Kesselman & Kesselman PricewaterhouseCoopers (PwC) MoneyTree survey shows a 37% decrease in investments in high-tech companies backed by venture capital funds Globes correspondent Israeli venture capital funds' share in total investments for the second quarter of 2002 were 52%, as compared to 35% in the previous quarter, according to the Kesselman & Kesselman PricewaterhouseCoopers Money Tree Survey released today.
The Money Tree survey findings were presented today to venture capital executives by Joseph Fellus, senior partner and high tech practice leader at Kesselman & Kesselman PricewaterhouseCoopers (PwC). Survey findings show a decrease of 37% in the investments in high-tech companies backed by venture capital funds (where one of the investors in the first round of financing is a venture capital fund) in the second quarter of 2002 ($ 217 million) as compared to the previous quarter ($ 344 million) and 47% as compared to the corresponding period in the previous year ($ 415 million). According to Fellus, in the first half of 2002, high-tech companies raised an aggregate of $ 561 million, a decrease of 37% as compared to the corresponding period in the previous year and 60% as compared to the first half of 2000.
In addition, there was a 8% decrease in the number of companies (70) that raised capital during the quarter as compared to the previous quarter (76), which resulted in the lowest number of transactions since the first quarter of 1999 (68). The average investment per company in this quarter was $ 3.1 million, as compared to $ 4.5 million in the previous quarter (net of the effect of three major investments that were made in the previous quarter - $ 2.4 million), and remained unchanged as compared to the corresponding quarter in the previous year.
The Money Tree Survey has been carried out quarterly by Kesselman & Kesselman in Israel for the past six years, in conjunction with the surveys carried out in the United States and Europe by the largest accounting and consulting firm in the world -PricewaterhouseCoopers. In this quarter, 73 venture capital firms participated in the survey. The results of the survey are used widely every quarter by Israeli and foreign venture capital funds, commercial banks, investment banks and other financial institutions in Israel and worldwide, high-tech companies, Government Ministries, the Office of the Chief Scientist and others.
The survey further shows that the number of venture capital funds that made no investments during the quarter (neither in new companies nor in their portfolio companies) remained almost unchanged as compared to the previous quarter: 20 venture capital funds this quarter, as compared to 21 venture capital funds in the previous quarter, constituting 27% and 28%, respectively, of the venture capital funds participating in the survey.
| Q1-00 | Q2-00 | Q3-00 | Q4-00 | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 |
| Number of funds surveyed | 53 | 57 | 60 | 66 | 73 | 72 | 75 | 76 | 74 | 73 |
| Number of funds that made no investments | 7 | 9 | 11 | 11 | 18 | 20 | 25 | 27 | 21 | 20 |
| % of funds that made no investments | 13% | 16% | 18% | 17% | 25% | 28% | 33% | 36% | 28% | 27% |
The percentage of funds that made no investments
The piece of venture capital funds in the high-tech cake
The findings of the survey show a significant increase (in monetary terms) in the relative weight of local venture capital funds in total investments for the quarter (52% as compared to 35% in the previous quarter). This reinforces the estimate that the financing burden is distributed between fewer and fewer local funds.
At the same time, the decrease in the volume of investments made by local venture capital funds continues: $ 112 million as compared to $ 122 million in the previous quarter (a decrease of 8%). The remaining part was invested both by foreign venture capital funds and by other investors. According to the survey, the average investment made by a local venture capital fund in the second quarter of 2002 is similar to the level reported in the previous quarter: $ 1.2 million as compared to $ 1.1 million, respectively.
Aside from the investments in companies that have a connection to Israel, as mentioned above, the local venture capital funds invested only $ 18 million in 16 foreign companies that have no activities in Israel, which constitute 14% of total investments made by these funds during the second quarter of 2002. In the second quarter of 2002, the average investment of local venture capital funds in a foreign company ($ 1.1 million) was similar to the average investment in an Israeli company ($ 1.2 million).
| Q1-00 | Q2-00 | Q3-00 | Q4-00 | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 |
| Volume of capital invested by local funds in Israeli companies ($M) | 176 | 226 | 308 | 343 | 208 | 184 | 167 | 144 | 122 | 112 |
| The relative weight of local funds in total investments (%) | 29% | 31% | 30% | 41% | 51% | 44% | 44% | 38% | 35% | 52% |
| Volume of capital invested by local funds in companies that are not connected to Israel ($M) | 30 | 73 | 45 | 43 | 46 | 28 | 19 | 29 | 11 | 18 |
| The relative weight of foreign investments in total investments made by local funds | 15% | 24% | 13% | 11% | 18% | 13% | 10% | 17% | 8% | 14% |
Companies receiving grants from the Chief Scientist
32 companies out of the total number of companies that raised capital in the aggregate amount of $ 86 from venture capital funds during the quarter received grants from the Chief Scientist. The survey also shows that 27 (84%) of the companies that received grants from the Chief Scientist are registered as Israeli companies, as compared to only 5 that are registered as foreign companies.
| Q1-02 | Q2-02 |
| The weight of companies that received grants from the Chief Scientist in total number of companies | 37% | 46% |
| The weight of investments (in monetary terms) that were infused into companies that received grants from the Chief Scientist in total investments | 21% | 40% |
| Percentage of companies receiving grants from the Chief Scientist that are registered as Israeli companies | 75% | 84% |
Companies receiving grants from the Chief Scientist
Israeli VC's investments level
Analysis by geographical area
In the second quarter of 2002, about 74% of the transactions were carried out in Tel-Aviv and the central area (52 transactions, aggregating $ 177 million). 11 companies in Haifa and the northern area raised approximately $ 24 million. In the Jerusalem area, $ 15 million was infused into 6 companies. Only one transaction took place in the south.
Analysis by place of registration
The findings of the Money Tree Survey show that of the 70 companies that raised capital this quarter, 44% are registered as foreign companies (the vast majority of which are registered in the United States) and the rest are registered as Israeli companies. In addition, the survey shows that 2 of the 5 seed stage companies that raised capital are registered as foreign companies (40%), as compared to 19 out of the 27 seed stage companies that raised capital in the corresponding quarter in the previous year (70%).
Another notable finding is that, in this quarter, the average investment in a company that is registered in Israel is higher than the average in a company that is registered as foreign: $ 3.3 million as compared to $ 2.9 million, respectively. In addition, the analysis by technological sectors shows that, as in the previous quarter, life sciences companies are clearly more inclined to be registered as an Israeli company rather than as a foreign company. Other sectors show no preference in this respect.
Distribution of life sciences companies by place of registration:
| Parent company’s place of registration | Q1-2001 | Q2-2001 | Q3-2001 | Q4-2001 | Q1-2002 | Q2-2002 |
| Israeli parent company | 16 | 13 | 15 | 21 | 11 | 18 |
| Foreign parent company | 3 | 7 | 4 | 5 | 4 | 1 |
| Total number of life sciences companies | 19 | 20 | 19 | 26 | 15 | 19 |
Percentage of companies registered as foreign (vast majority in the United States)
Analysis by leading technological segments
The field of communications and networking continues to lead the investments in the second quarter of 2002, despite the sharp decrease in the volume of investments due to two large investments ($ 110 million) that were made in the previous quarter. In the second quarter of 2002, 21 companies in this field raised $ 59 million, as compared to $ 175 million which was infused to 22 companies in this field in the previous quarter. The communications field took a hard blow in this quarter, attracting only 27% of total investments (in monetary terms), as compared to 51% in the previous quarter. However, the number of transactions in this field remained almost unchanged from the previous quarter (30% as compared to 29%, respectively).
Investments in the software industry (both in monetary terms and in terms of the number of transactions) were similar to the levels recorded in the previous quarter: $ 42 million (19%) were infused into 21 software companies (30%), as compared to $ 48 million (14%) and 22 companies (29%) in the previous quarter.
The semiconductor field attracted 16% of total investments made in the second quarter of 2002. During the quarter, 6 companies in this field raised $ 34 million, as compared to 7 companies that raised $ 84 million in the previous quarter (including a large investment of approximately $ 56 million).
The life sciences sector registered a significant increase in the second quarter of the year, constituting 27%, in monetary terms, of total investments for the quarter, as compared to 7% in the previous quarter and attracting investments in the volume of $ 59 million which were infused to 19 companies this quarter (as compared to only $ 24 million which was invested in 15 companies in the preceding quarter). The field of medical devices led the investments in life sciences, with investments in the volume of $ 38 million, which was invested in 13 companies. 6 biotechnology companies raised $ 21 million.
Analysis by type of financing
The seed round
The survey’s analysis of investments by rounds shows a continuing decrease in investments in the seed stage: only 5 seed stage companies raised capital this quarter, aggregating approximately $ 7.5 million, as compared to 6 companies and approximately $ 7 million in the previous quarter.
| Seed | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 |
| Number of companies in the Seed stage (out of total companies) that raised capital in the quarter | 24% | 20% | 16% | 9% | 8% | 7% |
| Volume of investment (out of total capital raised in the quarter) | 10% | 6% | 4% | 1% | 2% | 3% |
The early stage rounds
The early stage (the first and second stages together) registered an increase both in the volume of investments (in monetary terms) and in the number of transactions, constituting 54% of the volume of investments and 46% of the number of transactions for the quarter. In this round, 32 companies raised $ 118 million, as compared to 25 companies and $ 85 million in the previous quarter. The average investment in this round was $ 3.7 million, as compared to $ 3.4 million in the previous quarter.
Third round
This round accounted for 37% of the volume of investments (in monetary terms) and 19% of the number of transactions: $ 80 million was invested in 13 companies in this round, as compared to $ 109 million (including two major transactions in the aggregate amount of $ 90 million) and 6 companies in the previous quarter.
Later stages
This quarter shows a sharp decrease both in the volume of investments (in monetary terms) and in the number of transactions made in later stage rounds (from fourth round to mezzanine round):
| Later stages | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q1-02 |
| Number of companies | 4 | 9 | 8 | 11 | 7 | 3 |
| Volume of investment ($ in millions) | 39 | 31 | 78 | 92 | 111 | 4 |
Investment level- Early stage vs. Later stages ($ millions)
According to Fellus, a possible explanation for the drop in the levels of investment in this round is the funds’ disappointment from the delay in the recovery of the Nasdaq both on the primary and the secondary market, which causes them to change their investment strategy to support investments in early stages companies at lower prices, based on the anticipation that by the time these companies mature the markets will start recovering.
Bridge loans
The volume of capital raised by way of bridge loans in this quarter was only 3%, as compared to 9% in the previous quarter. 17 companies raised $ 7 million through bridge loans this quarter, a decrease of 47% in the number of companies and 78% in the volume of investments (in monetary terms) as compared to the preceding quarter.
| Bridge loans | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 |
| Number of companies | 31 | 40 | 37 | 38 | 32 | 17 |
| % of companies (out of total companies that raised capital in the quarter) | 23% | 30% | 32% | 36% | 42% | 24% |
| Volume of investment (out of total capital raised in the quarter) | 10% | 13% | 9% | 10% | 9% | 3% |
Fellus adds that the bridge loans are usually granted in later rounds. Therefore, the drop that characterized the investments in later stages also affected the bridge loans in this quarter.
Average investment by rounds ($M)
Distribution of initial and follow-on investments made by Israeli venture capital funds
| Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 |
| Weight of follow-on investments (%) | 47% | 62% | 69% | 81% | 80% | 63% |
| Weight of initial investments (%) | 53% | 38% | 31% | 19% | 20% | 37% |
Published by Globes [online] - www.globes.co.il - on 17 July 2002