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(photo credit: Ariel Jerozolimski)
Were it possible to blink twice like a "Jeannie in a bottle" and skip this year to jump straight to 2010, the target date for the start of an economic recovery, many CEOs, entrepreneurs, venture capitalists and angel investors would climb on board without a moment's hesitation.
This year will no doubt be a challenging test year for the fate of many Israeli hi-tech companies and venture capitalists who would rather forget about 2009 even before it begins.
The name of the game for this year will be the survival of the fittest in the industry and the survival of innovation.
"2008 [was] a crisis year and 2009 will be a lost year in terms of growth," Adi Gan, general partner at Evergreen Venture Partners, said at a recent panel discussion with The Jerusalem Post. "The players who will manage to survive 2009 and keep their head above the water will come out very strong.
"In our forecast, the crisis will be with us for the next one and a half to two years, during which the industry will be struggling with a slowdown in sales and low credit and capital availability."
If the year had finished in the third quarter, 2008 would have gone down as a record year in capital raisings by Israeli hi-tech companies. The most recent report by the IVC Research Center showed that Israeli hi-tech companies raised $600 million in the third quarter of 2008 from local and foreign venture investors. The quarterly amount was the highest reported in the last eight years. In the first three quarters of 2008, Israeli hi-tech companies raised $1.68 billion, 34 percent above the $1.25b. raised in the corresponding period of 2007.
"Having learned a lesson from the Internet bubble in 2000," Gan said, "Israeli hi-tech companies and VCs acted faster than the US market in responding to early signs of market changes and the falling dollar-shekel rate to raise follow-on capital to help them navigate through the global crisis. Now that the crisis is here, a similar rate of investment won't be maintained."
Also speaking on the panel, Peleg Hadar, managing partner of Telecom & IT at Cukierman & Co. Investment House Ltd., warned that venture-backed companies and VCs who failed to raise enough money until the third quarter of last year would have a problem getting through the crisis.
"Options for raising money are very limited," he said. "The public-offerings market has dried up and, as a result, we are going to see delistings of companies from Nasdaq and the Tel Aviv Stock Exchange because of low valuations.
"The crisis is a credit crisis and will have a very negative effect on the hi-tech industry and in particular on... companies who are heavily dependent on credit and the ability of VCs to raise money from abroad. As a result, we are going to see more companies go bankrupt or having to close down because of a lack of funds," Hadar said.
The VC Indicator survey of venture capitalists for the third quarter conducted by Deloitte Brightman Almagor Zohar indicated that respondents believe many venture-backed companies will shut down during 2009. Seventy-four percent forecast that at least 10% of venture-backed companies will close. Only 5% said a significant majority of venture-backed companies (more than 95%) would last through 2009.
The survey paints a similar gloomy outlook for the Nasdaq IPO market in 2009. According to 92% of the respondents, the markets will not reopen prior to the year 2010. Furthermore, 16% of them believe it will reopen only in 2011.
In contrast to the gloomy outlook for the IPO market, the outlook for mergers and acquisitions is somehow brighter: 41% of respondents think M&A transactions will ramp up during 2009; 36% think they will ramp up in early 2010.
Seventy-nine percent of respondents expect exit valuations to decrease in light of the poor outlook for the IPO market and M&A transactions.
"Israel has been far less vulnerable to the global financial crisis, as local banks acted conservatively and were spared from the subprime mortgage crisis," said Bruce Alan Mann, senior partner at the Morrison & Foerster international law firm, which has represented many successful Israeli companies, including CheckPoint, Comverse and DSPG. "However, the global liquidity problem is affecting the technology sector. I have several Israeli hi-tech companies who by now would have gone public but can't. Good Israeli companies are looking out for potential acquisitions to fill gaps in their product line and for companies that fit their portfolio, as no one can go public today."
In contrast to previous crises, Israeli hi-tech reacted quickly to the pending signs and companies fired a tenth to a third of their staff. This time, the axe was wielded without hesitation, as if Israeli hi-tech had practiced the maneuver.
Employment expectations for 2009 might get worse. About 21% of the venture capitalists in the VC Indicator survey believe there will be more than 5,000 layoffs, 46% believe there will be between 3,000 and 5,000 layoffs, 26% see between 1,000 and 3,000 layoffs, 3% see less than 1,000 layoffs, and 5% believe there won't be major layoffs. The vast majority of respondents, 92%, believe hi-tech companies that do not fire employees are likely to slash salaries, compared with 70% in the third-quarter survey.
So the question is how and what kind of companies will be able to win the game of the survival of the fittest.
"The main worry in the coming period of the credit crisis is the damage that could be caused to Israeli innovation and the development of early start-ups, which are the grassroots of the industry and are dependent on seed investments," Hadar said. "Therefore, the government needs to intervene and return to the old models of providing support with the assistance of the Chief Scientist's Office."
Gan said seed or pre-seed companies would be hit hardest, as they will find it most difficult to attract new investment or financing rounds.
"Companies that have already developed a product but have not yet put it onto the market are in the most difficult situation," he said. "More mature companies, such as communications companies, are already changing strategy to adapt to the situation by offering services and products to clients that aim at cutting expenses rather than increasing sales."
Gan believes the telecommunications and software sector will struggle, while the consumer electronics sector and sectors offering technology-saving products and services will be able to see some light at the end of the tunnel.
"The sector in which we are still seeing activity is in the field of green technology, such as solar energy and water technology," he said. "In light of a looming global water crisis, we believe in water technologies, such as water desalination, as an underestimated sector that has great potential of growth for the provision of technologies, in particular in large countries without proper national infrastructures, such as China and India."
Venture capitalists in the VC survey said main affected sectors in 2009 would be wireless and telecom, and semiconductors, with 81% and 78% of respondents, respectively, expecting a decrease in the number of transactions. They said the most stable and attractive sectors would be cleantech and medical devices, with 41% and 47% of respondents, respectively, expecting a decrease.
"Cleantech is the future, and I believe Israel can be a frontrunner," Mann said.