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Investors lose $5 billion on Israeli startups

By Oded Hermoni
August 5, 2002

Venture capital funds (VCs) that invested in Israeli startups between 1999 and 2001 have lost $5 billion of the $6.5 billion they had invested, Yoram Tietz of Ernst & Young Israel (Kost, Forer & Gabbay) said. Israeli VCs, which accounted for 45 percent of the number, lost about $2.5 billion.

Tietz and his firm, which handled about half of the startups in Israel, studied data for companies set up between 1999 and 2001. "We estimate that investors - about half of them Israeli VCs - lost $5 billion of the $6.5 billion they invested.

"About $2 billion were lost when companies were completely written off. Another $3 billion are tentative losses at this point due to depreciation, but since the situation in the industry is not getting any better, the likelihood of the VCs seeing any of this money back is very slim," Tietz explained.

Israel Venture Association president and president of Yozma venture capital, Yigal Erlich, concurs with the estimate that some $2 billion worth of startups were written off. His indicator is that about 30 percent of the companies in the portfolios of the VCs were written off.

"The more troubling issue is the $3 billion loss due to depreciation. I believe these amounts are not totally lost yet, because some of the startups may still survive. Should a recovery start within a year, many of the companies that lost some of their value will survive and generate returns.

"However, the longer it takes, the harder it is for the VCs to raise more capital to keep the companies going, and without any government support to encourage Israeli entities to invest in the industry, it will be very hard to keep these companies going."

While there is no official data about the losses incurred by VCs in the U.S., the ratio of write-offs is higher and that of depreciation is similar.

At this point no demand has surfaced to reduce the VCs' management fees, Tietz says. However, funds that are established in the future will probably charge 1.5 percent instead of the current 2.75 percent or so, he said.

Tietz further said he did not expect the scenario of BRM - which was forced to reduce its capital from $250 million to $150 million as investors went back on their commitments - to repeat itself. Limited partners in VCs are not likely to reduce their commitment, he said.