Israeli high-tech capital raising bucks global downturn

Startups

IVC-KPMG: Israeli high-tech companies have raised $4 billion so far this year, up 27% from the first nine months of 2015.

Israeli high-tech companies raised $1.19 billion in the third quarter of 2016, the second highest quarterly amount in 10 years, the latest IVC-KPMG survey reports. The amount was significantly affected by the exceptional Ormat PIPE deal of $204 million, which amounted to 17% of total capital raised. Excluding the Ormat transaction, the quarterly results stand at $982 million, similar to the $1 billion quarterly average raised in the past three years.

IVC-KPMG Survey findings presented only 142 funding deals closed in the third quarter of 2016, a 26% drop from the 193 deals in the preceding quarter and 17% below the three-year quarterly average of 171 rounds per quarter.

KPMG Somekh Chaikin's Technology group partner Ofer Sela said, "While we observe a decline in the number of investments, we don’t believe that the local ecosystem is going to be dramatically impacted by the global downtrend in the long run, since the flow of quality deals continues to be strong and new growth investors are investing in these deals, providing a wider horizon to such companies, both in terms of the type of potential exit and valuation."

Sela added: "We expect the IPO market in the US to be much stronger at the beginning of 2017, which will keep pushing both investors and VC-backed companies to continue nourishing the local ecosystem, alongside more traditional industries that are looking to reinvent themselves through innovative solutions."

Since the beginning of 2016, Israeli high-tech companies raised a total of $4 billion in 510 deals, 27% above the $3.15 billion raised in 491 deals in the first nine months of 2015, and only 7% below 2015’s record of $4.3 billion. The average transaction reached $7.8 million, a noticeable increase, compared with the $6.4 million average in Q1-Q3/2015. In the third quarter of 2016, the average company financing round stood at $8.4 million, or - controlling for the Ormat deal - $7 million, far above the three-year average.

IVC Research Center CEO Koby Simana said that IVC had noticed a drop in foreign investor participation in Israeli technology capital raising, particularly by foreign VC funds, in rounds closed during the third quarter. "This is a reflection of the global downtrend in VC investment that has been going on for over a year. Venture capital investors have put on the brakes in nearly every country, with US capital raising, for example, declining for the fifth quarter in a row. In Israel, we have so far been going against this trend, exceeding former capital raising records. Thus, this drop in the number of deals involving foreign VC funds is not entirely unforeseen. However, we need to wait for the fourth quarter results in order to determine that Israeli market is indeed following the global tendency. In any case, we expect 2016 to close as a record year in terms of capital raising, so short of a dramatic surprise in the coming months, we are still far from declaring that the global VC crisis has hit Israel."

In the third quarter of 2016, 75 VC-backed deals attracted $662 million, or 56% of total capital. This reflects a 41% decrease from the $1.1 billion invested in 119 deals in the previous quarter, and a 24% year-on-year decrease ($869 million was invested in 101 deals in the corresponding quarter of 2015). The number of VC-backed deals this quarter was the lowest in the past three years, 23% below a quarterly average of 97 VC-backed deals.

The survey editors believe the decline in VC-backed deals reflects a global downtrend in VC investments, as foreign and Israeli VC funds adjust their investment strategies and models, focusing on later stage investments and strengthening existing portfolios. Concurrently, new early stage investment models are being developed and expanded, with accelerators and private investments including angels, investment clubs, family offices and crowdfunding platforms growing in prominence as seed and early stage funding sources - offering alternatives to Israeli high-tech companies.

Israeli venture capital fund investment activity

In the third quarter of 2016, $130 million was invested by Israeli venture capital funds in local high-tech companies, 11% of total capital proceeds. The amount demonstrated a 45% fall from the $238 million (14%) in the previous quarter, back to third quarter 2015 levels of $131 million (13%).

First investments by Israeli venture capital funds directed into new portfolio companies captured 38% of their total capital investments in the third quarter of 2016, a 46% decrease in amount compared to the preceding quarter, when their investments comprised 39% of total capital.

Capital raised by stage and deal size

The survey revealed a continued fall in seed investments, with 30 seed deals in the third quarter of 2016, closing $35 million (3%), down 15% from $41 million (2%) raised in 44 deals in the preceding quarter, and 60% below the $88 million (8%) raised in 53 seed deals in the corresponding quarter of 2015.

Moreover, while the number of deals (89 transactions) below $5 million still comprised the majority of deals (63%) in the third quarter of 2016, it was 25% down from the past three-year quarterly average of 116 deals.

The IVC-KPMG Survey found that larger deals are the running trend this year, with the third quarter keeping up the lively pace, featuring 20 deals above the $20 million closed at a total of $771 million, a 65% of total capital raised in the third quarter of 2016. This explains how the quarter placed second in 10 years in terms of dollar volumes despite a decrease in the number of deals.

Published by Globes [online], Israel business news - www.globes-online.com - on October 26, 2016

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