A new report by the the Israel Venture Capital (IVC) Research Center shows that Israel’s tech economy is attracting more investment money than ever – as well as a better “class” of investor.
The report issued Tuesday found that Israeli high-tech firms set a new record for financing in the second quarter of 2015 – breaking the record set in the last quarter of 2014. The report said that 179 Israeli high-tech firms raised a total of $1.12 billion during Q2/2015 – beating the $1.11 billion raised in Q4 2014.
The IVC report also shows that Israel is attracting more attention from private equity investors, a development that portends well for the tech economy, according to Koby Simana, CEO of IVC Research Center. “If we want the local high-tech industry to continue growing and see more large-scale, mature companies emerge, there is room for technology investments from more than just venture capital funds, local or foreign,” said Simana. “The industry needs a variety of investors and investment models to support companies throughout various stages.”
Much of the Q2 investment money came from foreign private equity (PE) investors, the IVC data show – with venture capital-backed (VC) investments hitting a six-year low. That change, said Simana, is a sign of maturity for the Israeli tech economy; while VCs generally invest in earlier growth-stage companies and start-ups, PE investors seek out companies that are more mature, with bigger sales and larger markets, further along on the road to “making it big.”
Many of those PE investors apparently are coming from Asia, another positive development for the Israeli tech economy, which is now a “world brand,” as opposed to a specialized market that appealed to VCs looking for “bargains” in companies with promising early-stage technology.
“Investors from Asia are investing in an increasing number of Israeli growth companies, adding to the overall amount of cash available for market expansion,” said investment expert Ofer Sela, a partner at KPMG Somekh Chaikin’s Technology group.
“Overall, Israeli portfolio companies are priced much more reasonably than Silicon Valley companies, making Israel an attractive location for both investments and acquisitions,” said Sela. The trends “reflect the health of the venture-backed ecosystem in Israel and the patience of investors supporting their portfolio companies that can grow into ‘unicorns,’ tech companies that become world-class organizations, that are substantial and mature.”
Besides netting more money as an aggregate, individual companies in the Israeli tech industry – which encompasses companies in systems, networking, biotech, mobile tech, environmental technology, and other areas – also netted more money on average individually. In the first half of 2015, the average financing round for tech firms was $6.2 million, compared to $4.8 million in the first half of 2014, and $2.9 million in that same six-month period in 2013.
Even more important, said Sela, was that many more tech firms had raised significantly more than the average. “Fifty percent of the amount raised during this quarter, and even more since the beginning of 2015, results from large deals of $20 million or more raised per round,” said Sela. “The overall number of growth companies attracting investments continues to increase quarter over quarter.”
The software industry led fundraising in Q2/2015, for the first time since Q1/2013, with $487 million (44% of total money raised) invested in 50 companies. The amount was the largest ever for the sector, almost triple the last two-years’ average. Internet and life science investments, which led all sectors in Q1/2015, decreased reaching 21% and 13% respectively.
In Q2/2015, late stage companies accounted for the majority of investments, with $480 million, followed by mid-stage companies with $379 million. Together, growth stage deals, as opposed to investments in earlier-stage start-ups, accounted for 77% of quarterly investments, noticeably higher than the average 63% for both in each of the last three quarters. Early stage companies followed, with 19% of investments, while seed investments accounted for 4% of the capital. With that, seed investments were responsible for more than a quarter of all the deals in Q2/2015.
The stronger emphasis on investments in more mature companies, said Simana, is evidence that Israel’s tech economy is maturing – and is seen by many more investors than in the past as a place to make money. “Private equity funds and international conglomerates are the kind of investors we want to see supporting growth companies, and we have lately found that, indeed, the number of growth stage technology companies in Israel is rapidly increasing,” said Simana. “As the number of high growth companies and company valuations climb even further, we expect to see a more diverse investor mix.”