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Venture capitalists on Wednesday warned of a "much-hyped" market amid concerns over a deteriorating economic climate and the fast exit strategy of many Israeli companies.
"There is a change in VC's sentiment into a more pessimistic trend in both investment and exit valuations," said Asher Mechlovich, partner and head of Technology Media & Telecommunications industry at Deloitte Brightman Almagor. "With venture valuations on the rise for quite some time, more venture capitalists are worried that we are in a much-hyped market. These fears are accompanied with a negative shift in overall economic climate expectation and might indicate that it is time to be a bit more careful and cautious in the coming months."
The VC Indicator survey, conducted by Deloitte Brightman Almagor among leading VCs in the third quarter, showed a downward shift in economic expectation among respondents with 33 percent believing that the overall economic climate will worsen over the next six months compared with 6% in the second quarter. Simultaneously, only 17% of respondents believed that the economic climate will improve over the next six months compared with 49% in the previous quarter, while 50% of respondents predicted no change in the overall economic climate.
"These are the most pessimistic results in five years," said Mechlovich.
At the same time, the majority of venture capitalists were convinced that many Israeli companies doing an initial public offering were not mature enough.
"Most venture capitalists believe that Israeli companies who go public on NASDAQ tend to do so too early," Mechlovich said. "Good market conditions for an IPO, namely market appetite for new floats and increased interests in the company's field, are not enough. Revenue growth history, earnings and promising prospects are key factors to consider when assessing a company for listing."
According to the survey, 81% believed that Israeli companies who go public on Nasdaq tend to do so too early, while only 19% disagreed.
"This outcome is very much in line with the fact that the share price of most Israeli companies that went public on the Nasdaq dropped during 2007 to below the IPO price," said Mechlovich.
In addition, the survey found that 38% of venture capitalists believe the fourth quarter will have extensive Israeli IPO activity on Nasdaq, with 29% expecting three IPOs; 9% foreseeing at least four; 44% expecting two; 15% anticipating just one; and 3% believing that not even one Israeli company will go public on Nasdaq by year-end.
Meanwhile, for the third straight quarter, cleantech remained the favored sector for increased investment. Expectations of an increase of cleantech transactions continued to be high at 77% although down slightly compared with 88% in the first and second quarters.
"The hype surrounding cleantech in Israel continues to increase. And yet one thing is missing - deals. Significant investments have been few and far between. One of the major causes for the gap between the markets expectations and actual investments is lack of cleantech investment knowledge," said Mechlovich. "When scrutinizing the cleantech sector more closely, investors are looking at projects that require different scales and timeframes of investment. Often they do not understand the sales cycle well enough to be prepared to commit funds."
A significant part, or 43%, of the local venture capital community blamed entrepreneurs for the deal scarcity, saying that the lack of talented Israeli cleantech entrepreneurs was a major obstacle for local cleantech companies' success. But the majority said the blame was on the investors for the lack of cleantech investment knowledge, which they marked to be the top impediment to cleantech success in Israel. Some 26% said the Israeli market was hi-tech oriented and the players were not adequate for the cleantech business as one reason for the problem. Only 23% named lack of government support as a major impediment.