IVC and KPMG report: Israeli high-tech companies raised $673 million in Q1/2014
Key facts: Israeli VC fund share of overall investments skidded to 16% – an all-time low; Internet, software and communications deals were up 9% from 2013 average; Mid and late stage investments continued to lead in Q1/14.
Tel Aviv, Israel, April 29, 2014. In the first quarter of 2014, 160 Israeli high-tech companies attracted $673 million. Although the amount was 16 percent below the $801 million raised in Q4/2013, it is still exceptionally high and exceeded only by the record amount in the previous quarter. Compared to the $439 million raised in the corresponding quarter of 2013, the numbers reflect a 53 percent increase in capital raised over the past year. (Chart 1)
Seventy percent of all deals in Q1/2014 were VC-backed, compared with 75 percent in both Q4/2013 and Q1/2013. While the 77 VC-backed deals were valued at $472 million, down 22 percent from $604 million in the previous quarter, they exceeded the $331 million year-earlier total by 43 percent.
Interestingly, the total average company financing round in Q1/2014 jumped to $4.2 million, compared with a two-year average of $3.46 million. The average VC-backed company financing round was even higher, reaching $6.13 million, compared with the $4.19 million two-year average.
Ofer Sela, partner in KPMG Somekh Chaikin's Technology group commented, "The bullish US capital market and capital raising for technology companies via IPOs on NASDAQ in the last 12 months have been drivers of venture capital, both globally and in Israel. Venture-backed revenue stage growth companies are raising substantially higher amounts of capital on average than in the past, positioning themselves for continued market expansion and significant acquisition and/or NASDAQ IPO. This is an indicator of the maturity of the Israeli technology market and signifies that Israeli VC-backed companies are market leaders, providing more than just a 'great technology solution.' These later stage rounds are being led by investors who tend not to be venture capital investors. They are bestowing significantly higher valuations and lower risk to deals, similar to the private equity industry."
Sela continued, "We have also noted a trend that relates to the corporate structure of VC-backed companies. While there is no significant business advantage for a US incorporated company, the average dollar amount raised by such VC-backed companies at later stages is higher than the average amount raised by Israel incorporated VC-backed companies at the same stage."
Israeli VC Fund Investment Activity
Israeli VC fund activity slowed sharply in Q1/2014, with $106 million invested in Israeli high-tech companies. This is the lowest quarterly share on record. The amount is down 25 percent from $142 million (18 percent) invested in Q4/2013 and off 26 percent from $144 million (33 percent) invested in Q1/2013.
First investments, however, were $39 million or 37 percent of total Israeli VC investments, compared with 30 percent and 40 percent in Q4/2013 and Q1/2013, respectively.
"This is the third quarter in a row that capital raising exceeded $650 million. These are great figures that show a sustained, positive momentum for the Israeli high-tech industry," asserted Koby Simana, IVC Research Center's CEO. "At the same time, high-tech's success is clouded by the weakness of local venture capital funds, with investments continuing to shrink from quarter to quarter. The Israeli VC fund share of investments has plummeted to under 16 percent, while foreign VC involvement is increasing." Simana added.
"While foreign VC participation in Israel is a positive development for the high-tech industry, it is important to understand that at the core of the process lies a clear food chain. Without funds raised by local VCs, there won't be sufficient capital for early stage investments. Without early stage financing, there won't be late stage investments. Therefore, it is critical to understand that prolonged absence of Israeli VC funds threatens high-tech industry growth in the longer run," concludes Simana.
Capital Raised by Sector and Stage
In Q1/2014, 44 Internet companies led all sectors, accounting for $260 million or 39 percent of the total raised in the quarter - the highest amount and share for the sector since 2000. Software followed with 21 percent, compared with 23 percent in Q4/2013 and 31 percent in Q1/2013. (Chart 2)
Late stage companies led capital raising in Q1/2014 with $227 million (34 percent), followed closely by mid-stage companies with $221 million (33 percent). Companies at the seed stage accounted for 6 percent, compared with 5 percent in the previous quarter and 7 percent in Q1/2013.
This Survey reviews capital raised by Israeli high-tech companies from Israeli and foreign venture capital funds as well as other investors, such as investment companies, corporate investors, incubators and angels. The Survey is based on reports from 87 investors of which 39 were Israeli VC management companies and 48were other entities.
The survey covered total investment in the Israeli venture capital sector, including both VC-backed rounds where at least one investor participating in the round was a VC fund, as well as deals not backed by venture capital funds. For more on our methodology please click here.
For additional information:
Additional survey information will appear on the IVC-KPMG High-Tech Survey webpage.
About the authors of this survey:
IVC Research Center is the leading online provider of data and analyses on Israel's high-tech, venture capital and private equity industries. Its information is used by all key decision-makers, strategic and financial investors, government agencies and academic and research institutions in Israel.
KPMG Somekh Chaikin's technology professionals offer insights and experience accumulated from a long history of work with technology and life science companies. Through a global network of highly qualified professionals in Israel, the Americas, Europe, the Middle East, Africa and Asia-Pacific, KPMG helps clients address the opportunities and challenges driven by new business models such as cloud computing mobile services and others. KPMG is a global network of professional firms providing Audit, Tax and Advisory services. KPMG operates in 146 countries and has 140,000 people working in member firms throughout the world.
Material in this work is for general educational purposes only, and should not be construed as legal advice or legal opinion on any specific facts or circumstances, and reflects personal views of the authors and not necessarily those of their firm or any of its clients. For legal advice, please consult your personal lawyer or other appropriate professional. Reproduced with permission from IVC-Research Center This work reflects the law at the time of writing in April 2014.