Count Israeli firms as carnage in Nasdaq high-tech wreck

JERUSALEM– When Amir Aharoni quit his job as a senior executive at the Israeli high-tech firm Optibase to establish a start-up, being a technology entrepreneur was a far more promising endeavor than it is today.

True, share prices on the Nasdaq, where Optibase trades, already were falling last December, and dot-com companies were collapsing by the dozens.

Yet Israeli entrepreneurs felt somewhat insulated from the technology turmoil.

They had been spared the worst of the dot-com carnage, since the Israeli industry focused on creating infrastructure technologies for Internet and telecom firms instead of on consumer Web sites, which lacked solid business models and were the first to collapse.

Furthermore, even though investment in Israeli start-ups slowed toward the end of 2000, it had been a record year for the sector, which has fueled Israeli economic growth in recent years.

But things have changed for the worse.

No longer insulated from what is happening elsewhere, Israel's high-tech sector is feeling the shock waves of these developments.

"We have to be concerned," said Aharoni, whose start-up, Mobixell Networks, is developing a technology to manage traffic of multimedia and video applications over wireless networks.

"Even though I think that the uniqueness of our team and the background of our people puts us in a better position, we still have to be careful. We know that no fund-raising is certain anymore."

As increasing numbers of Israeli tech companies fall victim to the turbulence, officials are concerned about the potential for a broader battering of the Israeli economy.

PriceWaterhouseCoopers, the international accounting firm and consultancy group, reported that Israeli start-ups attracted $3.2 billion of investment from venture capital funds during 2000. According to a recent Finance Ministry report, that accounts for 2.9 percent of Israel's gross domestic product.

The slowdown has contributed to the ministry's sharp reduction of economic growth forecasts for 2001 from about 4.5 percent to about 2.5 percent — and the worst may be yet to come.

The ministry report warns that if the start-up sector slows by 25 percent or more compared with last year, Israeli economic growth may fall below 2 percent. That would be the slowest growth rate in more than a decade.

The status of Israeli high-tech in the world's eyes was important enough for Prime Minister Ariel Sharon to take recently time out from his hectic schedule for a satellite address to a Silicon Valley conference on Israeli technology.

But nothing he or the Israeli government may do can stop the tidal wave from Wall Street that is starting to crash down on Tel Aviv.

The trends confirm what analysts have said for months: that Israeli-Palestinian violence has far less effect on Israel's high-tech industry than does the Nasdaq.

The most immediate impact is on the ability of Israeli start-ups to raise new cash.

IVC Online, an Israeli venture capital industry research group, recently issued a study showing that the amount of money raised by Israeli start-ups in recent years has tended to rise and fall in line with the ups and downs of the Nasdaq.

Koldoon, an Israeli database company that tracks the technology sector in Israel and Europe, reports that during the past year 256 Israeli companies — out of some 1,500 total — have shut down.

While many of these companies were dot-coms, the next wave of shutdowns is expected to include more hard-core technology companies. Layoffs already are sweeping the sector.

Layoffs have hit companies ranging from Yazam, a high-profile venture group that made headlines in the international business press when it started to flounder, to Versaware, a start-up that makes technology for producing e-books.

Tobias Fischbein, Israel technology analyst at the Tel Aviv office of the Lehman Brothers investment bank, said Israeli stocks have more or less performed in line with the Nasdaq.

But the combination of layoffs, shutdowns and sliding stocks is not all bad news.

For several years Israel has suffered from a severe skills shortage. Now, fired workers are expected to gravitate toward companies with more viable business plans. Wages already are falling.

This ultimately may contribute to the sector's financial health. "The outcome will be better in terms of both the labor market and the Israeli high-tech industry," he said. "The noise level will come down, and money will be invested more wisely.

"Of course, it will all be at a slower pace and lower valuations, but all this will contribute to the long-term sustainable growth of the industry."