Israeli high-tech companies raised an all-time annual high of $4.8 billion in 2016, 11 percent above the $4.3 billion raised in 2015, a new report by IVC Research Center and attorneys Zag-S&W shows.

The average financing round, which has been constantly rising over the past five years, reached $7.2 million in 2016, 19% above the $5.1 million five-year average.

In the fourth quarter of 2016, there was an 8% decline in investments compared with the same period a year earlier, along with a drop in the number of transactions. In Q4 2016 high-tech companies raised $1.02 billion in 151 transactions, compared with the $1.11 billion garnered in 202 deals in the last quarter of 2015. The average financing round stood at $6.7 million in Q4 2016, similar to the past two-year quarterly average of $6.6 million.

While capital-raising reached new heights in 2016, there were fewer financing rounds compared to 2015. There were 659 financing deals that closed in 2016, marginally above the five-year average of 657 deals but 7% below 2015’s record 706 deals.

Most of the investment deals in 2016 were in later stage companies. Later round investments – C stage or higher — when investors inject money into an already successful business — were responsible for more than 60% of the capital invested in 2016. Early stage deals — seed and A round funding — increased 5%, while the number of B financing rounds — investments into companies that are past development stage and taking their business to the next level — dropped 30%.

“As expected, 2016 ended as a record year in Israeli high-tech capital raising,” said Koby Simana, CEO of IVC Research Center. The drop in B round funding, though, could be a troubling trend for VC companies, he said.

The troubling B Crunch

“We found what I would call a ‘B Crunch’ — a 30% drop in the number of second rounds closed in 2016 compared to 2015,” he said. “This is a troubling trend for the Israeli VC funnel, since the majority of capital goes into later rounds. If there are no companies lined up for later investments, there could be a more serious issue later on,” Simana said.

The IVC-ZAG Survey also showed a surge in large deals, those above $20 million, in 2016, both in terms of quantity, 76, and capital raised, $2.68 billion. This represents a 22% increase from the $2.19 billion raised in 68 deals in 2015.

“The increase in capital raising in mid- to late stages could imply a growing use of mezzanine funding in mature companies, gearing towards a possible M&A or IPO, preferably on Nasdaq,” said Oded Har-Even, a partner at Zag-S&W. “If this is indeed the case, then it’s a very welcome trend, revealing a mature market considered to be on the ‘quick exit route’ following early stage investments.”

Israeli VC funds invested a total of $634 million in Israeli high-tech companies in 2016, marginally more than the $627 million invested in 2015. In the past five years, Israeli VC fund investments steadily increased, from $482 million in 2012 to the current level. At the same time, their share of total capital invested has been decreasing gradually, from 26% in 2012 down to a 13% share in 2016, the lowest yet.

Software companies led capital-raising in 2016 with $1.7 billion, up from 2015 when the sector attracted $1.4 billion, or a 32% share of the total, also placing first. Capital raising by internet companies decreased in 2016, with the sector attracting only $744 million or a mere 16% of total capital, compared to $1.12 billion raised in 2015, when internet placed second with a 26% share.

Life sciences companies witnessed a 14% drop in funding in 2016, the survey showed.