Although 2015 was in many ways a banner year for tech investments in Israel, it marked the beginning of an investment slowdown in the US, and especially in China – and that trend appears to finally be reaching Israel, according to the latest report from research firm Israel Venture Capital (IVC).
The first quarter of 2016 saw 173 Israeli high-tech companies raise a combined total of $1.09 billion in private financing rounds, a 10 percent decrease from the $1.2 billion attracted by 201 companies in the last quarter of 2015.
Although Q4 2015 set a record for quarterly investment, the lower numbers come at a sensitive time; the first quarter of 2016 was a period of deep losses for investors around the world, as Wall Street, London, Shanghai, and almost every other major stock market tanked; by the end of January, for example, Wall Street investors had lost over $2 trillion in stock valuation. Although things have recovered since then on the security markets – by mid-March investors in US markets had made back all their losses from the beginning of the year – the poorer performance in the Israeli investment market shows that the local tech economy is indeed still very dependent on foreign investment, which may be pulled at any moment if conditions warrant.
Despite the slowdown, Q1 2016 shaped up as the fourth best investment quarter in the past four years, according to the IVC, which reviews the numbers from companies, investors, and other sources to determine the financial health of start-ups, and the tech industry overall. Q1 2016 was also 8% stronger than Q1 2015 – the first quarter in what turned out to be a record year for Israeli tech investments. In that quarter, 162 companies raised $1 billion.
In fact, for each of the past four years, 1st quarter investments in the new year were lower – sometimes significantly – than in the fourth quarter of the previous year, “so it may be a January thing,” said one venture capital investor who asked to remain anonymous. “January through March is when a lot of investors evaluate how they did last year and decide what their strategy for the new year will be, so it makes sense that Q1 investments, especially in start-ups, which need a lot of research and due diligence, would be lower than at other times.”
So there is still hope that, despite the problems in the world economy, Israel’s tech ecosystem could do as well this year as last. In 2015, there were a total of 104 exits of all types during the course of the year, worth over $9 billion to the firms and their investors. Venture-capital backed exits hit a decade high, while the average value of mergers and acquisitions was significantly higher than a year earlier. Indeed, for investors in Israeli tech firms, the watchword in 2015 was more, IVC said: More deals, worth more money, for more companies, as compared with recent years.
Still, based on Q1 2016, there is room for concern. Israeli venture capital funds invested $130 million in Israeli high-tech companies, just 12 percent of all investments in the quarter – a whopping 40 percent drop from the $217 million (18 percent of total) raised in Q4 2015, and a 23 percent year-on-year drop ($168 million, (17 percent) in Q1 2015). The fourth quarter of 2015 was exceptionally strong for first investments by Israeli VC funds, with 47 percent of their total capital investments directed into new portfolio companies. In Q1 2016, first investments by Israeli VCs declined to 30 percent, slightly below the 33 percent five-year average.
“The following quarters will determine if the slowdown trend which began in the United States will take hold in Israel as well, or perhaps the fact that the Israeli market didn’t experience the same peak as Silicon Valley and China in the past years indicates lower local volatility overall,” said Koby Simana, CEO of IVC Research Center. With that, he said, “the results of the first quarter of 2016 indicate stability. The capital volume, the number of quarterly deals, and the mix of deals by size, are very similar to the averages of 2015, which was considered very successful.”