2013 was less successful than the past two years in terms of Israeli venture capital fund raising, with 13 funds raising USD526m, almost 28 per cent below the USD725m raised by 14 Israeli VC funds in 2012.
This total was also 28 per cent under the 10-year average of USD732m.
The average fund size in 2013 fell to USD41m, well below the USD76m 10-year average. The decrease mostly reflected the formation of a large number of new micro-VC funds.
Only two funds managed to raise more than USD100m each in 2013: Vintage’s sixth fund attracted USD161m, and Aleph – a new fund raised by veteran venture capital investors Michael Eisenberg and Eden Shochat – raised USD151m. The two funds accounted for 59 per cent of total capital raised in 2013. In 2012, Pitango, Sequoia and Magma each raised over USD100m and accounted for 84 per cent of total capital raised.
In 2013, micro-VC funds accounted for almost USD124m or 24 per cent of total capital, the largest share in three last years, while the number of micro-VCs decreased to eight, compared to nine and 11 in 2012 and 2011, respectively.
Micro VCs became a more prevalent phenomenon, especially in the past three years, as 58 per cent of capital raised by micro-VCs in the past decade was raised since 2011.
Koby Simana, IVC CEO, says: "It seems that fund raising has slowed since 2011, with less capital being raised by fewer funds. Noteworthy too, is that the majority of first-time funds in 2013 were micro-VC funds, specialising in early stage startup investment. However, we believe this is not a new strategy for VC funds, but rather a reflection of the difficulties of fund raising by both first time funds and established funds.”
Five of 13 VC funds that raised capital in 2013, were raised by new players – management companies just entering the local scene – and accounted for 42 per cent of the total raised. This compares to seven funds that joined the VC industry in 2012 and captured some 10 per cent of total capital raised that year.
Ofer Sela, partner in KPMG Somekh Chaikin’s Technology group, says: "In the late '90s and the ensuing decade foreign investors invested in Israel mainly through venture capital funds that were managed locally. The tremendous success of the Israeli technology market, together with the experience and confidence gained by some investors led to a change, and now a substantial number of foreign investors are investing directly in Israel's technology market through foreign VCs, corporate VCs or as individuals. A significant number of foreign VCs operating from the US, Europe or the Far East allocates substantial capital from the overall managed capital to investments in Israel.
“Except for a handful of institutional investors, the local capital market is not taking part in the success of Israel's venture capital industry. Substantially all of the gains of Israeli VC funds is being enjoyed by foreign investors, and the Israeli economy is not reaping its benefits as an investor. These factors result in insignificant capital being raised by the local VC funds, especially relative to total investments in Israeli portfolio companies.
“We hope that the regulatory barriers will be removed, and the Israeli capital market will take part in local VC funds in a way that will contribute to the overall Israeli economy from the standpoint of appreciation of capital and also from increased tax collections."
Capital available for investment by Israeli venture capital funds at the beginning of 2014 was approximately USD1.6bn. Of this amount, only USD359m (22 per cent) is earmarked for first investments. The remainder is reserved for follow-on investments. According to IVC, 30 Israeli VC funds are currently in the process of raising capital, with a targeted total of over USD2bn. However, only half are expected to raise capital in 2014, not more than USD1.0bn.
