Percent of funds raised by Israeli Tech companies in Q1-3, 2005

We are looking a little further afield today than is our norm but headlines from Israel caught our attention. It turns out that when one U.S. VC firm, Sevin Rosin, cancelled its 10th fund recently because management said they no longer believed that venture capital had a future, it had a ripple effect in the Israeli marketplace. Many are questioning VC first-principles.

Chemi Peres says that at Pitango too, they have been asking themselves the tough question - does the venture capital model work? “My answer is that it does. I do not believe that we can predict what will happen in the long-term future, but I do believe that venture capital is the only answer for innovation and entrepreneurship. I cannot see how new innovative technology companies will manage to function otherwise. There will be a place for venture capital as long as we have innovation and entrepreneurship.”

Vertex managing partner Yoram Oron says:

“It’s true that these investments have yielded a low return due to the small number of IPOs, as a result of the more stringent market regulation, but 9 out of 10 exits in the US last year were through acquisition deals in which the return on investment is very high. The return on these deals is exceptionally high because the buyers are technology companies which prefer, for financial and organizational reasons, to acquire an off-balance sheet R&D activity which will not be seen in the company’s financial statements, and which will not affect the organizational character of a mature, publicly-traded company. These companies are willing to pay five times the R&D costs of start-up companies, and this is very worthwhile for investors.”

The final judgment on VC markets remains as elusive in Israel as it (...read more...)