Angel investing in hard times

In the new book Start Up Nation- The Story of Israel's Economic Miracle, Dan Senor and Saul Singer cite the importance of entrepreneurs, and their investors, in building a robust Israeli high-tech industry. The sector represents 16% of GDP and 25% of exports.

That model is now under siege, however, as venture capital firms (VCs) in Israel are bleeding money.  According to PWC's "Money Tree" report, $10 billion in venture capital was raised this decade but less than $1 billion earned back through IPOs and acquisitions. With returns like that, VC's are becoming more conservative toward riskier, seed-stage companies. According to the Israel Venture Center, venture investment tanked by 50% compared to the first three quarters of last year.

IVC Chairman Zeev Holtzman said in an October 20 press release:

The future is expected to be even worse. There is a major shortage of capital for new investments by Israeli VCs, and as foreign VC funds fail to find Israeli co-investors, they will further reduce their exposure to Israel... The entire high-tech industry is at risk."

In this environment, start-ups are relying even more on seed funds and proven Angel investors. However, sometimes even Angels hit turbulence.

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Lack of transparency hurts Israeli businesses

Recently, an NYSE-listed American conglomerate contacted me about investing in an Israeli media company. Despite being traded on the Tel Aviv Stock Exchange, my colleagues and I could find no readily accessible financial reports, disclosures or analyst coverage. Moreover, a request to the Investor Relations (IR) department was fielded by an Account Executive at their PR firm. That doesn't exactly inspire confidence in private equity or institutional investors, does it? Israeli companies seeking access to direct, portfolio or private equity investment need to recognize the importance of transparency and build a world-class Investor Relations department.

Research conducted by The Milken Institute's 2008 "Opacity Index" gives Israel poor marks across nearly every transparency category. This includes disclosure standards, regulatory quality and enforcement policies. Higher levels of opacity translate into reduced inbound investment and less capital available for businesses and entrepreneurs. In fact, higher opacity levels are directly correlated with lower GDP growth and a reduced ability to attract foreign direct investment.

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