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Following 2010′s Slump, Israeli VCs Raised $796M in 2011

Half of All Israeli Deals Come from Foreign Funds

Following a lackluster year in which Israeli VC funds raised virtually no capital, the sector returned in 2011 to raised $796 million, according to recent numbers from the IVC. Though an improvement, Israeli VC funds still have a considerable way to go to reach levels of a few years ago.

Last year also saw about half of all investments in terms of the number of deals in Israel coming from foreign investors, according to the IVC. However, in terms of dollars, Israeli funds made up 25 percent of all investments, with Israeli companies raising $2.14 billion.

Israel venture capitalists had managed to raise only $256 million in 2009, a 76 percent drop in 2008′s levels. In 2010, no capital had been raised by Israeli funds.

“Globally, and also in Israel, the venture capital industry is shrinking in terms of number of entities raising new funds,” said Ofer Sela, a partner in KPMG Somekh Chaikin’s Technology group. “Limited partners investing in venture capital firms are more selective in their investments and prefer investing in the most prominent VCs. The rest of the industry is re-inventing itself and trying to come up with an investment model that will attract limited partners with a lower burden of management fees and overhead costs and a less binding capital commitment for the limited partners.”

Fourteen VC funds raised money in 2011, including eight new funds. Seven funds raising capital in 2011 are considered micro funds with less than $30 million under management, and invest smaller funds to early stage companies. These microfunds raised $87 million in 2011, roughly 11 percent of the total capital raised in the sector.

However, a little more than half of the investment in Israel is coming from foreign investments, with 73 first investments by 23 foreign VC funds accounting for 52 percent of the total investments. Comparatively, foreign investment in Israel ranked at 31 percent in 2010. Six foreign funds made up the top four rankings in 2011, compared to two foreign funds in 2010.

“Foreign VC fund activity in Israel accelerated significantly in 2011,” stated Marianna Shapira, IVC’s Research Manager. “Foreign VC first investments have doubled since last year. This reflects the general situation in Israeli high-tech capital raising of 2011, where Israeli VC investments reached only 25 percent out of total, the lowest share in the last decade.”

Google’s Eric Schmidt’s Innovation Endeavors was the most active VC fund in the region last year, making eight investments. Pitango, JVP and Sequoia Israel followed with seven first investments each, trailed by Giza and Bessemer which made six investments. Five investments were made by Horizons Ventures, controlled by Li Ka Shing from Hong Kong, and foreign VC funds, Access Medical and CP Lantern.

For 2011, foreign VC funds made 21 investments in seed companies, making up 40 percent of all seed deals, compared to only four foreign seed investments in 2010. Internet companies made up 37 percent of last year’s seed investments in Israel, followed by software at 23 percent. Seed deals counted for the majority of first investments in Israel at 38 percent, followed by companies at initial revenue stage at 29 percent.

In terms of first investments, Internet deals led at 33 percent, followed by software at 23 percent, and life sciences and communication at 16 percent.

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