Tech Roundup / Exits Are a Blessing, but Do They Spell Trouble?

In the first half of 2012, only 29% of venture capital investments in Israel involved early-stage start-ups; Citi plans to expand its R&D in Israel.

* In the first half of 2012, only 29% of venture capital investments in Israel involved early-stage start-ups, according to research conducted by lawyers Lior Aviram and Limor Peled from the firm Shibolet & Co. in collaboration with the firm Fenwick & West in Silicon Valley. Their study shows that the percentage of transactions involving younger companies has grown compared with the previous three years, but is still down from 2008, before the sub-prime crisis hit.

When the industry is stable, first-round investments should exceed subsequent funding rounds, argues Aviram. "But subsequent investment should only go to the best companies. Since the second half of 2008, the first round of investment hasn't been the largest, or in other words, the industry is shrinking and that is a serious problem." This trend is also evident in Silicon Valley, he says. But there first-round investments have rebounded to surpass follow-up investments, while in Israel the situation remains unchanged.

*When you add the small number of early-stage start-ups getting first-round investment with the increasing number of exits in Israel, you get a dwindling number of mid-size companies whose revenues exceed $20 million. According to data compiled by analysts Oren Raviv and Dan Yachin from market research firm IDC, more than 60 Israeli start-ups rake in more than $20 million per year. However, compared with data from 2011, that marks a 20-30% decline.

"The intermediate stage is problematic," says Raviv. "More companies are sold and fewer of them enter the pool of firms that surpass the $20 million bar."

"Exits are a blessing, but looking a head there is cause for concern," says Yachin. "The cream of the Israeli start-up crop is 'picked' when the founders exit. The problem arises when we look ahead and see that the venture capital pool has contracted compared with the market."

*By the end of 2013, financial giant Citibank will employ four times the number of workers at its research and development center in Israel, the company's head of R&D in Israel, Liron Verman told TheMarker. Since its establishment last year, when the Trade Ministry approved a $93 million grant for Citi over five years, the R&D center in Israel has employed 20 staffers. Citi has 15,000 programmers on its payroll and 13 development centers worldwide. Of those, three are considered technological innovation centers – those in Dublin, Ireland, Singapore, and Israel. The Israeli center is expected to expand to 180 employees, making it the largest of the three.

*Israeli high-tech firms aren't just targets for acquisition; sometimes they are the ones making the acquisitions. Last week, uTest announced it had acquired Polish company Apphance, which has created an app that tests software for mobile devices, in a deal worth more than $1 million. In the wake of the deal, uTest has more than 100 workers on its payroll, and as part of the deal, the company, which tests software using crowd-sourcing methods, will open a development center in Warsaw. The Israeli company founded in 2007 is expected to bring in $40 million in revenues this year.