Israeli high-tech companies raised an all-time annual high of USD4.8 billion in 2016, 11 per cent above the USD4.3 billion raised in 2015, according to a survey conducted by IVC Research Center and Zysman, Aharoni, Gayer (ZAG).
The average financing round, which has been constantly growing over the past five years, reached USD7.2 million in 2016, 19 per cent above the USD5.1 million five-year average.
The fourth quarter of 2016 ended with USD1.02 billion in 151 transactions, compared with the USD1.11 billion garnered in 202 deals in Q4/2015, an 8 per cent year-on-year decrease, and 9 per cent above the USD933 million raised in 140 deals in Q3/2016.
The average financing round stood at USD6.7 million in Q4/2016, similar to the past two-year quarterly average of USD6.6 million.
"As expected, 2016 ended as a record year in Israeli high-tech capital raising," says Koby Simana, CEO of IVC Research Center. "However, despite the higher total amount, it was characterised by a smaller number of financing rounds, along with a higher average capital raising per round. When we looked into the numbers to try and explain the trend, we found what I would call a ‘B Crunch’ – a 30 per cent drop in the number of second rounds closed in 2016 compared to 2015, while the number of earlier rounds slightly increased. This is a troubling trend for the Israeli VC funnel, since the majority of capital goes into later rounds – if there are no companies lined up for later investments, there could be a more serious issue later on.”
The survey reveals that, while capital-raising reached new heights in 2016, the number of financing rounds were fewer than expected, with 659 deals closed in 2016, marginally above the five- year average of 657 deals, and 7 per cent below 2015’s record 706 deals.
While the number of early rounds (seed and A rounds) increased slightly (5 percent), the number of B rounds dropped 30 per cent and the number of later rounds – C or higher – was responsible for more than 60 per cent of the capital, down 11 per cent from 2015.
B rounds' share of capital raising also decreased, falling from 25 per cent in 2015 (USD1.07 billion) to a mere 16 per cent in 2016 (USD743 million), while early rounds and later rounds generated more capital and took up larger shares than the year before.
The survey further reveals an upsurge in large deals (above USD20 million) in 2016, both in terms of deal number and capital raised – with 76 deals and USD2.68 billion, respectively – a 22 per cent increase from the USD2.19 billion raised in 68 deals in 2015.
Oded Har-Even, ZAG-S&W partner responsible for its US office, says: "The increase in capital raising in mid- to late stages could imply a growing use of mezzanine funding in mature companies, gearing towards a possible M&A or IPO (preferably on NASDAQ). If this is indeed the case, then it's a very welcome trend, revealing a mature market considered to be on the ‘quick exit route’ following early stage investments."
Fifteen deals above USD20 million reached a total of USD573 million, or 56 percent, of all capital raised in Q4/2016. This compares with USD430 million (38 per cent of total), raised in 14 deals in Q4/2015, and USD517 million (55 percent) raised in 18 transactions in Q3/2016.
Israeli VC funds invested a total of USD634 million in Israeli high-tech companies in 2016, marginally more than the USD627 million invested in 2015. In the past five years, Israeli VC fund investments steadily increased, from USD482 million in 2012 to the current level. At the same time, their share of total capital invested has been decreasing gradually, from 26 per cent in 2012 down to a 13 per cent share in 2016, the lowest yet.
In Q4/2016, USD111 million were invested by Israeli VC funds in local high-tech companies, 44 per cent below the USD198 million invested in Q4/2015 and 20 per cent below the USD139 million invested in Q3/2016. Israeli VC funds' share was down to 11 per cent in Q4/2016, from 18 per cent and 15 per cent in Q4/2015 and Q3/2016, respectively.
Software companies led capital-raising in 2016 with USD1.7 billion, up from 2015 when the sector attracted USD1.4 billion (32 per cent share of total), also placing first. Internet capital raising has noticeably decreased in 2016, when the sector attracted only USD744 million or a mere 16 per cent of total capital, compared to USD1.12 billion raised in 2015, when internet placed second with a 26 per cent share.
