Financing for early stage, or seed, companies, in the third quarter of this year was the lowest since 2013, with investors preferring more mature Israeli companies, a new report has shown.
Israeli seed firms raised just $29 milion in 21 deals in the third quarter of the year, compared to 31 deals, or $53 million, in the same period year earlier, and an average of 30 to 50 deals per quarter in the last four years, a new report by IVC Research Center and attorneys Zysman, Aharoni, Gayer & Co. (ZAG-S & W) shows.
For the third quarter, Israeli high-tech companies raised a total of $1.6 billion in 131 deals, bringing the amount raised by tech firms this year to $4.5 billion, which equals 82% of the total funds raised in 2017, the report said.
In Q3/2018, deals above $20 million reached a record level of $1.1 billion. While the number of deals under $5 million decreased, the number of deals larger than $10 million continued to rise, the report said.
Investors prefer maturity
“Investors’ preference for mature companies has negatively affected the levels of seed financing, which continues to shrink similar to US patterns,” Marianna Shapira, research director at IVC, said. “Nevertheless, we expect capital raising in 2018 to achieve the levels of 2017, and the numbers to rise again following the quarter, in line with a pattern that is typical for this period,” she told The Times of Israel by phone.
In Q3/2018, mature-stage companies raised almost six times more capital compared with early-stage companies. In terms of number of deals, IVC found that through 2016, investors favored seed and R&D stages. Since 2017, and even more so in 2018, the trend shifted as investors turned to more mature companies, which are at revenue growth stages.
Shapira added that the tech ecosystem in Israel is seeing “many more foreign and international investors” who are looking to invest in the more mature Israeli firms, those with revenues and sales, who are managing to draw their attention and raise more capital. “This is a sign of more maturity of the market,” she said.
According to Shmulik Zysman, managing partner at ZAG-S & W, the increase in foreign interest “can also be credited to European venture capital funds that start investing in Israel.”
In the third quarter of the year, VC-backed capital raising deals totaled $1.3 billion in 67 deals, down 34% compared with Q3/2017. Non-VC-backed deals accounted for $285 million, at the lower end of the last three years. The numbers were generally down for the quarter due to the Jewish holidays that occurred in September this year.
“We expect the fourth quarter figures to be higher than that of the third quarter, for both VC-backed funds and non-VC funding,” Shapira said. “There is no lack of interest by investors nor interesting companies.”
In Q3/2018, software companies raised $760 million mainly due to 12 deals, each larger than $20 million.
Artificial Intelligence (AI) companies were the main attraction for financing deals in the quarter. The number of deals grew some 15% in Q3/2018, compared with the corresponding quarter last year – 39 deals compared with 34 deals in the same period last year. The number of AI deals for the full year to the end of the third quarter rose steadily, with 17 companies attracting more than $20 million each, the report said.