Development of the Venture Capital Sector

A dynamic venture capital sector has emerged in Israel since the mid-1990s. The country is now the third-largest regional venture capital recipient in the world: in November 1999, for instance, some $276 million was invested, with only California and Massachusetts exceeding this amount.

This sector has increased from only one company with $34 million of investment funds in 1994, to 70 investment companies with more than 50 funds relevant to high-tech industries. Moreover, since the beginning of the 1990s, the Israeli venture-capital industry has invested around $2 billion, of which $800 million was earmarked for high-tech companies.

Many of the investors include major companies from North America, Western Europe, and the Far East looking to profit from Israel's unique capabilities in communications, computer software, medical equipment, and biotechnology. The list of foreign investors ranges from leading investment banks like Hambrecht & Quist and Goldman Sachs in the U.S., George Soros' Quantum, and Converse Technologies, and major worldwide business corporations like France Telecom, Germany's Siemens and Daimler Benz, and Japan's Kyocera. The U.S. aircraft manufacturer Boeing also recently invested in an Israeli venture capital fund ” its first such investment anywhere in the world. ^[1]

One unique aspect of Israeli venture capital is that the government initiated this most capitalistic of endeavors. Yigal Erlich, a former chief scientist at the Ministry of Industry and Trade, set up the government-owned Yozma Management and Investment Fund, which raised some $200 million in the first wave of venture capital investment. Yozma, still headed by Mr. Erlich, has since been privatized.

In Israel, the venture capital assumption ” that only a small percentage of these start-ups will actually succeed but that the profits from these companies will be enough to make the investment worthwhile ” has paid handsome dividends , with the average fund earning 40% to 50% in annual returns during the high-tech market expansion of the late 1990s.