After a record-breaking year for capital raised by Israeli start-ups in 2011, the world economic crisis of the past year took its toll, reducing local start-up funding by 10%.
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In 2012 some 575 nascent firms raised a total of $1.92 billion from Israeli and foreign investors. That was 10 percent less than the $2.14 billion raised by 545 companies the previous year, according to an annual review published yesterday by IVC Research Center in association with the KPMG Somekh Chaikin accounting firm.
The decline was particularly pronounced in venture capital funding. VC-backed deals in which at least one venture capital fund participated fell 22% from $1.76 billion in 2011 to $1.37 billion in 2012. Israeli venture capital funds accounted for $516 million of the total amount for 2012, 19% short of the $638 million invested in the country's high-tech sector the previous year.
"While investment by Israeli VC funds is shrinking, foreign VCs as well as corporate and private investors are gradually increasing their activity," said Koby Simana, CEO of IVC. "As a result, I'm optimistic about the high-tech industry's chances of maintaining the current level of capital raising in the coming year."
"The year 2012 was a record one in terms of the number of companies raising capital over the past decade," said Ofer Sela, partner in KPMG Somekh Chaikin's technology group. "In early stage investments, micro-VCs and angel investors succeeded in filling the void left by Israeli VCs."
Internet companies stood out in 2012, attracting 21% of the investments. According to Sela, more than twice as many early-stage Internet companies were funded in 2012 than in 2011. "Technology developments in recent years in both cloud-based infrastructure and content delivery platforms have enabled Internet companies to mature and develop their intended technology with greater capital efficiency than any other sector," he explained.
However, the leading sector in attracting capital was life sciences with 26% of the pie in 2012. Start-ups in this sector raised a total of $497 million, 28% more than in 2011.
Interest in early stage start-ups actually grew despite the drop in overall investment. "In 2012 we saw investors shifting back into early stage and seed investments, with a five-year record $146 million raised by 157 seed companies," explained Simana.
Another positive development in 2012 was an increase of investments by Israeli venture capital funds in companies outside their portfolios. Israeli funds allocated $195 million, 38% of their total, to initial investments. This represented an 8% increase over 2011 when $181 million was allocated to initial investments.
In the fourth quarter 163 Israeli start-up companies raised $494 million, 5% more than the $468 raised in the previous quarter but 14% less than in the last quarter of 2011. Israeli funds invested $140 million in the fourth quarter of 2012, a 7% drop compared with their investments in the same quarter of the previous year.