1)      VC investing – Private Israeli tech companies raised $380 million in 53 transactions, putting Q1-2008 just slightly ahead of Q1-2007’s total of $378 million (and 2007’s quarterly average of $370 million). Deal breakdown was fairly broad, as we’ve come to expect – 29% commtech (including wireless), 20% semis, 19% Internet, 11% life sciences, 8% cleantech, 7% software, and 6% other. Foreign VCs continued their dominance of the Israeli market – for example, all eight VC financings of size greater than $10 million announced during the quarter were led by a US or Europe-based VC investor; 10 of the 20 transactions of size $5-10 million were also led by foreign investors. And one of the icons of Silicon Valley’s financial scene, Silicon Valley Bank, opened an Israeli office.  

2)      IPOs – Not unexpectedly, with all the turmoil in the financial markets (the Nasdaq Composite index was down 14% during Q1) and talk of impending/current recession, no Israeli tech companies went public during Q1. Indeed, only five companies in the US backed by venture investors went public during Q1 – the quietest quarter since Q2-2003. Several companies are, however, lining up to go public, such as recent IPO filers Eyeblaster and Alma Lasers (actually filed Dec 31/07). 

3)      M&A – it was a much different story on the M&A side of the exit ledger, with another solid, active quarter. Israel tech M&A totaled $2.3 billion during Q1, with 12 acquisitions by foreign companies – nearly a company sold a week! – as well as seven acquisitions by Israeli tech companies. Acquirers of Israeli tech companies during Q1 included Microsoft (two acquisitions totaling $125 million), IBM, PayPal, GE, NetApp and Yahoo!.  

Looking forward – As in several other industries, players in high tech remain nervously focused on the continued shakeout of financial markets, as well as on the US and global economies as a whole. Most tech companies are not directly affected by the subprime and asset-backed securities related mess (other than those which invested their spare cash in such markets, as the Wall Street Journal reported did frequently occur – see http://online.wsj.com/article/SB120545543061035279.html?mod=technology_main_whats_news). However, major customer groups of technology companies (e.g. financials, healthcare, global tech giants) face large cutbacks in spending and likely consolidation, and are becoming increasingly risk averse in all types of decision making. During the next few quarters it likely will be increasingly difficult for tech companies – particularly small ones – to sell into these sectors. And for tech companies which typically sell in US$but have a good part of their expenses (i.e., employee salaries) in other currencies (such as the Israeli Shekel, which appreciated 7.6% versus the US$during Q1 and 22.8% since the beginning of 2006), margins will continue to come under pressure.

For these (and other) reasons, we expect to continue to see a migration among VCs toward business models which rely more on direct-to-the-consumer (see Kleiner Perkins’ new “iFund” iPhone app fund), and to companies that do not expect to rely solely on either advertising revenues, or on a small number of large customers in the financial / healthcare / industrial sectors. We also now are entering an era where Israeli tech companies no longer enjoy low-cost supplier status – e.g. an NIS 20,000 monthly salary (before “social benefits” which typically tack on another 25-30%) for a typical high tech employee cost the equivalent of about $52,000 (annually) two years ago – now that salary costs an employer more than $67,000. Most foreign VCs which have migrated to investing in Israel continue to claim that they are here not for the low costs, but the high success rates and exit values. But if the Shekel remains strong below the NIS 4 per US$range (reportedly the Bank of Israel’s preferred target; it is now NIS 3.64) – or strengthens further – Israeli high tech companies will come under increasing pressure to produce more with less, and engineer products (and exits) with relatively fewer resources. Time will tell……..

Please contact us at info@leapcap.com if you are interested in purchasing the charts and data behind the summary numbers we refer to above. You can also keep updated on a more regular basis on what’s going on in the Israel high tech and VC world at our blog www.leapcap.com/Blog.html. 

This report is for informational purposes only. The information contained herein has been obtained from publicly available sources we believe to be reliable, but has not been independently verified. Therefore we cannot guarantee the accuracy or completeness of information, or opinions derived from such information, contained in this report. If any errors or omissions are noted, or if you have any comments, please contact us at info@leapcap.com. Transaction lists and details are based on publicly available sources only. Therefore, the list will likely be incomplete, missing out on transactions which were not announced, or which were completed during the quarter but announced subsequent to quarter end. The summaries based on the lists will also likely somewhat understate total actual activity. Transaction details may likewise be incorrect, as in certain cases publicly reported (but unconfirmed) details are relied upon for this report. Opinions expressed in this report reflect those of LEAP Capital management at the time of writing, and are subject to change without notice. We express no opinion or recommendation regarding any of the securities of the companies mentioned in this report. LEAP Capital Advisors Ltd. does and/or seeks to do business with entities mentioned in this report. As a result, readers of this report should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.

To receive future such reports directly by email, please let us know at subscribe@leapcap.com.