Local venture capital industry fears fund closures

'This is, essentially, the initial direct impact that the US recession is having on funds in Israel.'

Venture capital managers fear closure of funds operating in Israel over the next two years amid concerns over a deteriorating economic climate in the US and difficulties of raising follow-on funding. The VC indicator survey for the first quarter of 2008, conducted by Deloitte Brightman Almagor among leading VCs, revealed that 92 percent of the questioned managers believe that the US economic slowdown will reduce Israeli VCs' fundraising ability. "This is, essentially, the initial direct impact that the US recession is having on funds in Israel," said Asher Mechlovich, head of Technology Media and Telecommunications industry at Deloitte Brightman Almagor. "VCs who are in the process of raising money for a follow-on fund may find it extremely difficult to convince current and prospective limited partners to make investments and to reach the target that the VC has set for its fund. This will result in a decrease in the number of active VCs in Israel." The VC indicator survey results showed that 75% of Israeli venture capitalists forecast that by 2010, the number of active VCs in Israel will decrease. Of those, 59% said the main reason for the closure of a number of active VCs would be the failure to raise follow-on funds. Furthermore, the survey revealed the most pessimistic shift in economic expectation among respondents since the last quarter of 2001, with 74% believing that the overall economic climate will worsen over the next six months. High volatility on the stock markets around the globe is set to continue for at least another six months according to 49% of the surveyed managers against 38%, who expect the crisis on financial markets to end within a year. The survey further showed that 59% of venture capitalists, the highest percentage since 2004, expect both investment valuations and exit valuations to be lower during the next six months. "Late-stage startups will soon start to feel the negative impact of the stock markets' fall and the tightening of the IPO market," said Mechlovich. "M&A activity might also be affected. As large technology, media and telecommunications companies brace for the possibility of a long recession, these potential startups acquirers might change their M&A strategy and acquire fewer startups. Less viable IPO options and dwindling M&A opportunities mean lower exit valuations." In such an environment, 59% of venture capitalists said that compared to last year, it would be much more challenging for entrepreneurs to raise seed money. According to 40% of Israeli venture capitalists, the most interesting deal flow opportunities during 2008 will be in mobile application. Other hot investment areas include cleantech (23%), on-line video (14%), casual gaming and social networks (each with 6%). The highest expectations of transaction flow are in cleantech, as 72% of venture capitalists expect an increase of transactions in this sector. The Internet sector is second in expectations of transaction increases with 37%. The medical devices sector continues to be among the most positive sectors, with 36% expecting an increase of transactions in this sector.