Insight Partners, one of the major venture capital funds that have taken Israeli tech by storm in recent years, was the country's most active investor last year. Insight Partners invested in 37 new companies - nearly three times the number of its investments in 2020, according to the IVC-Gross Investors Report 2021, which ranks venture capital fund activity in Israel.
However, Insight Partners may find it difficult to maintain its top ranking. Tech news website The Information recently revealed that, over the past year, the fund decided to reduce its investment in mature growth companies by about a third. At the same time, Vertex Ventures, an Israeli fund founded by the Oron family - investors in SolarEdge, Verbit, and Yotpo among others - doubled its investments in new companies to 16, compared with last year, and Gigi Levy-Weiss' NFX has increased the number of its investments to 15. Also ranked at the top of the list are Entree Capital, the first investor in monday.com and Riskified (15 investments), Tiger Global - the US-based hedge fund that gained fame for speedy check-writing - and veteran fund Pitango Venture Capital (13).
Not all VC funds took advantage of 2021's prosperity to increase their investments in Israeli tech. Perhaps they preferred to avoid investing at valuations that turned out to be unrealistic. Other funds may be waiting to raise additional capital in order to go back and invest in new companies. These include, for example, the Genesis Partners' F2 Venture Capital fund, which reduced its new investments from 14 to nine last year, or TLV Partners (founded by two Pitango veterans), which last year invested in just six new companies, down from nine companies in 2020. Others, like Lightspeed Venture Partners, Jerusalem Venture Partners (JVP), and Russian fund Altair, were not included in the ranking due to the low number of new investments, while others, such as SoftBank, Grove Ventures (founded by Dov Moran), and European fund Target Global - made the list this year with investments in the single-digits.
Will Israeli funds ever return to center stage?
According to Adv. Ayal Shenhav of law firm Gross & Co. GKH, co-author of the IVC-Gross Investors Report, the dramatic increase in tech investments in 2021 was the result of giant foreign funds entering Israel. "Correspondingly, since the beginning of the year, we've seen a shift in reality, which is testament to the dramatic impact that recent months have had on foreign funds."
Now, he predicts, Israeli investors will return to center stage. With new capital raised for funds such as Vintage Investment Partners, Aleph, StageOne Ventures, Vertex Ventures, Glilot Capital Partners, and TLV Partners - which raised a total of about $2 billion during the boom period of 2021 - Israeli funds have enough to capitalize on the deals that foreign funds may drop. "There's what's called dry gunpowder here," Shenhav says. "That is, a threshold waiting for an investment opportunity."
Or Lenchner, CEO of Bright Data, a company acquired by private equity fund EMK Capital, is also optimistic about the future. As he sees it, the change in investor approach - focused on growth - will bring many private equity firms to Israel in search of profitable companies. "These are companies are focused not only on investing in companies, but sometimes on acquisitions to improve or even take companies out of crisis," he said. "Private equity funds may take the lead over venture capital funds as early as this year or next."
Aside from EMK, other major funds already in Israel - or considering opening operations here - include Permira Private Equity, TCV (Technology Crossover Ventures), Hellman & Friedman Private Equity (H&F), and General Atlantic, which recently greatly increased its investments in Israel.
Global investment volume down 50%
Israel's isn't the only tech sector affected by the change in major fund investment. According to a study by research firm PitchBook Data and The Information, among the giant funds with the largest downturn in global investments - at a rate of at least 35% as compared with the same period last year - are Greenoaks, Index Ventures, and Coatue Management. All are investing heavily in Israeli high-tech.
Greenoaks, which has invested solely in Israeli unicorns such as Wiz, StarkWare, and Tipalti, has dramatically reduced the number of its investments from 13 in the same period last year to five from the beginning of this year. Coatue, whose investment profile is similar to that of Greenoaks, with portfolio companies in Israel like Melio, Rapyd, Snyk, and Fireblocks, also went down to 18 investments in the early months of the year, from 28 last year.
What these funds have in common is that they are relatively new investors in tech companies. These are crossover funds, investment firms with a hedge fund or a private equity background. Such entities have raised huge sums over the past two years as part of the influx of easy money into the technology industry, and the growth in shares of giant companies.
The trend reversed after the stock market crash that began last summer, and those same funds - like Tiger Global, which owns a hedge fund - lost a great deal on the US and Chinese stock exchanges. Tiger's hedge fund loss, since the beginning of the year, is estimated at over 50%, and its investments in growth companies have shrunk by half to $5.7 billion in the first five months of this year, as compared with last year. On the other hand, it has increased its investments in early-stage companies, including in Israel.
It should be noted that Tiger Global, which ranked as one of the most active funds in Israel - and was behind a series of venture capital investments in unicorns with a particularly high value, like Rapyd and Snyk - has also reduced the number of funding rounds for mature high-tech companies over the past five months. This is a decrease of 17% compared to the corresponding period last year. Similarly, Insight Partners, as mentioned, reduced investments by 30% as compared to last year, while SoftBank reduced its investments by 27%.
On the other hand, funds like Lightspeed and Sequoia sat on the fence, and their investments this year are similar to those of last year; apparently, they were wary of investments with too-high valuations. Salesforce’s fund also moderated its investments in mature companies, but not by much. After investing last year prior to Monday.com's IPO, it reduced its investments by only 10%.
R&D partnerships have not proved themselves
Another phenomenon noted in the report is a significant weakening of R&D limited partnerships. The share price of these publicly traded investment funds, like Millennium Food-Tech, Big Tech 50, Unicorn Technologies, and Feat Investments, fell by between 40% and 70%. The exception was Menara Ventures, which went down by 20%, all in all. These are small partnerships, compared to other investment entities, but the total capital raised by the 16 large partnerships is just slightly in excess of $200 million - an amount characteristic of a small VC fund today.
"In the past, this was considered a classic investment channel, but it didn't happen," noted Adv. Shenhav. "Their business model hasn't proven itself, their tradability is low, and the amount of capital raised has been low relative to the period. It turned out that the general public does not really have a serious investment channel in high-tech companies, because venture capital funds are still closed to it, and the publicly traded funds haven't gained momentum."
Published by Globes, Israel business news - en.globes.co.il - on July 10, 2022.
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