Sarah Lacy published a seminal piece yesterday on TechCrunch about the Israeli VC and entrepreneur scene.  In an article entitled, “Now that China Is the New Israel…What’s Israel?”, Lacy explores the evolution of the Israel tech industry.  From enrapture in 2000 to finishing 2008 without a single IPO and virtually no exits, Lacy questions whether Israel has just hit a bump in the road or just peaked out.

Lacy explains:

Israeli companies have raised just over $10 billion since the beginning 2001, but acquisitions and IPOs have returned just over $860 million over that almost eight-and-a-half-year period…

Somewhere along the way, the entrepreneur scene here lost its mojo.

So I don’t say this to trash Israel, but facts are facts. In sheer numbers, Israel’s place on the global scale of investing has been dwarfed by China, and matched by the United Kingdom. And after three days of talking to dozens of entrepreneurs and investors in Tel Aviv, this seems like a country wandering in the desert, looking for a new tech movement to own and dominate (emphasis mine).

Besides being the hottest reporter in the tech world ever (really), Sarah Lacy has a point.  We’ve spoken about the overabundance of foreign private capital making its way to Israel combined with smaller exits and how hard that makes it to post any real returns for an Israeli VC.

Furthermore, Lacy may be correct when she says poignantly:

What happened to Israel is a bit like what happened to Boston—the story and opportunity moved away from what the city’s entrepreneurs were good at. In the case of Israel, security and encryption was always a strength, but that’s not the growth industry that it was. In the case of Boston, enterprise technologies and telecom were always strengths. Now, as media has become the story of the last boom, it’s not a surprise New York surpassed Boston in the amount of venture capital raised.

But I think Lacy misses the point when comparing investments into China with investments into Israel.  Israel is a technology development center; Indochina is an investment destination.  VCs pour money into Israeli technologies because they are developed by Israelis.  Investors sink money into China/India because they have 1/3 of the world’s population.   Israeli entrepreneurs export technologies abroad while Indian and Chinese technologies are developed to be consumed in-country.  Israel produces and China/India consumes.

Israeli entrepreneurs have learned to sell and run businesses, not just flip them and start again.  Real products with real technologies are being sold.  Security is a big one but so is Israeli development for the mobile and the mobile web.  Mobile 2.0 applications are really just beginning to explode.

But much of this doesn’t require a big box.  I think Israel is suffering because there just aren’t that many exits.  To me, this doesn’t mean that the Israeli entrepreneur is washed up but that the VC industry just isn’t that interesting here.  Too much money chasing too few, good deals.  I’ve got friends looking to put seed money into 3-men startups to either make a cash-cash yield because these companies are quickly getting to profitability or to sell out for a few million dollars.  No 10x.  No multimillion dollars plunked down in successive B,C,D rounds.  Just good business.  In fact, this may attest to the maturation of the Israeli startup which is able to quickly get up to profitability.

So, Sarah, maybe what’s happened is not that the story and opportunity moved away from what Israeli entrepreneurs are good at but maybe that exact scenario is what happened to the Israeli VCs.  From where I sit, I still don’t think Chinese or Indian startups can hold a candle to what’s developed in Tel Aviv.

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With shares in financials and hi-tech getting crushed, I think we are about to see a new trend develop. You’re probably thinking that I will suggest something along the lines of re-branding. Nope. While we did that, I am talking about a change much less cosmetic and much more fundamental. Taking publicly traded companies private. Today’s NY Post (no new revelations on A-Rod/Madonna so I decided to look at the business section) has an interesting report on struggling investment bank Lehman Brothers (LEH) trying to figure out a way to go private.

“According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm’s solvency have caused the venerable bond shop to shed more than 79 percent this year.”

Lehman isn’t alone. Israeli hi-tech firm BluePhoenix (BPHX), whose shares have been nailed as well, has mentioned that they are thinking about going private as well.

For companies this is a great situation. They can go private, reset the cap-tables, retain employees- who are currently holding options that even a deep sea diver would have trouble recovering- by issuing new options. Then they can focus on stabilizing their business, getting back to profitability, and then in a few years after this current crisis is a memory, go public in a ‘much anticipated’ IPO. Ultimately, the companies will be back trading at pre-bear market levels. Senior management, who share much if not all the blame for the current debacle, will come out smelling like roses, as their stock will be worth hundreds of millions of dollars.

Sounds good. So who loses? You guessed it. The same people who always get left holding the bag. The INVESTORS. You see, they are the ones who bought into Lehman at $75 a share 12 months ago, and will be lucky to get $15 on a deal of some sort. They heard analysts beat the drum on BluePhoenix at $22 about 9 months ago, and decided to invest, only to cringe every time they hit refresh on Yahoo finance to see if the stock has held the $4 level.

Going private may be a great solution for a company to weather the current market malaise and return to health. Unfortunately for investors, it will be another in a long line of recognized tax losses.

Aaron Katsman, IsraelNewsletter.com

Disclosure: Author’s fund has a position in  BPHX. He has no position in any other stock mentioned as of 7/15/08.

Please see our Disclaimer HERE.

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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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It’s been a wild and woolly week for stocks in general and even more so for Israeli companies. We’ve seen some disappointing earnings across a broad swath of stocks and even the mighty have felt some pressure.

Let’s start with Alvarion (ALVR). Even after the Cisco purchase of WiMax competitor, Navini, the stock has had a hard go of it and even received a downgrade by Merriman, Curhan, et al. IsraelNewsletter’s Katsman, though, is still very positive on the name. Read his recent post here. Before Cisco (CSCO) officially announced its takeover of Navini, I posited that it would be better served by buying ALVR. Read that article here.

Commtouch (CTCH) out with numbers.

Radvision (RVSN) stinks up the joint. Even my colleague, Aaron “Buy Everything” Katsman has lost faith in the firm. See his recent capitulation here.

Magal (MAGS) Systems gets an order.

RRSat (RRST) reported last week.

Partner (PTNR) sees a lift from rising revenues.

Answers.com (ANSW) reports really strong traffic growth in its new WikiAnswers product.

Laggard BigBand Networks (BBND) terminates its CMTS business. I wrote on BloggingStocks about the future of cable TV and how BBND plays into the thesis.

ClickSoftware (CKSW) traded down big after reporting OK earnings. Read why Katsman smells an opportunity in this name.

Microcap Cimatron (CIMT) out with earnings and some info about its plans for China.  Read some excerpts from the conference call.

012 Smile.Communications (SMLC) floated this week.  I posted on the offering here.

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Zack Miller
IsraelNewsletter.com

It’s great when you read about your own service provider going public. It’s a tremendous feeling of accomplishment as a consumer when you think your well-spent dollars have helped propel your ISP into the big leagues. So I read with excitement today that my ISP, 012 Smile.Communications (SMLC) is gearing up for an IPO this week.

SeekingAlpha has a short write up on the IPO.  I love Smile’s service — I love their logo (cure little smiley a la Incredimail (MAIL)).  At first blush, I don’t love the IPO.  40% yoy revenue growth off the back of a 60% rise in cost of revenues.  Not a particularly jiggy biz in my mind.

In fact, it hearkens to the same discussion we’ve raised before at IsraelNewsletter.com about the interest in investing in native Israeli service providers: where’s the growth?  Read Aaron “Buy Everything” Katsman’s write up on Israeli cellular leader: Cellcom (CEL).  Aaron’s pretty tough on CEL and explains that growth is going to eventually have to come from international expansion.   The same will probably hold true for SMLC.

I’m reserving my smile for now on 012 Smile.Communication’s IPO.  Let’s watch how the market receives the new offering.

Disclosure: Author’s fund has no position in any stock mentioned as of 10/28/2007.

Please see our Disclaimer HERE.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com

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