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“Only 200 Start Ups Will Survive”
Shlomo Kalish, Founding Partner at Jerusalem Global Ventures, estimates that the VC’s will only be able to fund a few of the 500 start ups
By Yosef Assis
JERUSALEM (July 10, 2002) - The feeling in the high-tech and VC sectors in Israel is not good. Other sectors such as real estate, tourism and industry were also hit by the local and global recession but the frightening collapse, from the absolute heights to the lowest depths, of the proud Israeli technology industry stands out, particularly as the end is not yet in sight.
One of the people most identified with the Israeli high-tech industry is Shlomo Kalish, founding partner at Jerusalem Global Ventures. Kalish, like many of his friends, learned much in the past two years. One can even hear it in his voice. Whoever spoke to him three years ago heard enthusiasm, optimism and pride. Today he sounds more sober, and a bit calmer. There is time. Kalish’s comments today come after the recent merger of the Platinum and Neuron funds as well as the decision by the fund BRM to return $100 million to investors - both direct results of the difficult situation in which the high-tech and VC industries find themselves.
Shlomo, already in March 2000 you predicted that this crisis was going to happen. Even you must have been surprised by the strength, aggressiveness and length of the collapse of this sector?
“I must admit that I was surprised by the magnitude of the crisis. The situation today is a mirror opposite of the hype of the years 1999- 2000. Investors are disappointed with the market and so the pendulum is shifting to the other side. But in the long term, I estimate that the technology industry with return to its historical growth rate of 20-30% a year, the rate of growth from before the bubble. While it is true that stockpiles are still high in all industries, the fact remains that people and businesses will continue to purchase technology, be it software, medical devices or communications.”
And what about the VC industry?
“Too much money was invested in the VC industry just as too much money was invested in the technologies themselves. For example, in the US, no less that $100 billion was raised by VC’s in the year 2000 as opposed to only $2 billion 20 years earlier. The projection for 2002 is only $15 billion. In Israel, $3 billion was raised during Y2000while in 2002 it will be half a billion at most. And that is without taking into account the $100 million that BRM is returning. With regard to returns, I estimate that the best funds will be able to report on annual returns of 40% and the good funds 20%.”
Do you think that returning money was a wise step?
“In the US, where vast sums were raised, the wise and logical step was to return some of the money and decrease the size of the industry as a whole. There was simply too much money there, so the big funds returned money, also because of the difficulty in achieving good returns with so much money. I do not think, however, that this is the proper course of action in Israel since there is a shortage of cash needed to fund existing companies and invest in new ones. The high-tech industry in Israel is in dire need of money thus it does not make sense to return money that is already in the funds. Most of the funds in Israel are under $250M, which is the right size of fund. Exceptions are Star, JVP, and Pitango however, and Star and JVP are global funds, investing in Europe and US, while Pitango has many partners, and in terms of partners per capita, they are similar to the smaller funds.
“The important question is not how much money a fund manages, rather how much capital is managed by each partner. In the US the acceptable ration is $30-$50 million per partner. We at Jerusalem Global, for example, manage $190 million in capital (of which $40 million has been invested already) and have 6 partners - or, $30 million per partner.”
How much do you intend to invest in the last half of this year?
“I suppose about $10 million in new companies and another $10 million to support existing companies.”
Sounds very cautious-
“It certainly is. The situation today forces one to be cautious. On the other hand, there are very good investment opportunities at good prices. There are many good companies that do not have money, these are the companies we are looking for. If I find a company like this I will invest in it. There are exceptional investment opportunities today, for those that have money of course.”
Do you think that the luster of the Israeli VC’s has declined proportionately in the world because, among other reasons, of the fact that most of them were active only during the 7 good years?
“It does not work this way. Foreign investors have a certain amount of money earmarked for VC investments abroad including Israel, so the investors will look for the best funds in Israel. If you are asking me if there will be an absolute decline in the amount of investments in Israeli funds, the answer is yes. With regard to the question of a larger proportional decline in investments in Israel, well, that might happen because of the security situation. In Europe, for example, the VC fund Accel Europe, which is supposed to invest its capital in Europe, is not doing so since there are no start-ups there. People are afraid to leave secure jobs at large companies to set up a start-up.”
Do you think that the same thing could happen to Israeli entrepreneurs?
“No, Israeli’s are natural entrepreneurs. Many of the entrepreneurs in Silicon Valley are Jews. Look at the executives of the large companies: Steve Balmer of Microsoft is Jewish, Larry Ellison of Oracle is Jewish, and there are many such examples.”
What about mergers of funds, as was the case with Platinum and Neuron. Do you think this is going to be a new trend in Israel?
"I do not think this will happen. There are problems in combining the teams of different funds, to say nothing of the legal problems. It is very difficult to do. For Neuron and Platinum it was appropriate."
So after all of these shocks, how will the Israeli technology sector look? How many start-ups will survive?
“Currently there are about 500 VC backed companies. As for the others, backed mostly by angels, their chances of surviving are very low. Of the 500 companies, only about 150-200 will still be around in a year. This is the norm that will continue for quite some time. “
If I take what you say and combine it with the fact that 2200 workers are about to be let go from Amdocs and Comverse alone - the situation is very bad.
“I agree. The situation is bad and it is going to get much worse for the Israeli hi-tech worker over the next year. But there is a light at the end of the tunnel. There are companies that are continuing to hire new workers, like Intel and Microsoft.”
So what you are saying is that at the end of the day most Israeli hi-tech workers are going to be employed by foreign companies?
“That very well might be the case, and I don’t think it is bad. People who work at Intel and Microsoft, are exposed to modern management techniques in global corporation, an experience that prepares them better to be entrepreneurs..”
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