Israeli high-tech appears to be booming, but megadeals like the $1 billion sale of Waze to Google and the approaching initial public offering by Outbrain conceal one of the industry's biggest problems: the meager capital being raised by Israeli venture capital funds. So Pitango Venture Capital's closing of its sixth fund at $270 million this week brightened the atmosphere.
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Still, this was the smallest fund raised by Pitango, which has never matched the $500 million fund it raised in 2000. This has been the trend for Israeli venture capital; it has shrunk in terms of number of funds, amount of capital invested, and share in Israeli startup investments.
Pitango said the fund would invest in companies eyeing global markets with high growth and earnings potential in mobile apps, telecoms, the Internet, life sciences, medical equipment, biotech and nanotechnology – and at all development stages from early seed to expansion.
A year ago Pitango said it had already raised $150 million for the fund and this week announced that the final amount was $20 million higher than originally planned amid strong demand. It drew new investors from China, India, Taiwan, South Korea and Japan. The new fund is already invested in companies like Taboola, Revizer, Ubimo, Magenta Medical and Vertos Medical. Pitango, Israel's largest VC firm, now has $1.6 billion under management.
Besides Pitango, the new Aleph fund founded by Michael Eisenberg and Eden Shochat recently raised $140 million for investing in Israeli companies. Others like Carmel Ventures, Vertex Venture Capital, Qumra Capital, and Haim Shani and Moshe Lichtman's Israel Growth Partners are in various stages of establishing new funds, with more launchings likely next year by firms such as Gemini Israeli Ventures and Genesis Partners.
But despite the optimism generated by large Israeli companies like Outbrain, Wix.com and Conduit, Israeli VC fund managers find they need to lobby the world's major investment institutions if they want to reach their fund-raising targets.
"There’s a dissonance between the success of Israeli companies and the lack of appetite by financial institutions around the world for venture capital investing,” says Koby Simana, chief executive of IVC Online. Despite the acclaim for Israel's high-tech achievements, investment managers handling the public's pension funds – including those of the high-tech sector itself – are still shunning VC funds.
"Israeli high-tech enjoys strong PR because good things are happening here; it's no illusion," says Simana. "The Israeli market isn't inferior to any other market of startups and innovation. The best evidence is that all the leading U.S. funds operate in the Israeli market, many with local representatives or funds specifically targeting Israel. Greylock Partners, Battery Ventures, Sequoia Capital, Index Ventures and Accel Partners all invest hundreds of millions of dollars in the Israeli market."
Waze and the glass ceiling
According to Simana, this proves that opportunities are available - the problem is convincing financial institutions to invest in VC funds.
"The question is how much money Israeli high-tech needs from Israeli VC funds," says Simana. "I estimate $1 billion a year - half the total investment of $2 billion a year. The importance of Israeli funds isn't the amount of money they invest but making foreign institutions confident that investing in Israel makes sense."
Simana says Waze broke through a glass ceiling. "Until the Waze deal, when M&A managers at the big technology companies sat down with Israeli firms and checked how much a company was worth and what deals were previously made - at what multiples and company value – they came up with $200 million to $250 million," he says. "The XtremIO deal [for $450 million] followed by the Intucell deal [for $475 million] made people rub their eyes. They saw that a company that had raised $23 million sold for $450 million. These are phenomenal returns that hadn't been seen in Israel. Then they began talking about Conduit, Mobileye and other companies being worth $1 billion or more."
Israeli VC fund managers played a key role by providing entrepreneurs with cash before an exit for closing out their mortgages, for example. "That's the real Waze effect: The entrepreneur had the patience to say 'I'm not selling the company for $200 million,'" says Simana. "It takes a lot of guts to tell someone putting an offer on the table that it's too low. We see companies like Outbrain and PrimeSense refusing checks for hundreds of millions. Today there are dozens of Israeli companies saying no while building up the company and acquiring others."
Israeli companies have recently raised hefty sums from VC funds, which could be a sign that the industry is maturing. Revizer, for instance, raised $20 million, Check raised $24 million and Credorax raised $40 million.
"Waze gave entrepreneurs an appetite for establishing large companies," says Ehud Levy, a partner at Vertex Venture Capital, one of the investors in Waze. "They’re no longer reticent to talk about a high value for the company, and the funds are adjusting. When a company raises a large sum of money, expectations for an exit rise significantly."
But not everyone in high-tech has been swept up by the optimism. "There is no resurgence and no queue of investors with checks in hand," says attorney Sharon Amir, partner at law firm Naschitz Brandes, which helps Israeli VC funds with their capital raising campaigns. "The market is still very difficult, even for funds that have shown returns, and in the U.S. too it’s hard to raise capital. Pitango's fund is an achievement for the current period; I don't think we've returned to the industry’s high-flying days."
The Waze deal had a limited effect on the mood, says Amir. "Investment decisions aren't made in a day. Had there been a Waze effect, it would have been seen in Israeli investment institutions investing in funds ... but we still hardly see Israeli institutions investing,” Amir says.
“Some have begun looking at venture capital investments, but with negligible sums relative to their capital under management. No local pension institution has made the strategic decision to invest in venture capital."