"Money will continue to pour into venture capital"

Yossi Vinitski
Yossi Vinitski

Poalim Hi-Tech head Yossi Vinitski surveys Israel's high-tech scene from the investors perspective, and insists there's no bubble.

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Ahead of the SmartUp3 competition, Globes interviews Bank Hapoalim (TASE: POLI) high-tech unit Poalim Hi-Tech Ltd. head of high tech Yossi Vinitski, to obtain a overview of developments in the Israeli economys growth engine - the high-tech industry. Vinitski, who has more than 20 years of experience in high tech, including as a senior partner at The Challenge Fund Etgar LP, joined Bank Hapoalim a year ago as part of its strategy to deepen its involvement in the provision of unique services to technology companies, including start-ups.

Globes: What is the current situation in the start-up world?

Vinitski: When looking at start-ups, there is no question that, in terms of raising capital, we are at a peak. Figures for the first half of 2015 show capital being raised at a rate of $1 billion per quarter, which is a huge amount. The average amount raised is rising, reaching $6 million. In terms of trends, we see software and the Internet taking the top places in raising capital.

This reignites the argument whether there is a bubble.

It seems that the era of cheap money is continuing, and conventional wisdom holds that if there is an interest rate hike in the US, it will not be great. Therefore, money continues to pour into alternative investments, including venture capital. There is no question that were at a peak, which naturally cannot last forever, with very high valuations for private companies. Airbnb Inc., Uber Technologies Inc., and other companies stand out. The plunge in capital markets will unquestionably affect the valuations of these private technology companies, but the difference between the current situation and past bubbles is that most of these ventures are based on a real business model that knows how to create value. Company values may be inflated and could tumble, but there is a business model behind them.

At the same time as the massive raising of capital, almost every week, weve heard about the founding of a new accelerator company.

There is unquestionably a degree of bubble in the field. Many companies are founding their own accelerators. Capital is being raised at the same time, with the participation of similar organizations. In other words, were seeing multinationals, such as Microsoft Corporation (Nasdaq: MSFT), IBM Inc. (NYSE: IBM), and others establishing accelerators, as well as venture capital firms and private parties involved in such plans.

What do you advise an entrepreneur deliberating between the surfeit of accelerators?

I advise carefully examining the accelerator youre interested in joining. Check who is behind it, what it offers the venture, what it takes, who its mentors are, and so on. It is also worthwhile asking companies who have completed the accelerators program. Some of them are very good and some do not really give the value you expect from them. There is transparency of developments in this sector, which we saw in high-tech investment, including the entry of foreign accelerators that are interested in the Israeli market and are seeking to attract Israeli companies to their overseas accelerator programs, or which establish these programs in Israel. The most prominent among them is MassChallenge, one of the top accelerators in the world with offices in Boston and London. To date, it allowed Israeli companies to participate in its programs overseas, and it recently announced that it planned to become more global with Israel as its first target.

An interesting phenomenon is that because an accelerator does not require 24-hour presence of the entrepreneur, there are start-ups which participate in several programs at the same time. I recently encountered a company whose two founders were participating in two accelerators at the same time, one in Hong Kong and the other in Tel Aviv. The idea is to obtain the advantages of each of the accelerators.

What are the prominent trends in venture capital?

Some Israeli funds are losing their share of the investment pie, falling to 10% of total capital invested by funds in the previous quarter. This is because the Israeli funds are more involved in early-stage investments, where the amounts raised are smaller. In advanced rounds, we see growing involvement of foreign venture capital funds, resulting in a greater proportion of total investment.

Poalim Hi-Tech invests in Israeli funds and we recently closed investments in Glilot Capital Partners Glilot 2 Fund and in StageOne Ventures. As far as we are concerned, the overall picture of Israeli funds is good, after several funds failed to raise capital, were now seeing a wave of successes by Israeli funds, which are continuing to raise capital. The big exits of recent years greatly improved the funds results, which makes it easier for them to raise capital.

Given these circumstances, what do you advise startups raising their initial capital to do to find investors?

First, Israeli entrepreneurs can still find a wide range of potential investors without leaving the country. There is money in Israel, including foreign money, and the huge concentration of investors in such a small territory greatly helps the Israeli entrepreneur, compared with his peers overseas, including most parts of the US. Obviously, the most important recommendation is to pick the partner most suited to you, which is not always possible, but it is worthwhile tying to choose the investor who specializes in the entrepreneurs field and who can give him maximum added value. Another trend which can help entrepreneurs today is investment from China, especially investment in venture capital funds. An estimated 20-25% of capital raised by venture capital funds nowadays comes from China. Chinese investment is also arriving gradually as part of large $40-50 million investments in companies, and I predict that we will gradually see Chinese investors in smaller start-ups. This trend is connected to the recent rise weve seen in the number of large financing rounds by Israeli high-tech companies.

How should the banks handle startups?

The banks and other service providers, like accountants and lawyers, should adapt to the pace and level of service that this industry needs, and develop tools to help give technology entrepreneurs suitable services. For example, Poalim Hi-Tech allows interim financing which bridges the money a start-up is due to receive from the Office of the Chief Scientist or venture capital funds, and offers other instruments that meet the entrepreneurs needs. Banks are unlikely invest directly in start-ups. There is room to develop additional instruments, such as bank loans, similar to existing instruments for small businesses, including government-backed loans. On the technology side, the banks are showing growing interest in fintech. Bank Hapoalims fintech program is an example of this. A lot is due to the realization that new technologies will dramatically change the banking world, so the banks involvement in technology will continue to grow.

Published by Globes [online], Israel business news - www.globes-online.com - on August 27, 2015

Copyright of Globes Publisher Itonut (1983) Ltd. 2015

Yossi Vinitski
Yossi Vinitski
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