Financial Crisis – Hi Tech in Israel Affected

This article was posted yesterday on techexposures.com and it definitely gives us something to think about what’s in store for the hi-tech industry in Israel during the coming months.

The Financial Crisis – Internet startups will suffer

I attended a conference of about 40 CEOs and founders of start-ups last week in Herzlya, Israel.  The focus of one of the meetings was to discuss the current financial crisis and how it will affect the operations and viability of these companies.

One of the CEOs commented that he had just raised several million in capital for his start-up and that the money had hit their account only three weeks ago – just on the cusp of Wall Street’s meltdown.  He said he felt like Bruce Willis in Die Hard as he ran as fast as he could from a burning skyscraper that was about to explode.  He remarked that had the deal been delayed for even a week, he probably wouldn’t have been able to close the round, or that the terms would have been severely altered.

In attendance were also partners of some big name VCs.  One of the VCs (who is headquartered in Silicon Valley) told us that he has already instructed his Israeli portfolio companies to begin firing employees.  In his words,

“It is not enough for the CFO to tell me that they didn’t hire the 3 that were in budget.  They also have to fire existing employees”.

He believes that this (recession) downturn will last throughout 2009 and into Q1 of 2010.

Another VC thought that the amount of deals in 2009 would be lower, but that there will still be dealflow, and that this is actually a good opportunity for raising smaller sums (e.g. $200K).  The bigger VCs have traditionally avoided investments of less than a few million dollars.  Now it appears that many VCs will be ‘competing’ with angels and private equity groups to find the gems out there for $500K or less initial investment, with an eye on sustaining them until a Series A round can be raised in better market conditions.

The affects of the fallout from Wall Street in the coming months are too early to measure, but it’s clear that most sources of new funding will dry up at least until the credit crisis has passed.  Existing companies will have to squeeze their purse strings tight, and possibly begin proactively laying off to ensure enough capital remains to keep the mother ship afloat.