from the August 2013 issue

Headline Expenditure Projections

Computer Hardware Sales: ILS9.83bn in 2012 to ILS9.78bn in 2013, down marginally. Forecast downwardly revised due to macroeconomic factors, but Israeli businesses are investing more to facilitate expansion and development.

Software Sales: ILS5.1bn in 2012 to ILS5.2bn in 2013, growing 2% y-o-y. Device and data proliferation will drive spending on customer relationship management (CRM), databases and business intelligence.

IT Services Sales: This will remain the most dynamic sector of the industry, increasing from ILS7.9bn in 2012 to US$8.1bn in 2013. . Stable sectors such as government and defence offer continued revenue opportunities while other sectors will grow in importance over our forecast period.

Key Trends & Developments
We have revised down our forecasts as the outlook for the Israeli economy is weaker than we had previously expected. Market specific factors such as the launch of Windows 8 operating system and an expected increase in tablet sales will offset some of the economic slowdown but it cannot be ignored for long. Nevertheless, the ever changing IT services segment offers strong growth opportunities that may offset slower growth elsewhere in the market.

New cloud computing offerings and increased competition in this segment should fuel further demand from users. Particular areas of opportunity for cloud computing include banking and retailing as organisations in those fields look to save money on hardware investments. Businesses will, not only seek to make cost savings, but will look to boost efficiency and increase flexibility of response to customer needs.

$493 million raised in Q2/2013, up 4% from Q1
Q2 Israeli VC fund investments down to a 24 percent share, a two-year low
Israeli seed investments decline to $27 millon or 13 percent from Q1/2013
VC-backed investments up 20 percent H1/2013
Software sector leads investments in H1/2013 with $217 million

Tel Aviv, Israel, July 23, 2013. In H1/2013, 312 Israeli high-tech companies attracted $967 million from local and foreign investors, slightly above the $962 million raised by 270 companies in H1/2012, but almost eight percent down from $1.05 billion invested in 286 companies in H1/2011. One hundred and eighty-four VC-backed deals attracted $763 million or 79 percent of the total raised in H1/2013. This amount is 20 percent higher than the $638 million raised in VC-backed deals in H1/2012.

The average company financing round was $3.1 million, while the average financing round for VC-backed deals was $4.2 million. In Q2/2013, 143 companies raised $493 million, up four percent from $474 million raised by 169 companies in Q1/2013 and three percent from $477 million attracted by 129 companies in Q2/2012.

Sixteen companies attracted more than $10
million each, accounting for 52 percent of the total amount raised in the quarter. Eighty-five VC-backed deals attracted $399 million or 81 percent of the total amount raised in Q2/2013. This compares with 77 percent in Q1/2013 and 67 percent in Q2/2012.

The average company financing round was $3.5 million, while the average financing round on VC-backed deals was $4.7 million. "The second quarter of 2013 ended on a strong note for Israeli high-tech companies, which managed to raise nearly half a billion dollars in the first half of the year. It is interesting to note that more than 60 percent of financing rounds were with the participation of Israeli VC funds, despite the fact that the Israeli VC share in capital invested declined,", said Koby Simana, IVC Research Center's CEO. "Analyzing the data beyond the direct investment perspective, shows that local funds play a major role in driving high-tech financing deals forward, even when the bulk of capital is sourced from foreign investors," Simana concluded.

Israeli VC Fund Investment Activity
In H1/2013, Israeli VC fund investments accounted for $265 million or 27 percent of the total amount invested. The share is unchanged from H1/2012, but is well below the 35 percent of H1/2011. First investments captured $94 million or 35 percent of total investments, compared with 29 percent and 24 percent in H1/2012 and H1/2011, respectively. Follow-on investments by Israeli VC funds in the period accounted for the remaining 65 percent.

In Q2/2013, only $118 million (24 percent) was invested by Israeli VC funds, the lowest quarterly amount in three years. This compares with the $147 million (31 percent) invested in Q1/2013 and $131 million (28 percent) invested in Q2/2012.

First investments in Q2 were $32 million (27 percent of total investments), a 48 percent decline from the $62 million (42 percent) of Q1, but about 2 _ times the $13 million (10 percent) of Q2/2012. Follow-on investments by Israeli VC funds accounted for 73 percent.

Capital Raised by Sector and Stage
In Q2/2013, the life sciences sector attracted the largest share of quarterly investments for the fourth time in three years. Thirty-three companies raised $121 million (25 percent of total investments), a 33 percent increase from $91 million (19 percent) raised in Q1/2013, and a slight rise from $120 million (25 percent) raised in the year-earlier period. The Internet sector followed with $87 million or 18 percent. Ofer Sela, partner in KPMG Somekh Chaikin's Technology group, commented, "The uptick in investments in the second quarter reflected in part relatively robust activity in the medical devices segment. Yet, more than two years after the launch of the Israeli government initiative to promote investments in the life sciences, the sector as a whole is still not showing the expected results (although we believe new investors have been brought to the Israeli market and have provided some stimulation to the overall life sciences industry).

Israel is clearly falling behind the US in the relative level of biotechnology investments. Few of the most remarkable success stories of technology transfer from Israeli research institutions have been in biotech. While the risk in this industry is obvious, overall returns are still considered very rewarding. The Israeli government needs to continue to intervene in order to create the right ecosystem for Israeli biotech companies to flourish and prosper, as it did with the venture capital industry in the early '90s."

Thirty-two seed companies raised $27 million (5 percent) in Q2/2013, a decrease of 13 percent from $31 million raised by 53 companies in the previous quarter, but 29 percent above the $21 million (5 percent) attracted by 31 seed companies in Q2/2012.

Reprinted from the Israel High-Tech & Investment Report August 2013

Click HERE to request further information.
Click HERE to go BACK.