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Friday October 19, 2001

Despite intifada, Nasdaq, investors in Israel hopeful

MARTIN KASSMAN
Bulletin Correspondent

The resumption of violence between Palestinians and Israelis appears to have had little impact on the willingness of Bay Area venture capitalists to invest in Israeli companies.

While U.S. investment in Israeli high-technology firms has dropped -- the Jerusalem Post recently reported "a growing flight of foreign investment from Israel's high-tech sector"-- observers place blame primarily on the precipitous fall of the technology-laden Nasdaq stock market.

"The main factor is not the Palestinian-Israeli clashes in the West Bank and Gaza Strip," said Amon Agassi, director of business development at the Consulate General of Israel in San Francisco. "It's the Nasdaq fall, and starting a recession in the United States, [that] does more harm for venture capital than Israeli-Palestinian relations."

Tali Aben, a Bay Area-based general partner of Gemini Israel Funds, a venture capital fund with headquarters in Israel, agreed. "The impact is so huge that Nasdaq brings," said Aben, who manages the Silicon Valley operation for Gemini, which has about $350 million invested in Israeli and Israel-related companies.

The Nasdaq Composite Index peaked in March 2000 and had been falling for several months by the time the al-Aksa intifada began just over a year ago. The index has dropped by about 60 percent since then. The Dow Jones Industrial Average has fallen by about 20 percent since January.

"Israel is essentially a mirror of what's going on in the U.S.," said Aben.

Bruce Mann, a San Francisco investment banker and attorney, agreed. "I would say that venture capital in Israel has been subject to the same trends and pressures that venture capital has in the United States, largely because the players are now the same," said Mann, a senior managing director with WR Hambrecht & Co. and a partner with Morrison & Foerster.

"Venture capital has been dead for the past six to nine months, and VCs haven't been investing anywhere," Mann said.

Recently, however, the S.F.-based venture capital fund Blumberg Capital declared plans to begin investing in Israeli start-up companies. According to its Web site, Blumberg focuses on communications and information technology.

"There is a lot of doom and gloom out there nowadays, but this is an excellent time to be either a VC fund or an entrepreneur," Blumberg principal Bruce Taragin said. He added it is now easier for entrepreneurs to find good employees and affordable office space.

Aben allowed that the intifada "definitely hasn't helped," but she said that the high-tech research and development work being done in Israel is located far away from the areas subject to conflict. Mann said that Israeli high-tech start-ups are located primarily in the Tel Aviv suburbs, in Haifa, and outside Jerusalem.

"The new venture investment was at such a low point anyway, it would be very hard to prove one way or another" whether the intifada has affected investment, according to Mann. He is, however, convinced that the stock prices of Israeli companies have not suffered as a result of the Palestinian-Israeli unrest.

As if to demonstrate that the Palestinian uprising would not deter investors, Menlo Park-based Benchmark Venture Capital announced last November that it would invest $200 million in Israeli high-tech start-ups. In May of this year, Benchmark announced that it had closed on financing for the Benchmark Israel fund, with investments of $220 million.

Benchmark did not respond to a Bulletin request for comment.

The Sept. 11 terrorist attacks in the United States have prompted concerns that U.S. venture capital investment in Israel will fall further. "Everybody's re-evaluating their strategy" in the wake of the attacks, said Aben.

At a news conference last month, Israeli Finance Minister Silvan Shalom said the Sept. 11 violence has created "a real danger of collapse for U.S. and European capital markets, especially of high-tech related industries."

Shalom therefore announced a new tax exemption to encourage investment by non-Israelis. He also said that foreign investments in Israeli venture capital funds will be completely exempt from taxes through the end of 2003.

Gemini's Aben expressed some optimism about the future of investment in Israeli high-tech firms. "Things look very grim, but it's a cycle," she said. "Technology is something that's not going away."

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