16%. That is the shrunken share of Israeli venture capital firms in the rush of fund raising by local technology companies in the first quarter of 2014. 160 high-tech companies raised $673 million in the first quarter, of which just $106 million came from Israeli funds, their lowest ever share in the pie.
"Three years ago, the venture capital funds accounted for 40% of investment. Today, it's less than half that," says Koby Simana, CEO of research company IVC, which put the figures together. The reason, he explains, is that "there are fewer and fewer Israeli VC firms that have managed to raise new funds, so they only support their portfolio companies and cannot finance new ones.
"It's true that nowadays there are different kinds of investors filling the gap that the funds are liable to leave in this area, at least in part: micro-financing, crowd funding, angels, and foreign funds," Simana adds, "but there are companies that, from the start, have funding needs that are too great for these solutions, that will not require $5 million but tens of millions. In this sense, the importance of the Israeli funds to the local industry is immense.
"The prospectuses of the Israeli funds state that they can only invest in Israeli companies. When times are good, the need for them is not felt, but in a crisis, the foreign investors go wherever is good for them. We, on the other hand, are left with the same solutions as now exist on the market, but without the real power of funds with deep pockets managing $100-200 million, and so a market failure or shortage will arise here."
Lack of "money for growth"
"There aren't enough Israeli funds for what is called money for growth, that is, for a later stage in the company's life," comments Adv. Sharon Amir, a senior partner at Naschitz Brandes Amir & Co., who represented the sellers in both the Waze and Prime Sense deals. In fact, he says, the funds' true share is even smaller than appears, because some of the entities designated "funds" are not funds in the classic sense, but angels who invest large amounts, or the same order of size as a fund investment, such as Benny Landa and Beny Steinmetz.
"The funds find it difficult to raise money and need to support their existing companies, so that their share of the more successful investments will not be diluted too far in favor of other investors," Amir says, "They are not succeeding in raising new funds, so there are fewer funds in Israel, and the investments they make are smaller. They allocate less and less money for first investment rounds and for late stages, and so when $50-60 million are needed, they don't have the money required, especially as funds needs to diversify their investments, and a fund's average investment will not be more than 9% of its total."
Is that what is making the industry shift its center of gravity to Internet companies?
"Yes. At one time, we were world leaders in fields such as semiconductors and telecommunications. Companies like Orckit, Ceragon, Alvarion, Libit, Passave. Today, there are fewer of them, because it requires higher investment. With Internet companies, development is cheaper and faster, and not just in Israel"
"Part of a global process"
IVC Online's research data back up this assessment. The amount of money raised by companies shot up 53% in the first quarter, in comparison with the first quarter of 2013 ($673 million versus $439 million), but the breakdown of investment in the opening quarter of 2014 shows a clear move towards Internet companies, which raised $260 million, 39% of the total, and the largest share taken by Internet companies since 2000. Software fell to 21% from 31% in the first quarter of last year.
Other revealing figures are that companies in the late development stage raised $227 million in the first quarter 934%); mid-stage companies came close with $221 million; while seed-stage companies took 6%, 1% less than in the first quarter of last year.
"The encouraging part," Simana explains, "is that the current quarter was characterized by a large rise in the ability of Israeli start-ups to raise money and finance their continued development and marketing. The less good news is the identity of the investors, and here the joy is mingled with a certain sadness. At the same time as investors are flocking to Israel, we are seeing a decline in both the number and value of deals by Israeli investors and Israeli funds."
Aaron Mankovski, managing general partner at Pitango Venture Capital, refuses to become too perturbed by the fall in the funds' share of investments. "In recent years," he explains, "the Israeli funds have invested around $500 million annually. If their share of the total is falling, we ought to be happy: it means that more money is being invested. Another interesting statistic is that the proportion of Israeli companies that have at least one Israeli fund among their investors is more than 80%. In most cases, other, foreign funds won't invest in a company that doesn't have at least one Israeli fund invested in it. In other words, the Israeli funds are doing their job in bringing the world here."
Still, in the past the Israeli funds invested much more, even in nominal terms.
"In the past year or two, the funds have stabilized, after a decade in which both the number of funds and the size of their investments constantly fell. But this was part of a global process. There were too many funds in 2000, with far too much money that went to far too many unsuitable companies. There were a hundred funds in the Israeli market in 2000; now there are fifteen to twenty. For the sake of comparison, in the same period the US market went from a thousand funds to about 300. The concrete hardened, we sat on the floor, and now we have reached the size that makes sense for the market."
"Why New York pension funds yes and Harel no?"
Only last week, Elisha Yanay, formerly president and general manager of Motorola Israel and currently chairman of the Israel Association of Electronics and Software Industries, told "Globes" that the Israeli government's exchange rate policy would mean disaster for Israeli high-tech companies, and that "the day is not far off when it will have to face thousands of laid off workers who will not find their place in Israel and will leave for foreign pastures." He is no less accusatory of the government when it comes to venture capital investment. In particular, he points to the restriction imposed by the Ministry of Finance on the management fees that Israeli financial institutions can pay specialized funds such as venture capital funds. According to Yanay, for a financial institution this restriction has almost entirely eliminated the option of handing over some of its money to be managed by a venture capital fund.
One of the arguments of the institutions is "we don't understand high-tech".
"Which is why we, as an association, hope to put together for the institutions a pool of high-tech experts, such as Haim Shani and Moshe Lichtman (of Israel Growth Partners), who will also charge more reasonable management fees with a more moderate profit for the managers in the event of an exit. The institutional investors will be able to obtain advice from these experts and to invest directly in the technology companies, and not via a venture capital fund."
Do you expect government aid?
"If the program receives government backing, that will be good, but I would prefer to manage without the state. Every year over the past decade, Israeli high-tech has raised between $1.5 billion and $2.5 billion, that is, $20 billion. The exits over the past decade amount to over $45 billion. The problem is that 80% of this is foreign funds and investors.
"I realize that at a certain stage it was very easy and popular to invest in real estate in Romania and Las Vegas, but that didn't go too well," Yanay says provocatively of the institutions that, among other things, manage the pension savings of Israel's citizens. "I'm not really angry with them, but what do you think of the idea that they should invest our money in a company in Yavneh, in Rehovot, or in the Galilee? You don't have to get on a plane, and they even speak Hebrew there, and as it happens our children or our neighbors work there. Why is it that pension funds from Los Angeles and New York can do it, and Harel can't?"
Published by Globes [online], Israel business news - www.globes-online.com - on May 19, 2014
© Copyright of Globes Publisher Itonut (1983) Ltd. 2013