Israeli High-tech Fundraising Dips in First Quarter

Decline is led by youngest startups, risking deal flow in future years, report says

Bloomberg

Israel’s high-tech industry is showing signs on hunkering down, with fundraising by startups down 8% in the first quarter from the same time last year and an even sharper 23% in fundraising by the youngest companies.

A survey by Israel Venture Capital Research and the ZAG law firm released on Wednesday showed that high-tech companies raised $1.03 billion in the first quarter as the number of deals dropped to its lowest first-quarter total since 2012.

Among the youngest startups – those raising seed and A round investments – the decline was much sharper. Funding was down 23% year on year by $247 million and the number of deals was also down by double-digits, IVC said.

“Venture capital funds, both Israeli and foreign, are shifting their activity focus to investments in later stages – in terms of companies’ product development stage, financing stage or capital raising round,” said Koby Simana, the CEO of IVC Research Center.

But he warned that the decline threatened the future of Startup Nation. “If there are no investments in early stages and early rounds now, two years down the line there could well be a shortage of promising late stage companies,” he said.

While Silicon Valley experienced a slump last year, in Israel the pace of investment continued to climb, fueled by the Israeli industry’s global-leading position in the hot areas of cybersecurity and self-driving cars.

On Wednesday, Shmulik Zysman, a partner in the law firm Zysman, Aharoni, Gayer & Company that co-sponsored the survey, said he hoped Intel’s $15.3 billion purchase of the Israeli self-driving-technology company Mobileye last month would whet investors’ appetite for Israeli startups. “The Mobileye deal, which shifted paradigms regarding valuations of Israeli companies, [should] have future impact on the industry in terms of growth in capital raising volumes. The deal is yet more proof of the high quality and standards of Israeli companies,” he said.

More mature companies fared better on fundraising metrics in the first quarter, IVC said. The number of deals for older startups was up 5% to 74 in the three months, compared to the same time in 2016. In terms of capital raised, the most mature tech companies – those raising their C rounds – raised a record $285 million, up 21% from a year earlier.

Venture capital funds, once the industry’s prime source of capital, have been displaced by other investors. IVC said that in the first quarter, VCs invested 26% less than they did in the first quarter of 2016 to just $577 million. On the other hand, Israel VC funds stepped up their pace of investment by 17% year on year to $162 million.

Still, Zysman said he was concerned that Israeli startups are too reliant on overseas money, a phenomenon Finance Minister Moshe Kahlon said last month he hoped to reverse. “High-tech investments in Israel are biased toward foreign investments in low-risk companies, which is liable to affect the future of Israeli high-tech as a whole,” Zysman said.