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From The Jerusalem Post: 
"The Promised Techno-land"
By Shlomo Kalish
JERUSALEM (March 7, 2003) - The flood of capital that flowed into venture capital funds in the late '90s has been a good lesson in Economics 101.
The excess of capital coupled with a sizzling stock market led to unrealistic valuations and the formation of far too many technology companies with similar business plans. When the bubble burst it became impossible even for the best-managed companies to provide returns to their investors. Moreover, massive inventories were created in every part of the food chain - capital, companies, products, installed infrastructure, and debt - making the cleanup and recovery process lengthy.
Even though the short-term outlook seems fairly grim, we are not at the end of technology investing. Technological progress provides the means for changing the economic equation by providing lower- cost delivery of needed products and services, and thus can capture a substantial part of the created value.
Well-managed venture capital funds that focus on technology- intensive startups will soon return to historical standards of providing 25 percent to 30% annual internal rate of return (IRR) to their limited partners. Lucrative opportunities for technology investing exist in emerging fields such as alternative energy, agriculture, security and anti-terrorism, business continuity, and select information technology areas.
Israel is second to none in the per capita number of engineers and scientists and start-up activity. Even on an absolute scale of technology investing Israel is in the top five "US regions."
Newly created Israeli companies such as Checkpoint Software, Mercury Interactive, ICQ, Orbotech, Comverse, Amdocs, and Galileo (acquired by Marvel) are global leaders in their field. This is why companies such as Intel, Microsoft, Cisco, and IBM have thousands of engineers designing their top products in Israel, and the reason why leading VC funds, such as the European $500 million Accel Partners and the American Benchmark and Sequoia funds have established Israeli funds or have allocated a significant portion of their overseas funds to investments in Israel.
Palestinian terrorism has severely hurt the tourism and construction sectors. The effect of terrorism on the technology sector has been small, but the effect of the global downturn was swift and devastating.
The country is in the midst of a long and deep recession. Fund formation in the last three years was dismal, bringing the uninvested capital of Israeli VC's to about $1 billion, approximately equal to the amount invested in Israeli start-ups during 2002. Mounting pressure by Israeli institutions and corporate investors to reduce commitments may cut this figure by another 20%- 30%. Nevertheless, some of the 600 venture-capital backed start- ups in operation are top-notch companies with deep technology and promising economic viability.
Some of the best entrepreneurs are back on the market, looking to establish fresh start-ups. Moreover, Israel has a strong competitive advantage in many of the areas that are in high demand, such as security and anti-terrorism.
The combination of great opportunities and lack of investment capital will make 2003 and 2004 great investing years, particularly for seed investments. Valuations are low, great entrepreneurs are available, and operating expenses are down substantially.
How can institutional investors take advantage of this situation? Immediate participation is possible by purchasing secondary limited partners interests in funds that have capital for new investments in 2003.
Due to internal financial pressures, some Israeli institutions, corporate investors, and (less) wealthy individuals are looking to reduce their future commitments by selling their interest in VC partnerships. Since supply is high, attractive prices can be obtained. Institutions that can't buy secondary interests can invest in new funds likely to be formed during 2004.
Experts predict that the Iraq war will be won swiftly, and the resulting calming effect on the Middle East and Palestinian extremists will bring back the foreign investors to Israel in 2004. With the Iraqi uncertainty and several years of bubble-induced clean- up behind us, it seems likely that in two to three years we will be a bull market, providing for nice exits to current investments. It looks like a perfect timing for: "Buy low, sell high."
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