The findings of the Money Tree Survey show that the investments in high-tech companies backed by venture capital funds (where one of the investors in the round of financing is a venture capital fund) remained unchanged in the third quarter of 2002 as compared to the previous quarter, both in the volume of investments (in monetary terms) and in the number of transactions. According to the survey, 72 high-tech companies raised $ 221 million in the third quarter of 2002 (as compared to $ 217 million which were invested in 70 companies in the previous quarter).
Joseph Fellus, Senior Partner & High Tech Practice Leader at the accounting firm Kesselman & Kesselman PricewaterhouseCoopers (PwC) says that the findings for the quarter indicate stability both in the volume of investments and in the distribution of investments by sectors and investment rounds and do not disclose what may, in the opinion of industry sources, take place in the coming quarters (closing of companies, further dwindling of the high-tech sector - both as concerning new initiatives and the financial resources available to the industry as a whole).
The average investment in a company remained unchanged as compared to the previous quarter ($ 3.1 million).
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, 75 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 (either in new companies or in their portfolio companies) returned to the peak experienced in the last quarter of 2001:
| Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 | Q3-02 |
| Volume of capital invested by local funds in Israeli companies ($M) | 208 | 184 | 167 | 144 | 122 | 112 | 106 |
| The relative weight of local funds in total local investments (%) | 51% | 44% | 44% | 38% | 35% | 52% | 48% |
| Volume of capital invested by local funds in companies that are not connected to Israel ($M) | 46 | 28 | 19 | 29 | 11 | 18 | 9 |
| The relative weight of foreign investments in total investments made by local funds (%) | 18% | 13% | 10% | 17% | 8% | 14% | 8% |
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 decrease in the volume of investments made by local venture capital funds, not only in absolute terms, but also in relative weight 48% ($ 106 million) as compared to 52% ($ 112 million) in the previous quarter. 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 third quarter of 2002 is similar to the level reported in the previous quarter: $ 1 million as compared to $ 1.2 million, respectively.
Aside from the investments in companies that have a connection to Israel, as mentioned above, the local venture capital funds invested only about $ 9 million in 11 foreign companies that have no activities in Israel, which constitute 8% of total investments made by these funds during the third quarter of 2002. In the third quarter of 2002, the average investment of local venture capital funds in a foreign company ($ 0.8 million) was similar to the average investment in an Israeli company ($1 million).
| Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 | Q3-02 |
| Volume of capital invested by local funds in Israeli companies ($M) | 208 | 184 | 167 | 144 | 122 | 112 | 106 |
| The relative weight of local funds in total local investments (%) | 51% | 44% | 44% | 38% | 35% | 52% | 48% |
| Volume of capital invested by local funds in companies that are not connected to Israel ($M) | 46 | 28 | 19 | 29 | 11 | 18 | 9 |
| The relative weight of foreign investments in total investments made by local funds (%) | 18% | 13% | 10% | 17% | 8% | 14% | 8% |
Distribution of initial and follow-on investments made by Israeli venture capital funds:
| Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 | Q3-02 |
| Weight of follow-on investments (%) | 47% | 62% | 69% | 81% | 80% | 63% | 50% |
| Weight of initial investments (%) | 53% | 38% | 31% | 19% | 20% | 37% | 50% |
In the third quarter of 2002, first time financing accounted for 50% of total investments made by venture capital funds (in monetary terms). Software companies led first time financing ($ 30 million), followed by the communications and networking field ($ 16 million). In follow-on investments, the communications and networking field took the lead ($ 23 million), followed by software companies ($ 12 million).
According to Joseph Fellus, venture capital funds continue to support their existing portfolio companies in order to carry them through the crisis. Nevertheless, these days venture capital funds understand that in addition to protecting existing investments, they have to prepare for tomorrow. Accordingly, they are searching for new companies that are likely to be leaders in a few years.
Companies receiving grants from the Chief Scientist
31 companies out of the total number of companies that raised capital in the aggregate amount of $ 48 million from venture capital funds during the quarter received grants from the Chief Scientist. The survey also shows that 26 of the companies that received grants from the Chief Scientist during the quarter are registered as Israeli companies, as compared to only 5 that are registered as foreign companies.
| Q1-02 | Q2-02 | Q3-02 |
| The weight of companies that received grants from the Chief Scientist in total number of companies | 37% | 46% | 43% |
| The weight of investments (in monetary terms) that were infused into companies that received grants from the Chief Scientist in total investments | 21% | 40% | 22% |
| Percentage of companies receiving grants from the Chief Scientist that are registered as Israeli companies | 75% | 84% | 84% |
Distribution of companies receiving grants from the chief Scientist by development stage (see definitions at the end of the page):
Israel VCs level (in $ million)
Analysis by geographical area
In the third quarter of 2002, 49 companies from Tel Aviv and the central area raised $ 175 million. 15 companies from Haifa and the northern area raised approximately $ 16 million. In the Jerusalem area, both the number of companies and the volume of investments remained almost unchanged as compared to the previous quarter: $ 17 million was infused into 6 companies (as compared to $ 15 million and 6 companies in the previous quarter). In the south 2 companies raised $ 14 million.
Analysis by place of registration
The findings of the Money Tree Survey show a decrease in the number of foreign companies that raised capital this quarter in general and in the seed stage in particular: of the 72 companies that raised capital this quarter, 43% are registered as foreign companies (31 companies, the vast majority of which are registered in the United States) and the rest are registered as Israeli companies. The separate analysis of seed stage investments shows that the 3 companies that raised capital in this round are registered as Israeli companies, as compared to 9 of the 19 seed stage companies (47%) that raised capital in the previous quarter.
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 third of 2002, with $ 109 million which was infused into 19 companies (including 2 investments aggregating $ 60 million). This finding does not reflect the state of mind in the high-tech industry in general and in the communications field in particular, for the neutralization of the two investments mentioned above results in an average investment of only $ 2.9 million (as compared to $ 5.8 million before neutralization).
The software industry registered an increase in the volume of investments (in monetary terms) as compared to the previous quarter: $ 68 million was infused into 16 software companies, as compared to $ 42 million and 21 companies in the previous quarter. In the third quarter of 2002, the average investment in a software company was approximately $ 4.2 million, as compared to $ 2 million in the previous quarter.
The life sciences sector accounted for 8% of total investments for the quarter (in monetary terms), as compared to 27% in the previous quarter, and attracted investments in the volume of approximately $ 18 million which was invested in 17 companies (as compared to 19 companies and $ 59 million in the preceding quarter). The field of medical devices led the investments in life sciences, with investments in the volume of $ 15 million, which was invested in 13 companies).
VC Investments by Industry Q3 2002 ($ million)
Analysis by investment round
The seed round
| Seed | Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 | Q3-02 |
| Number of companies (out of total companies that raised capital in the quarter) | 24% | 20% | 16% | 9% | 8% | 7% | 4% |
| Volume of investment (out of total capital raised in the quarter) | 10% | 6% | 4% | 1% | 2% | 3% | 3% |
The downturn in the number of seed stage companies that manage to raise capital reached a new peak: only 3 companies raised approximately $ 7 million, as compared to 19 companies and $ 13 million in the corresponding quarter in the previous year.
The early stage rounds
| Q3-2000 | Q3-2001 | Q3-2002 |
| Number of companies | 39% | 36% | 40% |
| Volume of investment | 46% | 50% | 52% |
The early stage (the first and second stages together) attracted 52% of the volume of investments and 40% of the number of transactions for the quarter. 29 early stage companies raised $ 116 million, as compared to 32 companies and $ 118 million in the previous quarter. The average investment in these rounds was $ 4 million, as compared to $ 3.7 million in the previous quarter. The relative weight of investments in these rounds remained almost unchanged, both in volume of investments and in number of transactions, as compared to the peak quarter (the corresponding quarter in 2000) and the corresponding quarter in the previous year:
Third round
This round accounted for 31% of the volume of investments (in monetary terms) and 15% of the number of transactions: $ 69 million was invested in 11 companies in this round, as compared to $ 80 million and 13 companies in the previous quarter.
Later stages
This quarter shows a slight increase 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 | Q2-02 | Q3-02 |
| Number of companies | 3 | 9 | 8 | 11 | 7 | 3 | 10 |
| Volume of investment ($M) | 38 | 31 | 78 | 92 | 111 | 4 | 20 |
Distribution of early stage and later stage investments ($ Millions)
Bridge loans
| Q1-01 | Q2-01 | Q3-01 | Q4-01 | Q1-02 | Q2-02 | Q3-02 |
| Number of companies | 31 | 40 | 37 | 38 | 32 | 17 | 19 |
| % of companies (out of total companies that raised capital in the quarter) | 23% | 30% | 32% | 36% | 42% | 24% | 26% |
| Volume of investment (out of total capital raised in the quarter) | 10% | 13% | 9% | 10% | 9% | 3% | 5% |
Average investment by rounds ($M)
Stage of development
Early stage companies attracted most of investments in the third quarter: 34 companies in this stage received 54% of total investments (in monetary terms). 29 expansion stage companies raised 41% of the total capital invested in the quarter. The average investment in an early stage company is $ 3.5 million, as compared to $3.1 million in an expansion stage company.
The analysis by sectors shows that the software sector led the early stage investments ($ 58 million was infused into 11 companies). The next in line is the communications and networking sector, which attracted $ 38 million into 8 companies. Expansion stage investments were led by the communications and networking sector ($ 69 million was invested in 10 companies), which was followed by the software sector ($ 10 million and 5 companies).
Stage of Development Q3-2002 (% of companies) / Stage of Development Q3-2002 (% of total)
Average Deal Size ($ million)
Published by Globes [online] - www.globes.co.il - on 20 October 2002