BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
INTERNATIONAL -- THE MIDDLE EAST Violence May Also Leave Scars on Israeli High Tech (int'l edition) Instability could divert the recent influx of foreign capital Only two days before the latest round of violence erupted between Israel and the Palestinians in late September, venture capitalist Erel Margalit launched a $500 million fund--one of the country's largest ever. The founding partner at Jerusalem Venture Partners has such a good record of spotting hot new Israeli tech companies that he has often had to turn down potential investors. But because of the political uncertainty, two big European insurance companies are rethinking their planned investment in Margalit's fund, which he runs from an office located just 10 minutes from Jerusalem's Gilo neighborhood--the scene of almost nightly clashes. Margalit remains confident he will get his money, from other investors if not the European insurers. Nevertheless, fears are growing that the continuing violence could scare away the foreign capital so vital to Israel's all-important high-tech sector. ''If the conflict goes on for months, we'll be facing tough times,'' frets Jon Medved, general partner at Israel Seed Ventures, a Jerusalem venture-capital firm. That could put an end to a tremendous boom: In the third quarter alone, Israeli and foreign venture-capital outfits plowed a record $1.03 billion into local startups, more than in all of 1999. One worry is that the new intifada has come just as companies were getting hit by the downturn on Nasdaq, where the shares of more than 100 Israeli tech companies trade. ''Israeli shares have been dealt a double blow, first by bearish sentiment on the Nasdaq and then by the events here,'' says Tobias Fischbein, senior Israeli technology analyst at Lehman Brothers Inc. in Tel Aviv. Israeli shares traded on Nasdaq have dropped by 25% since July, compared with a 15% decline in the Nasdaq Composite Index during that period. Several initial public offerings planned by Israeli companies have been postponed by companies, including Tel Aviv-based XACCT Technologies Inc., an Internet-software billing company. Israeli startups are also feeling the pinch, even though they may be years away from listing. ''It will take us twice as long as we expected to complete our current round of financing,'' says Barak Pridor, chief executive officer of ClearForest Corp., a developer of knowledge extraction technology that is based both in New York and Or Yehuda, Israel. Pridor is trying to raise $15 million and says he is being grilled by investors in the U.S. about Israel's political problems. So far, the violence has not directly affected the operations of high-tech companies in Israel. Nevertheless, analysts believe more businesses could decide to base operations or headquarters in the U.S. to escape potential security risks--as well as Israel's high capital-gains tax. SHARP DROP. Meanwhile, the Oct. 26 State Dept. advisory on travel to Israel and the Palestinian-controlled territories has led to a sharp drop in visits. Conferences have been canceled or postponed as foreign participants pull out. The Telecom Israel 2000--a trade show billed as the country's biggest high-tech event ever--is going ahead as planned from Nov. 6-9. But foreign attendance is expected to be down by as much as 50%. Among the many cancellations: Keiji Tachikawa, CEO of NTT DoCoMo Inc. Boosters for Israeli high tech point out that other industries have been hit far worse. Tourism is down 30%, while a shortage of Palestinian labor has shut down hundreds of contruction sites. By contrast, some nice high-tech deals have been cut in the past month. On Oct. 23, an affiliate of Japan's Softbank Corp. led a $50 million round of financing in STI Ventures, a privately held investment company that focuses on Israeli startups. ''The political developments have an impact, but this is part of doing business in Israel,'' says Lee Feldman, vice-president for strategy and investment at Softbank International Ventures. But if an unending guerrilla war becomes part of doing business in Israel, investors may not be so brave. By Neal Sandler in Jerusalem _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Violence May Also Leave Scars on Israeli High Tech (int'l edition) CHART: Israel Loses Its Luster INTERACT E-Mail to Business Week Online

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