from the January 2015 issue

Venture Capital is Thriving

1967 was an epic year as Israel launched and won in lightning speed what has been hailed as the Six Day War. Israel was well armed with jet planes and other military equipment. However, Charles de Gaulle was piqued by Israel's rapid victory, He announced an arms embargo, This meant that plane parts and other equipment would no longer be available to Israel.

Dan Tolkowsky the one time Chief of Israel's Air Force foresaw the need of establishing technology based industries. In due course he established Athena Venture Partners, which in 1984 became Israel's first venture capital company.

Thirty years later the venture capital industry had blossomed. In 2014, 12 Israeli venture capital funds raised $914 million, the most raised by Israeli venture capital funds in six years, according to the Israeli venture capitalfund raising 2014 report compiled by the IVC Research Center. The report found that fund raising was up 68% last year from $544 million raised by 11 VC funds in 2013, and was 18% above the 10-year average of $777 million.

Four veteran Israeli venture capital funds raised more than $100 million each and accounted for 64% of total capital raised in 2014. Carmel Ventures fourth fund attracted the largest amount - $194 million, while Magma raised $150 million for its fourth fund, less than two years after closing its previous $110 million fund. JVP made a first closing of $160 million of a targeted $180 million for its seventh fund, while Vintage's seventh fund attracted $144 million, 50% of which is being allocated to Israeli investments.

The average fund size in 2014 reached $76 million, 55% up from $49 million in 2013, and up 46% from $52 million in 2012. The increase reflects the raising of more medium sized funds and fewer micro venture capital funds than in each of the previous two years.

A favorable window of opportunity for fund raising, has enabled a number of management companies to progress from a micro VC model to mid-size range, which offers more investment flexibility. Funds having scaled up include Amiti Ventures and Glilot Capital, but it remains to be seen if more of the existing micro-VC funds will follow suit or choose to maintain the micro VC fund model.

On the other side of the spectrum, there is an awakening of late and growth stage venture capital funds that focus on companies with proven product viability and expanding sales. Many such companies have the potential to develop into large global corporations and are stimulating the demand for more late stage funding. Qumra Capital, founded by former Evergreen partners Boaz Dinte and Erez Shachar, and Agate Korea are two examples of firms active in the growth market. In addition, at least five more funds are in various stages of capital raising and are focused at late stage companies and growth funding. Interestingly, funds in this group opt for a wide variety of investment mechanisms that include growth venture capital, venture lending, mezzanine financing and private equity.

The record number of Israeli portfolio companies with valuations of hundreds millions of dollars, together with positive investor sentiment in Nasdaq, has made it easier for VC firms to show good returns and raise capital. In the past 24 months, global and Israeli VC returns have been among their highest ever. This has encouraged new limited partners from China and Israeli institutional investors to join the more traditional investors in Israeli VCs, such as university endowment and US public pension funds. The growth of Israel's venture capital industry is traced to six cycles of fundraising that peaked in 2000 when $2.9 billion was raised, and declined until 2003 when only $64 million was raised. The industry's sixth cycle, which started in 2011, began a recovery and raised a total of $3 billion over four years through the conclusion of the cycle in December 2014. A seventh cycle, underway now in 2015, already looks promising.

At the beginning of 2015, IVC found that some $1.8 billion was available for investment by Israeli venture capital funds. Of this amount, $462 million (25%) is earmarked for first investments. The remainder is reserved for follow-on investments.

99 Israeli high-tech exits totaled $6.94 billion in 2014, up 5% from $6.59 billion in 2013 when there were 90 exits, reports IVC Research Center and law firm Meitar Liquornik Geva Leshem Tal. Although last year's figures were close to those of 2013, a detailed analysis reveals significant changes and interesting exit trends.

Israeli exits totalled $15 billion in 2014. IVC explained that the methodology relates to capital raised in the exits, while PwC related to the total value of the companies.

2014 saw significant growth in the number and size of IPO exits. 17 IPOs accounted for $2.1 billion, compared to eight IPOs worthy $360 million in 2013. MobilEye, the largest IPO of 2014, Mobileye(NYSE: MBLY) raised slightly over $1 billion and was listed on the New York Stock Exchange. There were 11 Israeli high-tech IPOs on Nasdaq in 2014, raising amounts ranging from $35 million to $150 million. The second largest IPO in 2014 was made by SafeCharge International Group plc (AIM: SAFE) on London's AIM.

Meitar Liquornik Geva Leshem Tal partner Alon Sahar noted that even though total capital raised through exits in 2014 was not much different from 2013, the blend of deals is instructive. He said, "The interesting finding of 2014 - in fact the reassuring one - is connected to the increasing number of IPOs. Sometimes IPOs reflect a Ômarket trend' stemming from public readiness to invest in certain sectors, such as life sciences. In other cases, IPOs reflect the real ability of the industry to build larger companies for the long term."

Sahar said a correlation can be found between the volume of IPOs and the number of growth round deals, which is also on the rise. "In light of success stories such as Mobileye and CyberArk, two companies that brought on investors at later stages and then followed the IPO road, more companies can be expected to turn in the same direction. This trend and the appeal of building larger companies may also explain current findings on M&A proceeds, where the number of deals below $5 million dropped to the lowest in a decade, with only 25 deals."

Reprinted from the Israel High-Tech & Investment Report January 2015

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