Testing time for VC; The pluses and minuses for Israeli funds.

BYLINE: Batya Feldman

The first closing for the new funds of Israel Infinity Venture Capital and Pitango Venture Capital and the probable closing by Vitalife Life Sciences Venture are positive signs for the other Israeli venture capital funds that are planning to shortly begin raising capital for new funds of their own.

The global climate for raising money is good. While in the past, investors had cold feet about investing in Israel because of the local geopolitical situation, that is no longer an issue, after the country's high-tech industry in Herzliya functioned last summer as if there was no Second Lebanon War being waged in the north. Israel is recognized as the second most important location of high-tech in the world, and international pension fund managers, insurance companies, and other institutional investors are looking for the right venture capital funds in which to invest. Recently, a new element has been added to the mix, in the form of Israeli institutional investors, who are definitely seeking to invest in the industry.

But not everything is healthy for Israeli venture capital. The performance of Israeli venture capital funds is far from impressive. Whereas the funds could claim when raising their previous funds that the 2000 harvest was the worst ever, that argument is no longer relevant. Most acquisitions of start-ups have been made for modest amounts of $100-200 million, while at the same time, few Israeli companies have held IPOs on Nasdaq, and those that have, did so at modest company values.

Venture capital funds that are supposed to achieve five-fold or larger returns on investment for their investors, are achieving, at best, three-fold return. This is a level not much greater than the yields of stock markets, and the larger the fund, the more difficult it is to achieve a high return. For example, the Pitango IV Fund raised in 2004 will have to achieve at least a three-fold return on investment to preserve Pitango's reputation. At the moment, that does not look like it's going to happen.

Pitango, like Israel's other large venture capital funds, has not been able to arrange one good exit by a portfolio company that would return most of the fund's principle. The key question is what will happen with the large funds. It seems that Pitango has closed another financing round, and we'll see if the other funds will be able to follow suit.

Two year ago, Prof. Paul Gompers of the Harvard Business School predicted that the number of Israeli venture capital funds would plummet. He said that when the shake-out was over, a few large funds would remain, such as Pitango. Other funds would be much smaller, and focus on niche industries, while the others would disappear. This hasn't happened - yet .

Published by Globes [online], Israel business news - www.globes.co.il - on May 21, 2007

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