Israel Seen as Quite Dangerous' for Investments

"Our investments in Israeli companies are dependent on developments in the peace process," said Kamran Elahian, manager of Global Catalyst Partners (GCP) and one of the prominent entrepreneurs in Silicon Valley in the past decade.

"At the moment, it is quite dangerous to invest in Israel and our investors, which include Americans and Japanese, are worried. We will apparently not be making as many investments here as we did in the past unless we are confident that a war will not erupt in the region," he said during a recent visit to Israel.

Even though Israeli entrepreneurs have heard such statements from foreign investors many times over the past two years, sources in the venture capital industry put considerable weight in Elahian's words in light of his deep connections with Israel and his heavy involvement in several economic and social projects here.

There is another reason, however, for the seriousness with which Elahian's words were received. During his visit to Israel in June 2001, Elahian found it difficult to understand the investors who were taking their business elsewhere due to the renewal of the intifada.

"After the earthquake in San Francisco in 1989," recalled Elahian in an interview with Haaretz two years ago, "investors also asked me why companies should build headquarters in Silicon Valley, which is in the danger zone. Now they are asking me why they should invest in Israel. But I am not afraid," he insisted.

"We have to be realistic," he said, hastening to explain the change in his attitude in the past two years. "What I said before was based on the belief that the crisis in Israel would be short. But the crisis has dragged on and the foreign investors are not interested in waiting any longer. We approached 21 universities about investing in us, but they all refused. Our investments in Israel were one of the reasons for their refusal."

Israel had a place of honor in GCP, the first venture capital fund set up by Elahian in 1999, which managed $50 million of investments. Some 50 percent of the investments GCP made were in Israeli companies, three of which were particularly close to Elahian's heart: Actelis Networks, Cahoots (which changed its name to Informative and moved to the United States) and KangarooNet (which changed its name to Entopia). Elahian also served as a member of the advisory council of the Vertex Israeli VC fund.

"The investments of the first fund really focused on Israel, and we were satisfied with their results," said Elahian. "But the second fund, of $108 million from different investors than those in the first fund, has so far made a third of its investments and not one of them is in Israel."

Nevertheless, Elahian noted that he still values Israeli technology and is continuing to invest in American companies founded by Israelis. "There is a mingling of cultures in Silicon Valley," said Elahian. "The entrepreneurs are East Indian, Chinese, Iranian, Israeli or Russians and Americans. I have no doubt that this combination of cultures contributes to the success of the companies."

Elahian is without a doubt one of the most extraordinary figures to come out of Silicon Valley in recent years. He was born in Iran in 1954 and at the age of 18 immigrated to the U.S., where he completed degrees in mathematics and computers. In 1978, he arrived in Silicon Valley as a software engineer for Hewlett-Packard, but left that company to set up an independent software company, CAE, which was sold three years later for $75 million. In 1984, Elahian set up the Circus Logic semiconductor company, which went public five years later at a market value of $150 million. In 1989, Elahian set up Momenta, his first resounding failure, which crashed after three years and burned up an investment of $40 million.

Following this failure, Elahian decided to donate most of his income from any companies he set up in the future to charitable organizations that he would also establish. One such organization is called Schoolonline, which connects schools in outlying areas around the world to the Internet, which Elahian views as the main tool for improving the lot of weak societies. Elahian has already transferred his holdings in Planet Web and Centillium to the charitable organizations.

"It makes life simpler," he explained. "I set up a company, sell it or help it go public, and donate my shares. Then I don't have to worry if their value rose or fell. It is easier for me without money. I have no plane or yacht like my friends in the valley, and after I visited Gaza and saw 23 people in one room, I have no problem making do with a four-room apartment rather than a huge house worth millions."

Elahian's Iranian origin and the fact that he is not Jewish are a source of trouble from the security authorities during his visits to Israel, which is why he carries around his own private passport that he presents to prove that he has no ill intentions - a collection of the articles written about him in various newspapers. Despite these difficulties and the current crisis in Israel, Elahian plans to continue coming to Israel and to keep up the local activities of GCP, along with its activities in India, Europe, the U.S. and Singapore.

"With the first fund, we conducted an experiment with the leading (venture capital) funds in the U.S.," said Elahian. "We made direct high involvement investments in eight companies and acquired minority holdings in 13 others, together with other funds, which took the lead. Eight of those 13 failed, but the eight companies in which we invested directly and maintained high involvement are still alive.

"The lesson we learned from this," concluded Elahian, "is that one needs real involvement in companies, and we plan to stick with this strategy in the future."