MoneyTree report: VC funding slumped in 2009

Venture capital-backed high-tech companies raised $735 million in Israel in 2009, 47% less than in 2008.

The latest Kesselman and Kesselman PricewaterhouseCoopers Israel MoneyTree Report indicates that venture capital-backed high-tech companies raised $735 million in Israel during 2009, a 47% decrease compared with 2008.

A venture-backed company is defined as a company in which one of the investors in the investment round is a venture capital fund.

The average investment per company in 2009 was $3 million, compared with $ 4.4 million in 2008 and $3.9 million in 2007.

The report does show some improvement in the fourth quarter of 2009, when 77 companies raised $201 million the highest amount raised in a single quarter last year. This represents an increase of 13% (in monetary terms) compared with the previous quarter, in which 55 Israeli companies raised $178 million, and a decrease of 30% (in monetary terms) compared with the corresponding quarter in 2008, in which 81 companies raised $287 million. The average investment per company in the last quarter under review was $2.6 million, compared with $3.2 million in the preceding quarter and $3.5 million in the corresponding quarter of last year.

Rubi Suliman, a partner in the High-Tech Assurance Practice at Kesselman and Kesselman PwC Israel, said, "Year 2009, as venture capital investments are concerned, is one that we will soon want to forget. In this year, the level of venture capital investments was even lower than the lowest point set in 2003, following the burst of the high-tech bubble. In this year it was clear that the rules have changed; the funds invested less in "dreams" and more in clear-cut and mature products with a real business plan. The funds focused more on the existing portfolio, and the natural selection process caused the closure of many companies."

The MoneyTree Israel report covers capital raised from venture capital funds operating in Israel, and for this reason, the figures differ widely from the figures given by IVC a few weeks ago. The main difference between the reports is usually the total amounts, but the changes between the 2009 and 2008 figures in the two reports are actually similar.

However, there is a major difference in the two reports' prognoses. IVC predicts that less capital will be raised by start-ups in 2010, alongside continued difficulties for companies on the financial side. It predicts that start-ups will raise $800 million in 2010, down from $1.1 billion in 2009. By contrast, the MoneyTree Israel report is optimistic.

"At the outset of 2010, we see the clouds of the financial crisis disperse," Suliman said. "The Israeli hi-tech engine did not stop (although it did slow down for lack of liquidity) and accepted the new rules. Israeli high-tech matured and adjusted itself; many companies worked in a bootstrap manner, self funding or low funding by angel investors, intensely focusing on revenue.

"In 2010, the number of mature companies applying to venture capital funding is large and although it is clear that the number of Israeli active funds decreased, foreign funds expanded their operations and involvement in the Israeli market and overall, the projection for 2010 is better".

In 2009, in the investment funds segment, foreign funds with representatives in Israel invested $333 million, 45% of total investment for the year, similar to the 48% of total investment made in 2008.

"40 funds are currently active in Israel," Suliman said, "but 90% of investments in 2009 were made by just 13 funds. This shows that the number of active funds is actually quite low, and that we're now at a level suitable for the Israeli market."

Suliman nevertheless believes that the amount of money available for investment in Israeli high-tech is insufficient, especially for early-stage companies, in which funds currently fear to tread. "The amount invested in 2009 reflected the funds' fear for the future of the Israeli high-tech market. There are a lot more opportunities than the $735 million invested," he said.

In 2009, communications attracted the most investment, 28% of total investment. However, in the fourth quarter, the software sector took the lead, attracting 36% of total investment.

Investment in cleantech was a bit of a surprise. It was not counted as a separate sector, because of the paucity of investment in it - just $3 million in the fourth quarter. In comparison, cleantech accounted for 12% of total investment in the US in 2009, and the percentage invested in Israeli cleantech was particularly low.

Suliman says, "All the big funds say that they're going to cleantech, but in practice, the amount of money is still small. We always lag behind the trends in the US, so it will presumably happen here too."

Published by Globes [online], Israel business news - www.globes-online.com - on February 3, 2010

© Copyright of Globes Publisher Itonut (1983) Ltd. 2010

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