Venture capital funds are usually accorded considerable respect in Israeli high tech; they are the ones who invest the money that is supposed to keep the industry going and make Israel the startup nation. On the other hand, the funds' behavior has aroused quite a few questions about them. Some say that the funds' returns are low, while others say the funds are being pushed out of the local investment market by foreign funds. It is also being said that their ineffectiveness in the early startup stages is clear, although this situation is changing.
One of the biggest and apparently still unaddressed questions, however, is to what extent the funds can take credit for the most profitable exits. The answer seems to be not very much. A survey by Israeli company iAngels, which makes it possible to invest in startups together with leading angel investors, shows that the venture capital funds had little part in the most profitable exits in Israel over the past three years. Actually, the figures, which include high-tech and technology companies (excluding biomedical companies), based on the IVC database, among other things, show that 45% of the 20 most profitable exits were based exclusively on angel investors.
What makes an exit profitable? iAngels managing partner Shelly Hod Moyal, who founded the company together with Mor Assia, conducted the survey. She explains that the internal rate of return (IRR) formula was used for the calculation. Hod Moyal's survey covered 330 exits since 2011. The calculation was carried out for 200 of these companies for which information about the exit volume was published.
Cyvera: the most profitable exit
According to the survey, the most profitable exit in Israel since 2011 was Cyvera, which was also one of the most recent: the company was sold in March 2014 to Palo Alto Networks (an Israeli-owned company) for $200 million. The exit followed a $13.1 million financing round, giving a return of 1530% on the investment, while the average time taken for a Cyvera investor to reach the exit was less than a year.
Second place was taken by online gambling company Playtika, sold to US casino giant Harrah's at a company value of $145 million, after having raised a mere $1.5 million - a multiple of 90 and an average investment-to-exit time of 18 months.
In third place was Crossrider, acquired by Teddy Sagi for $37 million after having raised a paltry $2 million (a 19.5 multiple), with an average investment-to-exit time of just over a year.
In fourth place, almost neck and neck with Crossrider, was XtremIO, sold for $450 million to storage giant EMC after having raised $25 million, an 18 multiple with an average investment-to-exit time of a little more than a year. XtremIO's investors were all venture capital funds - one of only five such companies on the list of the 20 most profitable exits. Rounding out the top five was ScaleIO, also sold to EMC. The price tag was $250 million, at a multiple of 20.8 with an average investment-to-exit time of a little more than a year.
The figures also show that the highest multiple among the 20 most profitable exits was by the 15th place finisher: Israeli retailer Plus500 Ltd. (AIM: PLUS). The company held its IPO at a $200 million company value - 500 times the $500,000 raised. Plus500's investors had to wait an average of five years for the exit, much longer than for most of the other profitable exits.
20th place: Waze
The iAngels survey showed that the biggest exit on the 20 most profitable list was by popular navigating application Waze, the 20th place finisher with a $1.2 billion exit, constituting a 17.9 multiple and an average investment-to-exit time of 2.5 years. The Waze exit was also based exclusively on investments by venture capital funds (the other four were Onavio, XtremIO, OffiSync, and Navajo). An additional six exits of the 20 most profitable were based on investments by both venture capital funds and angels.
"Given the flexibility enjoyed by angel investors in the type of investment and its horizon, they are the biggest beneficiaries of the most profitable exits," Hod Moyal says. Why are the funds not more prominent on the list? "Large venture capital funds need very large exits amounting to hundreds of millions of dollars in order to boost their profitability. It can be seen that they were present in most of the profitable exits fitting this definition (an exit of over $200 million), other than Viber Media, which is a special case.
"A large fund needs at least 10 small success stories for the same impact as one investment in a company on the same scale as Waze, Wix.com Ltd. (Nasdaq: WIX), or Trusteer. Profit alone is not the only important parameter for a venture capital fund; the volume of the deal is just as important. Angels and smaller funds, on the other hand, can definitely justify investing in companies with a smaller horizon, because there are many such companies, and it is definitely worthwhile for an angel or a small fund."
The figures show that a considerable proportion of the 20 most profitable exits took place less than three years after the companies first raised capital. This does not surprise Hod Moyal: "The sale of companies at a relatively early stage, but at an exceptional profit for the investors and entrepreneurs, should be welcomed, because it supports the entire industry," she asserts.
"First of all, the investors who reaped big profits are very likely to invest in other companies. Secondly, the entrepreneurs are likely to become new angel investors themselves, and bring with them practical experience. Some of them will even found new companies, and will have the patience to focus on bigger challenges and create larger companies." Hod Moyal sums up by saying, "There is definitely room for small and medium-sized exits, as long as they are in addition to the large ones, not at their expense, according to the type of opportunity,"
Published by Globes [online], Israel business news - www.globes-online.com - on August 26, 2014
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