Since I started following the Israeli market in 2005, it’s not often that I’ve seen so many Israeli startups raise money in such a short period of time. Capital raising is seen across the board in Telecommunications, Cleantech, Internet, Consumer Electronics and Biotech in the last couple of weeks. Is this the Golden Age of Israeli startups? Or are institutional investors looking eastbound for a cushion to protect them from the imminent recession in the west?
Part I – The Israeli venture capital scene
In a recent study, the IVC Research Center reports that the capital available for investment in the hands of Israeli VCs is now at $2 billion, making conditions ripe for the number of investments we’ve seen in the past couple of weeks. In 2007, Israeli venture capital funds raised a total of $1.1 billion (including venture lending), 21% more than in 2006. Not bad.
However, it looks like 2008 is going to bring a slowdown to the fast-paste that the industry is currently experiencing: VCs in Israel are projected to raise only $800 million this year, and it would be naive to believe that the available capital will find its way to early stage tech: Talia Aben, a former Gemini carefully points out that only two of the funds mentioned in the report (Pitango and Tamir Fishman) will invest in early stage IT. The rest of the funds are focused on Healthcare (Pontifax, 7Health, Agate, and SCP Vitalife), CleanTech (Israel Cleantech and AquAgro) and mid tech (Wanaka Capital and Aviv).
Despite the sense of optimism, Aben advised entrepreneurs to keep their budgets tight to the dollar, focus on building clear road maps and meeting product and revenue deadlines. I couldn’t agree any more. There are a few ominous signs in the horizon:
* According to the latest VC Indicator quarterly survey by Deloitte Brightman Almagor, 75% of Israeli venture capital managers expect to see a decrease in the number of funds operating in Israel by 2010. The main reason for closure is predicted to be difficulty in raising follow on funds (see Walden Israel)
* Funds are slowing down investments in early stage tech companies. One example is 3i Group, a leader in PE and VC with over $10 Billion under management, and one of the main investors in Giza Venture Capital. 3i Group’s CEO Philip Yea recently announced that the firm will no longer invest in early stage companies. i3 had previously made a few direct investments in several early stage Israeli startups, including IntelliDX Inc. (formerly Glucon), InLive Interactive Inc., Transtech Control Ltd., and OmniGuide Inc.
* Six Israeli VC funds completed their initial but not necessarily final capital-raising last year (MarketWatch):
– medical devices fund Agate Investments
– Aviv Venture closed a second fund
ROI – Run or Invest?
On a separate study, IVC Research reports that in 2007, 27 Israeli high-tech companies raised $701 million through initial public offerings on US, European and Israeli stock exchanges. In addition, M&A activity involving Israeli companies that were either acquired or merged totaled $3.2 billion in 2007 in 75 deals – the second highest number of M&A deals in any one year to date.
Guy Holtzman, IVC’s CEO adds:
“The current economic climate is affecting both VC funds and high-tech companies. Still, the level of foreign institutional investor interest and activity continues high, and Israeli institutional investors are increasing their allocations to Israeli VC and private equity funds. Concurrently, uncertainty in the capital markets and the weakness of the dollar are causing Israeli high-tech companies to seek more funds in order to meet their financial needs.”
THE ANT AND THE CRICKET
More M&A, less IPOs, we get it. I don’t think the VCs care, as long as there is a growing deal flow in the horizon and returns are positive.
In summary, what seems to be the golden age of Israeli start up funding, could be compared to the fable on the ant and the cricket. If you’re a funded startup, don’t just sing along in the summer. Work hard and collect the grains during the harvest time so you can enjoy the winter later on.
In part II I will cover all Israeli fundings in the past couple of weeks.
Thanks to Efrat Zakai from IVC for sharing these studies:
And study number two: