at companies such as Atrica and Mellanox that, together with Chiaro, have recently raised large rounds of financing. These companies are founded in Israel, have strong technology teams here, receive funding here, but also have US headquarters, management teams, and foreign funding.. These are international companies that have scaled very quickly – which is exactly what venture-backed businesses should be doing and what investors expect. They are leveraging the best of both worlds – using the strong R&D and entrepreneurial capabilities present in Israel and taking advantage of some of the world’s best sales forces, marketing and management teams in the US. They have recognised that they can’t go it alone and have to employ talent from around the world. Why are these companies any less Israeli for that?

This type of misrepresentation does little to help many people’s perception of the state of Israeli venture. In fact, the first quarter rounds raised by Atrica and Chiaro ($75M and $80M respectively) each exceeded the total first quarter amount reported by VentureOne. To leave them out is to miss the story. All over the world investment, is flowing inexorably to the strongest surviving companies with the bulk of money going to the larger and later stage firms. If Israeli venture numbers are reported without the benefit of these rounds then a false picture is painted of our industry.

There is no doubt that the political violence in Israel has recently caused some investors to be more reticent about committing to Israeli funds. Few investment committees will be naturally predisposed towards Israel at the moment. But I would argue that the venture capital downturn we are seeing here at the moment is much the same as is being played out across the world. We are in synch with what is happening elsewhere. We as an industry are focusing less on early-stage deals than previously, but it’s a hard proposition to make seed investments when you can snap up a far more established and less risky company at seed prices. That is happening everywhere else. We will see some fall-out as less experienced and less successful VCs go to the wall. So will every other region.

Special problems, special strengths
I would also argue that, despite our special problems, we also have special strengths. Israel was subject to a lot of the fund-raising frenzy we saw in the late 1990s around the world and many firms raised funds that were far larger than they were used to investing. However, Israel did not suffer from the internet frenzy to the same degree that we saw elsewhere. By and large, Israeli venture-backed companies have more or less continuously been based on ‘real technology’: network infrastructure companies, software companies, chip companies, security companies, telecommunications equipment companies, biotech companies, etc. Very few ‘fluffy’ internet companies got backed, unlike elsewhere. Many funds invested in Israel at high prices in the late 1990s, but their portfolios will be looking rather healthier than those backing virtual companies elsewhere.

As a result of this, we are seeing continued commitments from our existing investors, who have seen proof that investing in sound Israeli companies generates returns. Star Ventures Management raised its ninth Israeli-European fund last week with $400m in new commitments, for example. And in turn, Israeli VCs are maintaining a constant dialogue with their investors, informing them of what is really happening over here. That is the key to weathering the crisis – both the technology crisis and to some extent the political one. My job in doing this, and that of my peers, is made no easier by figures based on incorrect assumptions and presenting a picture to the world that is far removed from reality.

I just wanted to set the record straight.

Jon Medved is a founder and managing partner at Israel Seed Partners, an Israeli venture group with $262m under management in four funds.

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