Small and medium businesses in Israel will get a little extra help in raising funds, as the Economy Ministry announced this week that it had chosen two Israeli venture capital funds to create a billion shekel ($27 million) capital growth fund for firms that have an annual sales volume of NIS 100 million ($27 million) or less.
Chosen to establish the fund were two veteran Israeli investment firms, Cogito Capital and Peninsula Investments, to establish the funds. Both firms will provide an initial NIS 100 million to get the funds going, and will later raise NIS 300 million-NIS 400 million.
Funds will be invested in small and medium-sized businesses, and the fund managers will be expected to provide solutions for long-term funding and investment in the client businesses and bridge the existing gap between the needs of the businesses and the supply of capital.
Venture capital funds like to invest money in start-ups, where they can get in on the ground floor of the Next Big Thing, while large companies can raise money on the capital markets. But medium-sized firms – companies that need substantial money to expand, but are not likely to return the tens of percents on investments that start-ups do – are often left out in the cold. For them, banks are often the only alternative – and even though nominal interest rates are close to zero, things are often very different for companies that actually try to borrow money, according to the program’s sponsor, the Ministry’s Small and Medium Businesses Agency.
According to figures provided by the agency, medium-sized businesses in Israel employ around 22% of employees in the business sector, and they contribute about 16% of Israel’s NIS 1.6 trillion annually.
That’s more than the high-tech sector, which is responsible for 12% of GDP. But somehow, medium-sized businesses are squeezed out of the venture capital markets and have to resort to relatively expensive bank funds for cash, much of which is often used for working capital and purchasing fixed assets, not for growth and development, the figures show. The agency hopes that the new fund will change things, injecting much needed investment funds for growth in the medium-sized business market.
According to Ran Kiviti, director of the Small and Medium Businesses Agency, the businesses the agency seeks to help “are the economy’s growth engine, but they have to struggle with many hardships, especially in their ability to raise capital. The fund is intended to provide solutions to reduce the risk for investors and inject capital funds that will enable the business’s development and growth, increased production capacity, help expose companies to new markets, and enhancing competition inside Israel and overseas markets.”