Angels replace venture capital funds

A survey of technological incubators found that venture capital investment in early stage start ups is falling sharply.

Technology incubator managers expect a sharp fall in the rate of investment by venture capital funds in start-ups graduating from incubators, according to a joint survey by the Israel Technological Incubators Forum and the Fahn Kanne Grant Thornton Israel accounting firm.

Over the past decade, links in the feeder chain for early stage technology companies are weakening, and the raising of funds for early stage companies has become almost impossible.

Over the last two decades, VC funds have been the first place start-ups graduating from incubators looked for seed funding. Entrepreneurs would nurture an idea and the company in the incubator until an initial product was ready for market, and then the VC funds would open up their pockets and invest. The survey, however, found that there has been a substantial change in this process.

The new survey was conducted in the third quarter of 2010 among Israeli technology incubator managers. 71% of survey participants expect that the dominant investors (in terms of numbers) in start-ups graduating from incubators will be angels, whereas 29% of them expect the dominant investors to be foreign and institutional investors. Survey results clearly show that angels are expected to take the place of VC funds, which will no longer be the dominant investors in start-ups graduating from incubators.

The survey also examined the proportion of investors in start-ups graduating from since 2008. The results reflect a clear trend in the strengthening of angels over VC funds.

According to the survey, in 2008 and 2009, the division was equally split three ways - one-third angels, one-third venture capital funds, and one-third institutional or foreign investors.

However, in 2010 and in the first quarter of 2011, only 25% of investments in mature incubators came from Israeli VC funds, 52% came from angels, and 23% from other sources.

In the first quarter of 2011, there was another decline, and only 29% of investments came from other sources (rise of 6% compared with 2010). The proportion of investment from angels in mature incubators is still the largest: 46%.

There are differences among the various types of investment. Because angels are individual people, their pockets are not as deep as VC funds' pockets, and as a result are less stable.

Peregrine Ventures partner Eyal Lifshitz, who is also the chairman of the Technological Incubators Forum, said in reaction to these statistics: "Unfortunately, early stage start-up companies and entrepreneurs in Israel know that VC funds are cutting off funding sources for new investments. We have been in a financial crisis for some time now, and companies are having a hard time advancing past the initial incubator stage. This market failure has created a situation where entrepreneurs are giving up on their idea of creating a new project, and prefer to stay in their current place of employment, which is safe. Lifshitz believes that Israel is losing its main source of creativity, which has been the driving force behind its becoming an industry leader.

Lifshitz is not unrealistically pessimistic. 67% of incubator managers expect the rate of incubator exits to remain the same or to decline, and only one-third of them expect a rise in the acquisition rate, or of a share offering by start-ups graduating from incubators.

Incubator managers believe that the government must intervene in the crisis, and appoint a Minister of High-tech.

Fahn Kanne Grant Thornton Israel partner and high-tech director Ilanit Halperin said, "Venture capital funds are not succeeding in raising new funds, and therefore the unsound situation or investments in new projects is not going to improve. As a result, our advantage in the high-tech industry is disappearing. The industry is facing a real danger, and the government needs to formulate an overall systemic solution for this market failure."

Published by Globes [online], Israel business news - - on September 11, 2011

© Copyright of Globes Publisher Itonut (1983) Ltd. 2011

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