Funds shortage choking off start-ups

2011 setting record bad numbers for new high-tech companies and in foreign patent applications by Israelis.

By BATYA FELDMAN/GLOBES
Money Shekels bills 521 (photo credit: Courtesy)
Money Shekels bills 521
(photo credit: Courtesy)
2011 is setting record bad numbers for new high-tech companies, and in the ongoing decline in new capital raised by venture capital funds and in foreign patent applications by Israelis.
Luzzatto & Luzzatto senior partner Esther Luzzatto, who handles the leveraging and commercialization of technological intellectual property, says Israel is in trouble.
“Current models for venture capital and incubators no longer provide answers, and there is a need for new solutions. Israel’s economic locomotive is stuck, but it is possible to help it get going,” she told Globes.
This is not a bleak forecast, but the grim reality seen in the joint Luzzatto & Luzzatto and Israel Venture Capital (IVC) report. Luzzatto will unveil the full report tomorrow at its joint Sixth Annual High Tech Conference with BDO Ziv Haft and the Yigal Arnon & Co. law firm.
The sharp decline in capital raised by venture capital firms affects the number of companies they can invest in and the number of new companies that are founded.
Only 161 new companies were founded in the period January-September 2011, down from 500 a year in previous years.
It seems entrepreneurs realize there is no money, and they are in no rush to leave their jobs to strike out on their own.
Luzzatto said the drop in patent applications is another indication of the severe crisis.
“In the past two years, there has been a rise in the number of international patent applications, but Israel is struggling to match the trend. In the past three years, the number of patent applications in Israel has fallen by 25 percent, while the global trend is rising,” she said.
So what’s the problem in Israel? “A lack of money. Venture capital funds raised $1.7 billion in 2005, but only $200m. in 2009, and they stopped raising capital altogether in 2010,” Luzzatto said. “Although there has been a recovery this year, with $800m. raised, the general trend does not seem to have changed. For the sake of comparison, in the high-tech peak in 2000, venture capital funds raised $2.8b." The problem does not end with the lack of money. It continues with the decline in money invested in the early-stage companies, most of the available money being channeled to late-stage companies.
The Luzzatto-IVC study found that only $33m. was invested in new companies in January-September 2011. In 2009 – a year of crisis – $61m. was invested in new companies.
“In 2008, 41% of investment was channeled to new and early-stage companies. By contrast, this year, the proportion has fallen 30%, to 29% of total investment,” said Luzzatto.
“On the other hand, in 2011, investment in late-stage companies rose to 71% of total investment, from 59% in 2008. It seems that funds are making follow-on investments in companies in which they invested in previous financing rounds.”
Luzzatto said that each investment in a late-stage company means no investment in ten new companies.
“A $1m. investment in a late-stage company prevents the founding of several small companies because the money is usually spread among many early-stage companies.”
The situation can be fixed, though.
“I believe that it will be possible to get through this crisis with the right intervention. This is the time for the government to intervene to encourage and stimulate the growth engine of the economy. In the 1990s, the Yozma funds picked up the reins and encouraged many foreign investors to come and invest here,” she said.
“I think that this is the time for the government to thoroughly review its activity and announce good news. There are wonderful entrepreneurs here, and one of the most advanced infrastructures in the world. There is no reason that we can’t overcome this crisis.”