It is impossible to minimize the effect of a new economic crisis on Israeli high tech. While no capital market crisis desirable, should the current problems escalate into a full-blown crisis, could deliver a lethal blow to Israel's high-tech engine, which could remain in the garage for a long time.
Israeli high tech never really recovered from the last crisis, which especially hurt local venture capital funds that are even now unable to raise follow-on funds. Israeli high tech lacks the money to maintain the level of operations we have become accustomed to, and the shortage is liable to worsen.
Although most of Israeli high tech is in the private market, it is tightly tied to the public market. The valuations of large high-tech companies have been slashed, and their first response was to stop acquiring small companies. Since 2008, large companies have minimized acquisitions, although as they recovered, they seem to have begun reopening their wallets in the past 18 months.
A new crisis would put an end to acquisitions, even of small companies for negligible amounts. In other words, start-ups will have to raise capital on the private market. The problem is that venture capital funds and private investors will stop investing until the situation clears.
Israeli venture capital funds that have been unable to raise follow-on funds will unquestionably not invest in an inclement public market climate.
Large investment institutions that invest in venture capital funds will also pull the plug, and will be in no hurry to make new investments in funds until they can estimate the losses from the drop in value of public companies to their assets.
Hope is apparently being placed in large resource-rich venture capital funds, but they too will prefer to wait until the crisis deepens, slashing company values, so that they can invest in start-ups at low prices.
Companies planning IPOs will also take a hit. The primary market will go into the freezer during a financial crisis as investors avoid risks. Such a shutdown will result in late-stage companies turning to the private market to obtain more capital instead of raising it on the stock exchange, but it will not be easy, and company values will be mercilessly slashed.
Israel's high-tech engine has already been stuck for many years, and it is not certain that it can continue to drive the Israeli economy after another blow.
Published by Globes [online], Israel business news - www.globes-online.com - on August 8, 2011
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