Venture Capital Cafe

Reports on the drop of local VC financing in Israel don’t tell the whole story. The latest IVC report reveals that in 2011, 546 Israeli high-tech companies raised $2.14 billion in VC funding, representing a 70% increase compared to the $1.26 billion raised in 2010 and almost double from the $1.12 billion raised in 2009. How can we explain such a big increase? Let’s take a look at how VC money was deployed in Israel 2011.

In “What next for the start-up nation?” the Economist observed that there has been a change in the Israeli startup landscape. Companies have shifted from producing pure technology to producing consumer products. Pure technology companies focus on IP, and need to compete with emerging markets, offering cheaper labor and potentially better economies of scale. Technology companies don’t have the relationship with the end-customer and therefore suffer from lower margins. However, Israeli startups are slowly making a transition – building larger companies and establishing brands.

In 2011, 546 Israeli high-tech companies attracted $2.14 billion from local and foreign venture investors, the highest amount in 11 years.

Israeli funds now account represent only 25% of the amount raised by the Israeli high-tech companies, down from 40% a few years ago. This is the lowest rate of participation by Israeli funds in the last decade. In 2011, Israeli venture capital funds invested $525 million in Israeli companies, an increase of 42% from 2010, and a rise of 28% from 2009 levels.

First investments by Israeli VC funds accounted for 31% of their total investments, compared to 29% in 2010 and 2009. The average first investment in 2011 was $2.21 million, while the average follow-on investment was $1.06 million.

Foreign fundshave stepped in to fill the gap in capital raising, which still exists in the bracket of $1-$2 million. In 2011, foreign funds invested $785 million or 37%, the highest percentage in the last decade. This compares with $269 million (21%) and $205 million (18%) invested in 2010 and 2009, respectively.

The Internet sector dominated for the first time in the past decade and saw a large increase of investment, attracting $482 million or 23% of total capital raised by high-tech companies (115 total investments), compared to $222 million or 18% raised in 2010, and $147 million or 13% raised in 2009. The communications and software sectors followed with 20% and 19% of the total investment respectively.

Mid and later stage companies attracted $1.48 billion of the total investment in 2011, a 90% (!) increase compared to 2010 ($781 million). Seed stage companies attracted 5%, a slight increase from 3% in 2010, and Early stage companies accounted for 26% of the investment, down from 35% in 2010 and 29% in 2009. Israeli companies are attractive acquisitions for International players such as Apple, HP, Microsoft, which contributes to their attractiveness for VCs. According to KPMG Israel:

“The significant increase in late stage investments indicates the strength of Israel’s technology industry, as well as its attractiveness to foreign investors. An impressive number of mature Israeli companies have reached substantial sales. A decade ago, such companies would most likely have gone the IPO route, raising funds publicly.  Today, due to changed conditions in IPO markets, these companies are relying principally on both existing and late-stage investors. As a result, we expect a large portion of these companies to be sold over the coming 24-month period.”

Overall, the average round was $3.92 million in 2011, higher than the $3.23 million average in 2010.

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