from the March 2008 issue

The Ins and Outs of Exits

In 2007 the Israeli high-tech sector raised just under $2.0 billion. This was far less from the record figure in 2000 when Israeli startups raised more than $3.2 billion from venture capital funds. However, this could be a record year for company exits.

Foreign venture capital funds traditionally represent more than 50% of total high-tech investments. A closer look indicates that one of the reasons for the high level of foreign investments is related to the early exits by the Israeli companies.

With increasing numbers of Israeli high-tech startup companies being acquired by major firms, or enjoying successful public offerings, the VC funds that provided their early stage capital are reaping returns from their investments at a record pace. Probably no country in the world has such rapid exits.

Israeli start-ups tend to adopt an M&A exit strategy, due both to their great distance from major markets and to their lack of appropriate resources. This strategy usually creates lower value than the potential value that would have been achieved had the company adopted an IPO exit strategy.

Another factor is the lack of experienced management.
Staying independent and not rushing to sell its technological achievements would most likely enhance Israel's economy. Whether this would affect the flow of foreign capital is questionable. Israel has succeeded in creating only four mega companies -Amdocs, CheckPoint, Comverse and Teva. As long as companies continue to make early exits and thus providing the VC companies with profits Israel will continue to be a focus for foreign venture capital investments.

Since the beginning of 2008 we have witnessed eight exits totaling nearly three quarters of a billion dollars. At this rate 2008 could be a record year. With venture capital finance continuing to pour into Israel, there is no reason to believe the deal making upswing won't continue in 2008, IVC: Gemini and Vertex rated as most active VC funds in 2007

Reprinted from the Israel High-Tech & Investment Report March 2008

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