What a Falling Shekel Means

Little noticed in the discussion in Israel about corruption, Prime Minister Olmert's survivability, economic growth and planning for the next war, is the strengthening Shekel (NIS). Today the Shekel dropped below 4 NIS to the US Dollar for the first time in a long time. The strengthening Shekel is both a result of stellar economic growth in Israel and the falling US currency. I wanted to highlight a few areas which I think bear watching as the Shekel continues to rise (it has risen over 15% in the last 15 months). This is virgin territory for Israelis because for as long as I can remember as a child tourist and now adult in Israel, the shekel always sank against the Dollar.

1. Cost of R&D in Israel - My venture capital dollars are going 15% less far in paying for R&D that is done in Israel. This is particularly acute for those companies that did their budgeting 15 months ago. Put differently, if a company thought it would raise money at a certain milestone, they have 15% less time to get to that milestone assuming that 100% of their expenses are in Shekels.

2. Israeli public companies who pay their engineers in Shekels will have R&D OPEX of approximately 15% more than they or analysts may have forecasted. Those that repatriate much revenue to Israel will be less affected but this will affect many Israeli public companies.

3. Charity dollars raised in the USA are not going as far. You gave to your favorite Israeli charity 12 months ago? Well, expect to see the collector back in 11 months this year and your favorite charity short on money. Scant few charities had sufficient foresight to conservatively plan their budget on a rising shekel.

4. Finally, if you thought maybe you could make this up because the cost of housing in Israel, which has always been pegged to the dollar, would go down. Think again, Israeli builders and renters are fair-weather friends. They are all now converting their prices to shekels at some exchange rate 1+ year ago. They are no friers.

Where does all this take us? First, the growth in Israeli high tech and industry in general shows that Israel is increasingly important on a global scene, despite the fact that we are even farther from being the low-cost provider. Second, it is high time that Israel moved its entire economy to a freely traded shekel and that the entire economy think in Shekels. The semi-dual economy Israel runs hurts everyone: Taxi drivers who convert their life savings to dollars to buy apartments or cars only to have the exchange rate pegged to some other currency are as affected as home buyers.

And R&D companies and start ups are finally finding out what a real world of rising and falling exchange rates are about. I just kind of wish it was not on my VC nickel.