THE ISRAELI FOUNDER: USING DATA TO DRIVE INVESTMENT DECISIONS
EARLY STAGE FUNDING CRUNCH CONTINUES TO EXPAND ON THE BACK OF A STRONG 2017
2017 was another strong year for Israeli venture capital. Israeli startup companies raised $5.24 billion, a 9% increase from 2016. While the amount of capital raised in 2017 increased, the number of deals continued to decline, with only 620 transactions in 2017, compared to 673 in 2016. Across stages, 2017 continued to see an increase in late stage financing rounds with $3.9 billion raised, a 14.7% increase from 2016 while early stage funding fell 5% to $1.36 billion. The increase in late stage rounds was largely driven by the emergence of the mega round, as four large deals (Cybereason, Via, Lemonade and Skybox) of over $100 million each, accounted for 12% of total amounts raised in 2017. The continued shift towards late stage financings and the decline in early stage investments is not just an Israeli phenomenon and can be observed globally. According to KPMG Venture Pulse Q4 2017 Report, over 70% of all capital invested in venture capital in 2017 was concentrated in rounds of $25 million or more. The prevalence of these mega rounds is being fueled by two major sources. The first is the emergence of new mega funds worth between $1 billion and $6 billion (excluding the SoftBank Vision Fund, which is listed as a private equity fund). These funds, which have been established on the heels of the $100 billion SoftBank Vision Fund, are able to leverage their size and pressure Silicon Valley based funds to participate in larger investment rounds. A recent example of this "Softbank effect" consists of Sequoia raising a new fund that could top $6 billion in commitments, well above its most recent fund worth $2 billion. Another driver of late-stage funding is corporate venture capital. According to KPMG Venture Pulse Q4 2017 Report, over the past year (2017), the percentage of global venture capital activity that had corporate venture capital (CVC) participation rose to a new high, exceeding 18.7% in the final quarter of 2017. There are many reasons for this trend, ranging from technology focused corporations’ desire to remain exposed to all relevant innovations within their given fields of operation, as well as older multinationals and industry stalwarts’ desire to enhance R&D efforts into CVC arms and capitalize on advances that are finally coming to fruition, such as autonomous vehicles. Overall, the effect of these mega rounds has translated into higher valuations in growth and late stage deals.
On the other end of the spectrum, early stage financing rounds have been in decline since 2013, particularly in Israel, falling by 58% by the end of 2017. The unparalleled 115% increase in the number of new startups formed between 2015 and 2016 relative to 2013 and 2014, is widening the imbalance between supply and demand in early stage capital, as a slew of startups have been looking for early stage capital in 2017 and will continue to do so in 2018. This structural shift in the Israeli venture capital market is creating a favorable environment for early stage investors as reduced competition leads to attractive valuations of technological companies and augurs well for future returns. With limited capital available in early stage, we expect competition among startups looking to raise money to intensify given fewer sources for early stage capital. We continue to believe that exposure to Israeli venture capital should be obtained through a balanced strategy, with an emphasis towards early stage funds.
SWEETWOOD VENTURES' ANNUAL INVESTMENT CONFERENCE - RECAP OF VC PANEL
On February 15th, we held our Annual Investment Conference at the Hilton hotel in Tel Aviv. As part of the conference, we hosted a group of leading Israeli general partners to discuss recent trends in Israeli and global venture capital. The panel was hosted by Samuel Cohen Solal, Managing Partner of Sweetwood Ventures and the participants included Liron Azrielant, General Partner of Meron Capital, Omry Ben David, Partner of Viola Ventures and Gil Ben-Artzy, Partner and co-Founder of UpWest Labs.
The main questions and themes discussed during the panel, were the frontier technologies that VC funds are currently focused on and how do they evaluate them, the continuing drop in the number of transactions and volume of early stage investments in Israeli hi-tech companies, and the growing number of late stage companies in the Israeli market. The panel also discussed the effect of Initial Coin Offerings (ICOs) on venture capital funding and the underlining technology of blockchain.
All members of the panel agreed that the main challenge that Israeli startups face relate to their ability to penetrate the global market. As a result, the VCs tend to focus on startups which have significant differentiation from their global competitors. One of the most effective ways to do so is through investments in innovative core technology components. Therefore, all panelists noted that they continuously invest in startups which are on the frontier of technological development. Some of the main sectors which were highlighted were centered around the emergence of IoT in different verticals, including, drones, smart cities and autonomous vehicles. Other members of the panel noted medtech and blockchain as interesting sectors in which they currently invest in.
The panelists agreed that in 2017 we continued to witness a sharp drop in the number of transactions and volume of early stage investments, a shift which, the panelist believe, has created a fertile ground for strong opportunities in such stages, prior to the sharp valuation increase in mid-stage and late-stage rounds. On the subject of ICOs, the panel did not view the recent dynamics as a major threat to their investment thesis, but rather as a useful tool for startups to secure growth capital. In their view, the success of an ICO is highly dependent on a mature underlying product which requires seed capital to develop. Such seed capital may only be provided by the VC funds and not by ways of an ICO. Additionally, the panel believes that venture capital can deliver a significant value proposition to early stage companies which an ICO cannot. This mainly comes in the form of the experience of the VC firms and the strong network which they provide - all considerable assets which early stage companies require. Commenting on the underlying blockchain technology, there were some concerns that many entrepreneurs are attempting to fit a problem to a solution, as opposed to a solution to a problem.The panel expressed high hopes for blockchain technologies, but warned that it doesn't mean it can solve any problem and only models which actually work on blockchain should be used.
NOTABLE INVESTMENT ROUNDS
Origami Logic, secured its series D funding for $15.2 million from Viola Ventures and Saban Ventures. Origami Logic is a provider of marketing performance measurement solutions.
CommonSense Robotics, an Aleph portfolio company, secured its series A funding for $20 million from Aleph, Innovation Endeavors and Playground Global. CommonSense Robotics develops AI and robotics technology to help online grocery retailers speed up fulfillment and delivery.
CyberX, an UpWest Labs and Glilot Capital Partners portfolio company, secured its series B funding for $18 million from Norwest Venture Partners, Glilot Capital Partners, Flint Capital, and OurCrowd. CyberX is a provider of technology to secure the Internet of Things and industrial control systems.
NOTABLE FUND FORMATIONS
UpWest Labs, a Palo Alto based venture capital firm announced the closing of its third fund with aggregate commitments of $18 million. The fund will focus on early stage Israeli startups that want to enter the U.S. market.
TLV Partners, a Tel Aviv-based venture capital firm announced the closing of its second fund with aggregate commitments of $150 million. The new fund will invest in startups mainly in the domain of B2B.
RECOMMENDED VENTURE CAPITAL READS
A deep dive on the past two chaotic years at Facebook, when the company has gone from worldwide darling to the brink of disaster. [Wired]
A startup called Roam is constructing an international housing network for so-called digital nomads. You can go anywhere—as long as you never stop working. [The New York Times]
Why Amazon's self-serve grocery store might not be the future of retail. [Harvard Business Review]