Ask any Israeli venture capitalist about the most significant event of the year for this fast-growing industry, and you will be told the story of Lucent Technologies' $4.5bn stock acquisition of Chromatis Networks, an Israeli optical networking start up, last May.

But beyond the sheer scope of the deal - more than treble the previous record buy-out of an Israeli group - the Chromatis acquisition also marks the increasing integration of Israel's venture capital industry into the global market.

Israeli start-ups are building international business infrastructures as early as possible, local venture capital funds are looking overseas and their counterparts from California are playing a bigger role in financing the country's technology revolution than ever before.

"Much of the success of Chromatis actually had to do with the international element of the venture capital backing," says Erel Margalit, managing partner of Jerusalem Venture Partners (JVP), which manages $250m in capital and seeded Chromatis with $9m for a 15 per cent stake.

"The company was established internationally, with a business centre in the US and research and development in Israel, and through our introductions was penetrating major accounts in Europe."

Israel's venture capital and high-tech industry has always focused abroad, since the country's domestic market is tiny. In addition, over the past decade, international investors provided most of the money raised by Israeli funds, and helped establish the country as one of the most concentrated centres of venture capital outside the US.




Research groups report that Israeli venture capital funds raised $1.3bn in the first six months of the year, and are expected to raise more than $2bn by the end of 2000, compared to $1.6bn during all of 1999.

However, the rapid inflow of cash and mushrooming numbers of start-ups is making the VC game more global than ever before.

With competition for good deals on the rise, some funds have started looking outside Israel to fill their portfolios.

According to VentureOne Israel, the research arm of Ernst & Young and VentureOne of the US, Israeli venture capitalists invested $247.8m during the second quarter of 2000, a 9 per cent increase on the first quarter and more than double the same period last year. Of that sum, 17 per cent, or $42.3m, was invested in US or European companies. This included $25.4m invested in companies with no Israeli operations, management or technology.

"The market is getting global," says Yael Birk, research manager at VentureOne Israel. "In the last quarter, Israeli funds have invested more money in totally foreign companies with no connection at all to Israel than in Israeli-related foreign companies."

eanwhile, during the quarter, Israeli funds accounted for only one-third of $567m worth of investments in 72 deals involving local information technology companies. After securing seed financing from a local VC fund, most Israeli start-ups now solicit overseas venture capital funds for later and larger rounds of funding.

any Israelis welcome the shift. "There is more of a mix of investors from the US and Israel, and in general this is a positive trend," says Rami Kalish, managing director of Polaris Venture Capital, Israel's biggest VC group with $700m in three funds. "The ultimate way is to create a balance between US and Israeli funds, because it would not be wise for a non-Israeli fund to be invested in a company here without a strong local player."




The combination of new investors from abroad, bigger Israeli funds and a more selective Nasdaq, is also driving private financing rounds higher. In the past, many Israeli companies went public too soon. Now, successful start-ups can avoid that pitfall by attracting private financing exceeding more than $100m in several rounds.

Yet the jury is still out on whether the global environment will help Israeli entrepreneurs create global companies.

arketing imperatives are pushing more companies to move their headquarters to the US, where they often hire senior executives to chart a growth course. And as the Chromatis deal shows, Israeli start-ups with the most promising technology are easily lured away from plans to go global on their own by a lucrative offer from a technology giant.

"We wanted to create a world leader," says Mr Margalit of JVP, describing the evolution of Chromatis. "But sometimes you get snatched up for prices you cannot refuse."


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