ISRAEL 
HIGH-TECH & INVESTMENT REPORT

from the November 2012 issue


Q3/2012 VC investments in Israel - up 8%

Israeli VC fund first investments also increased in the quarter In the first three quarters of 2012 Israeli venture capital investments decreased 9 percent to $1.4 billion from $1.6 billion in the previous year. However, the amount is 55 percent above $0.9 billion invested in the same period in 2010. In the third quarter of 2012, 144 Israeli high-tech companies raised $488 million from venture investors - both local and foreign. This is an 8 percent increase from $453 million raised by 128 companies in Q2/2012, but 7 percent below the $522 million raised by 137 companies in Q3/2011.

In Q3 2012, $354 million were raised in 95 VC-backed rounds*, 73 percent out of total capital rose in all rounds. Remainder of rounds were completed by other investors, foreign and Israeli.

Ninety-three companies attracted more than $1 million each. Of these, seven raised more than $20 million, eight raised between $10 million and $20 million and 13 raised from $5 million to $10 million each. The average company financing round was $3.39 million, slightly below $3.54 million raised in Q2/2012, and significantly below $3.81 million in Q3/2011. * VC-Backed rounds - deals in which VC funds (Israeli or foreign) participated.

Israeli VC Fund Investment Activity
Israeli venture capital funds invested $341 million in Israeli companies in the first three quarters of 2012. This compares to $393 million and $278 million invested in the corresponding period in 2011 and 2010, respectively. The Israeli VC fund share was 24 percent, just under the 25 percent share in 2011, but well lower than the 30 percent share of 2010.

In the third quarter of 2012, Israeli venture capital funds invested $116 million, 9 percent more than in the previous quarter and 21 percent above the amount invested in the third quarter of 2011. <{> The Israeli VC fund share was 24 percent, compared to 23 percent ($106 million) in Q2/2012 and 18 percent ($96 million) in Q3/2011. Remaining investments came from foreign and other Israeli investors. Koby Simana, CEO of IVC Research Center says "the Israeli VC industry continues to perform strongly despite the challenges presented by a worsening global economy". Simana points to a number of positive trends that indicate its stability: "First, the Israeli VC fund share of total investments has leveled at a sustainable 24 percent; Secondly, capital raising for new funds is slowly picking up, with new funds recently raised by Pitango and Sequoia Israel and more funds about to close soon. These funds will inject much needed capital for first investments."

First investments in the first three quarters of 2012 accounted for 38 percent of Israeli VC fund investments, compared to 26 percent and 30 percent in the corresponding period in 2011 and 2010, respectively. The average first investment was $1.79 million, while the average follow-on investment was $1.08 million. In Q3/2012, first investments by Israeli VC funds accounted for 47 percent of their total investments, the second highest quarterly share in the past decade. (Q1/2012 first investments reached 48 percent.) This compares to 18 percent and 30 percent in Q2/2012 and Q3/2011, respectively. The average first investment by Israeli VC funds was $2.12 million, while the average follow-on investment was $0.86 million.

Ofer Sela, partner in KPMG Somekh Chaikin's Technology group, commented: "This year is expected to be a record year in terms of the number of companies raising first investments, this is mainly due to the increase in the number of investors, including foreign investors, operating in the market. It is a strong indicator to the globalization of the local VC backed industry."

Investment Rounds Excluding Israeli VC Fund Participation
In the first three quarters of 2012, Israeli venture capital deals with no Israeli VC funds involved reached $669 million. This is 18 percent above the $567 million invested in the year-earlier period and 188 percent above the $232 million invested in the first three quarters of 2010. In Q3/2012, investments without Israeli VC participation reached $216 million or 44 percent of all transactions, compared with 48 percent in the previous quarter and 45 percent in Q3/2011.

Capital Raised by Sector
In Q1-Q3/2012, the life sciences sector led capital raising with $387 million (27 percent) of total capital raised, compared with $320 million (20 percent) raised by life science companies in the first three quarters of 2011. Internet followed with $271 million (19 percent), a decrease of 22 percent from the same period in 2011, when Internet companies attracted $348 million (22 percent) and led all investments. Communications attracted $248 million (17 percent), a decrease of 15 percent from the amount attracted by the sector in Q1-Q3/2011.

In Q3/2012, the life sciences sector led capital raising for the third time in the past decade, with $147 million (30 percent) of total capital raised. Communications followed with $106 million (22 percent), an increase of 36 percent from the previous quarter, but 7 percent below the amount raised in Q3/2011. Software attracted $74 million or 15 percent of total capital raised in the quarter.

Ofer Sela, partner in KPMG Somekh Chaikin's Technology group, added, "The life sciences sector is expected to have a record year in terms of dollar amounts raised, showing consistent growth since 2009. This is in contrast to the trend in the US where capital raising for the life sciences has been in decline. The combination of a highly educated workforce, robust technology transfer from leading academic institutions, and the Israeli government's incentive program for the life sciences are the main reasons for this sector's positive performance."

Capital raised by stage
In the first three quarters of 2012, seed companies attracted 6 percent of capital raised, compared to 5 percent and 3 percent in the corresponding period of 2011 and 2010, respectively.

Mid-stage companies raised the most (41percent), as in Q1-Q3/2011 (45 percent) and in Q1-Q3/2010 (48 percent).

In the third quarter of 2012, seed companies attracted 9 percent of total capital raised, compared with 3 percent in the previous quarter and 9 percent in the third quarter of 2011. Early stage and mid-stage companies led capital raising with $190 and $191 million, respectively, each with 39 percent of total capital raised.

"This is yet another positive indicator," noted IVC's Simana. "Our findings show early stage investment has bounced back compared to previous quarters, demonstrating investor confidence in the future of Israel's high-tech industry."

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Reprinted from the Israel High-Tech & Investment Report November 2012

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