Capital raising by Israeli technology companies declined 8 percent in the first quarter of the year compared to the same period a year ago and showed a worrying trend of investors, both local and foreign, preferring later-stage companies over younger ones, a new report by IVC Research Center, which tracks the industry, and attorneys Zag-S&W (Zysman, Aharoni, Gayer & Co.) shows.
In the first quarter of 2017, Israeli high-tech companies raised a total of $1.03 billion in 155 transactions, 8% lower than the $1.11 billion raised in 174 deals in Q1/2016 and a 4% decrease compared to the previous quarter, the report shows.
The number of transactions was down 10 percent in Q1/2017 compared to the quarterly average of 172 deals in the previous three years. The average financing round rose to $6.6 million, compared to the $6.5 million and $6.4 million averages of Q4/2016 and Q1/2016, respectively. The number of financing rounds in the first quarter was the lowest since the corresponding quarter in 2012, the report said.
The number of early rounds — seed and A rounds — declined 31% compared to the same period a year earlier, with only 37 seed rounds and 40 A rounds closing in Q1/2017, at a total of $247 million, 23% lower than the $320 million raised in the first quarter of 2016 and 8% below the $267 million raised in early rounds in Q4/2016.
The number of all later rounds (B, C and later) was up 20%, with 78 deals in Q1/2017, only 5% above the 74 deals in Q1/2016 and compared to 65 deals in Q4/2016.
In terms of capital raising, only C rounds managed to top their previous record, with $285 million raised in 17 deals in Q1/2017, compared to $234 million in Q1/2016 and to $100 million raised in the previous quarter.
Israeli tech investments are biased toward foreign funds
“The fact that most of the capital goes into mature companies currently reflects, on the one hand, the maturity of companies today, but also the low appetite of investors for young companies, which embody greater risk,” said Shmulik Zysman, founding partner of ZAG-S&W. “If it continues, this trend is liable to harm young companies’ ability to realize their potential. In addition, according to the report, most of the capital injected into the Israeli market continues to come from abroad. Thus, it emerges that 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.”
In Q1/2017, VC-backed deal-making was down, with both the proceeds and number of deals shrinking. These figures mark the lowest point in venture capital fund investments since Q2/2015, with $577 million in only 68 transactions, 26% down from the $777 million raised in 100 VC-backed transactions in Q1/2016.
Israeli VC funds invested $162 million or 16% of total capital in Israeli high-tech companies in Q1/2017. The amount was 17% above the $138 million invested in Q1/2016, when Israeli VC funds’ share accounted for 12% of tech investments. While Israeli VC fund investment in the past tended to lean toward early-stage investments, in the first quarter of 2017, a whopping 65% of first investments went to late-stage companies.
“The figures show stability in the industry even if there is a small decline in investment,” Koby Simana, CEO of IVC Research Center, said in a phone interview. “What is worrying in the data is the mix of investments. If there are no investments in early-stage companies then we won’t have mature companies to invest in at a later stage when we want them. People are preferring later-stage startups because there are today many late-stage companies to invest in and because they are less risky. But 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.”
This change creates a void in the early stages that could represent an opportunity for new investors willing to focus on young startups and early-stage companies without much competition, Simana said, but on the other hand it “spells danger to the future of the local venture capital model. If VC funds pass up the opportunity to join at early stages and hold the majority of shares in a company, they will have less control over their deal-flows.”