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Israeli high-tech capital raising hits USD1.03bn in Q1

In the first quarter of 2017, Israeli high-tech companies raised a total of USD1.03 billion in 155 transactions, a 4 per cent decrease from the USD1.07 billion raised in 165 deals in the previous quarter and 8 per cent lower than the USD1.11 billion raised in 174 deals in Q1 2016.

The number of transactions was down 10 per cent in Q1 2017 compared to the quarterly average of 172 deals in the previous three years.
 
The average financing round reflected a minor increase, with USD6.6 million, compared to the USD6.5 million and USD6.4 million averages of Q4 2016 and Q12016, respectively.
 
Early rounds – seed and A rounds – dropped 16 and 31 per cent respectively, with only 37 seed rounds and 40 A rounds closing in Q1 2017, at a total of USD247 million, 8 per cent below the USD267 million raised in early rounds in Q4 2016, and 23 per cent down from the USD320 million raised in the first quarter of 2016.
 
The number of all later rounds (B, C and later) was up 20 per cent with 78 deals in Q12017 compared to 65 deals in Q4 2016, but only 5 per cent above the 74 deals in Q1 2016. In terms of capital raising, only C rounds managed to top their previous record, with USD285 million raised in 17 deals in Q1 2017, compared to USD100 million (only 9 per cent) raised in the previous quarter and USD234 million (21 per cent) in Q12016. 

 
Shmulik Zysman, founding partner of ZAG-S&W (Zysman, Aharoni, Gayer & Co), says: "Although 2017 started as a strong and stable year for Israeli high-tech capital raising, with figures similar to previous quarters, the number of financing rounds in the first quarter was the lowest since the corresponding quarter in 2012, while the number of new startups continued to grow. We expect the Mobileye deal – which shifted paradigms regarding valuations of Israeli companies – to have future impact on the industry in terms of growth in capital raising volumes. The deal is yet another proof of the high quality and standards of Israeli companies.
 
“The fact that most of the capital goes into mature companies currently reflects, on the one hand, the maturity of companies today, but also the low appetite of investors for young companies, which embody greater risk. If it continues, this trend is liable to harm young companies' ability to realise their potential. In addition, according to the report, most of the capital injected into the Israeli market continues to come from abroad. Thus, it emerges that high-tech investments in Israel are biased toward foreign investments in low-risk companies, which is liable to affect the future of Israeli high-tech as a whole."
 
In Q1 2017, VC-backed deal-making was down, with both the proceeds and number of deals shrinking noticeably. These figures mark the lowest point in venture capital fund investments since Q2 2015, with USD577 million in only 68 transactions, a 19 per cent decrease from Q4 2016's USD710 million in 95 deals, and 26 per cent down from the USD777 million raised in 100 VC-backed transactions in Q1 2016.
 
While capital raised in financing rounds involving VCs marked the lowest point in venture capital fund participation since Q2 2015, the number of VC-backed financing rounds was the lowest quarterly figure recorded since 2010. The average VC-backed financing round in Q1 2017 was up, however, with USD8.5 million, compared to USD7.5 million and USD7.8 million in Q4 2016 and Q1 2016, respectively.
 
Israeli VC funds invested USD162 million or 16 per cent of total capital in Israeli high-tech companies in Q1 2017. The amount was 26 per cent above the USD129 million invested in Q4 2016 and 17 per cent up from the USD138 million invested in Q1 2016. Israeli VC funds' share was up in Q1 2017, compared with these two quarters, when their share reached 12 per cent of total capital each.
 
The IVC-ZAG survey reveals that this upturn stems from the increase in first investments performed by Israeli VC funds in Q1 2017 – USD87 million, or 54 per cent of their investments. The share of first investments was up, compared to 45 per cent in Q4 2016 and 31 per cent in Q1 2016. While Israeli VC fund investment in the past tended to lean towards early stage investments, in the first quarter of 2017, a whopping 65 per cent of first investments went to late stage companies.
 
Koby Simana, CEO of IVC Research Center, says: "Our analysis shows that venture capital funds, both Israeli and foreign, are shifting their activity focus to investments in later stages – in terms of companies' product development stage, financing stage or capital raising round. This change creates a void in the early stages that is not fully met by other investors, such as accelerators or private investors. On the one hand, it creates an opportunity for new investors willing to focus on young startups and early stage companies without much competition, but on the other hand – spells danger to the future of the local venture capital model. If VC funds pass up the opportunity to join at early stages and hold the majority of shares in a company, they will have less control over their deal-flows. If there are no investments in early stages and early rounds now, two years down the line there could well be a shortage of promising late stage companies."
 
Mid-stage companies continued to lead quarterly capital raising in Q1 2017, with USD478 million (47 per cent), 11 per cent below the USD534 million raised in Q4 2016, the highest quarterly amount for this stage, but 17 per cent above the USD409 million raised in Q1 2016.
 
The first quarter of 2017 was the weakest for early stage rounds in three years, with 41 companies raising only USD199 million, or 19 per cent of total capital. 

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