Israeli Startups Shine in Another Record Quarter

Tech companies raise $1.12 billion with new kinds of investors joining the fray.

Pebbles

Israel’s high-tech money machine keeps surpassing records: Startup companies raised $1.12 billion in the second quarter, beating their previous three-month maximum by a sliver, the IVC Research Center reported Tuesday.

The second-quarter total exceeded the previous record in the fourth quarter of 2014 by just $3 million, but it was up more than 20% on the same period a year earlier. IVC said the increase was led by big investment rounds of $20 million or more, which accounted for half the total spent, including two very large rounds.

But venture capital funds, traditionally the mainstay of startup financing, found themselves crowded out by private equity funds, which specialize in buying control of older, established companies rather than injecting new equity into startups. IVC, which published the report with the accounting firm KPMG Somekh Chaikin, said corporate players like Microsoft and Intel were also big players.

Private equity funds and companies accounted for 43% of total investments, or $477 million, in the second quarter. VC-backed investing dropped 9% from a year ago to $486 million, or 44% of the total, its lowest share in six years, IVC said.

Israeli VC funds accounted for just 10% of the investing in the quarter, down 23% from a year ago, IVC said.

But Kobi Simana, IVC’s chief executive, put a positive spin on the development. “If we want the local high-tech industry to continue growing and see more large-scale, mature companies emerge, there is room for technology investments from more than just VC funds — local or foreign,” Simana said.

“The industry needs a variety of investors and investment models to support companies throughout various stages. Private equity funds and international conglomerates are the kind of investors we want to see supporting growth companies.”

Israel’s startup nation has seen an efflorescence of activity, with mergers and acquisitions reaching $6 billion in the first half of the year, feeding demand from technology investors to get a piece of the action. In the latest exits, Facebook agreed this month to buy the virtual reality startup Pebbles Interfaces for $85 million, and Microsoft agreed to acquire the cyberfirm Adallom for $320 million.

The average high-tech fundraising round for the 179 startups raising money in the first half grew to $6.2 million from $4.8 million a year earlier. Ofer Sela, a partner at KPMG Somekh Chaikin’s technology group, said the increase reflected “the health of the venture-backed ecosystem in Israel and the patience of investors supporting their portfolio companies to complete home runs and grow into Unicorns that are substantial and mature.”

Another major factor in the growth of startup investing is the expanding presence of Asian investors, which is adding to the amount of cash available in Israel, said Simana.