The following are the findings of the quarterly survey conducted by the IVC Research Center, which for more than seven years has been at the forefront of venture capital research in Israel. This survey reviews capital raised by private Israeli high-tech companies from Israeli and foreign venture capital funds as well as other investors. The survey is based on reports from 167 venture investors, of which 99 were Israeli venture capital funds and 68 were other, mostly foreign, investment entities. The survey is conducted with the cooperation of the Israel Venture Association (IVA).
During the second quarter of 2002, 91 companies raised $291 million from venture investors, compared to $376 million raised in the first quarter (chart 1). The amount raised in Q2/2002 was 23% less than in Q1/2002 (80 companies) and 43% less than in Q2/2001 (135 companies). In 78 of the 91 transactions (86%), at least one Israeli VC participated. The average financing round decreased by 32% to $3.2 million, compared to the first quarter’s $4.7 million.
During the first half of 2002, 171 private Israeli high-tech companies raised $667 million from local and foreign investors (chart 1). This amount is 42% lower than the $1,146 million raised by 289 companies in the first half of 2001. The average financing round per company in the first half of 2002 was $3.9 million, a slight decline from the $4.0 million raised during the previous year’s first half.
Large financing rounds – those exceeding $20 million – fell in the first half to five from 11 in the first half of the previous year. Large rounds constituted 34% of total capital raised in the first half of 2002 ($228 million), versus 28% in the same period last year ($322 million).
Venture capital in Israel versus US and Europe
The IVC Research Center compared trends in capital raised by Israeli high-tech companies to capital raised by European and US companies. In the second quarter of 2002, Israeli companies experienced a 23% decrease from the previous quarter, US companies a 15% decline and European companies an increase of 10%.
Zeev Holtzman, CEO and Chairman of Giza Venture Capital, said, “IVC Survey results, which are significantly different from other surveys published recently, demonstrates that in the long run, the situation in Israel is very encouraging considering the global crisis of the industry and the local political climate.” Holtzman also noted that “investment of about $300 million in the second quarter reflects an annual rate of $1.2 billion a year. This annualized rate is higher than total investments made in 1999.”
Israeli VCs make 51% of total investments
In the second quarter of 2002, investments made by Israeli VCs ($127 million) decreased by 8%, compared to the first quarter and were down 37% from the year-earlier period (chart 1).
The remainder was raised from other entities – mostly foreign, but also Israeli non-VC investors. These entities invested $164 million in Q2/2002, 31% less than in the first quarter. Investments by these entities in financing rounds in which Israeli VCs did not participate increased by 39% from Q1 and totaled $43 million (chart 1).
Holtzman added that “survey figures indicate that the Israeli high-tech industry continues to be the attractive to foreign investments in Israel and policymakers in the Ministry of Finance should understand that this sector provides a major avenue for the return to economic growth as well as a means of attracting foreign investors.”
During the first half of 2002 Israeli venture capital funds invested $265 million, a 43% decline from the same period last year. Other entities invested $402 million in the year’s first half, 41% less than in 2001’s first half.
The share of Israeli VCs in fund raising (those in which at least one Israeli participated) rose sharply to 51% in Q2, following the 40% share in the last two quarters. The first half of 2002 and the first half of 2001 show similar shares – 40% and 41%, respectively (chart 2).
First investments recovered to 51% of total investments
In the second quarter of 2002, Israeli VC first investments constituted 51% of Israeli VC investments as in the year-earlier period. First investments totaled $65 million, a 67% increase from the first quarter. Follow-on investments, which were 49% of investments in Q2, totaled $62 million – a 37% decrease from the previous quarter. Average first investment was $2.3 million, compared to $0.7 million for the average follow-on investment (chart 3).
In the first half of 2002, the share of first investments declined to 40% of total Israeli VC investments, compared to 60% in the same period last year. Those investments totaled $104 million, well below the $277 million raised in 2001’s first half. Follow-on investments totaled $160 million, a 14% decrease from the year-earlier period.
Capital raised by sector - Communications sector weakens
In the second quarter of 2002, the biotechnology sector soared with an eight-fold quarter-to-quarter increase (from $2 million to $16 million) in capital raised, and its share of the total rose to 5%. Fund raising by software companies climbed 38% from the former quarter, and their share of the total raised increased to 11%, compared to 6% in Q1. Medical devices rose by 25% compared to Q1 and constituted, as in the previous quarter, 12% of amounts raised. The Internet and communications sectors fell by 67% and 43%, respectively, from the first quarter, and their shares of the total raised was relatively low (2% and 38%) compared to the previous quarters. Fund raising by semiconductor companies declined by 28% from Q1, but their share (18%) of the total capital raising remained the same.
Capital raised by stage - Early-stage companies attract 50% of capital raised
High-tech companies in this survey were divided into 4 categories: Seed, Early-Stage, Mid-Stage, and Late-Stage.
In the second quarter of 2002, Early stage capital raising jumped 84% compared to Q1/2002 and totaled $145 million. Its share of total fund raising was up 50% from 21% in the previous quarter. There was a slight increase in amounts raised by seed companies compared to the first quarter – from $6 million in Q1 to $7 million in Q2 (2% of amount raised for both quarters). Amounts raised by mid-stage and by late-stage companies declined by 57% and by 27%, respectively from Q1 and attracted 36% and 12% of the total raised.
According to Holtzman, “Although seed investment figures comprise a low share of the total capital raised, we estimate a downward bias due to unreported seed company investments.”
Published by Globes [online] - www.globes.co.il - on 24 July 2002