January 2018 - Monthly Insights - Israeli Venture Capital
Updated: Aug 15, 2018
2017 RECAP - CAPITAL RAISED AND EXITS BY ISRAELI STARTUPS REACH ALL TIME HIGH
2017 was another strong year for Israeli venture capital as investments in Israeli startup companies and exits by Israeli companies reached new high.
Over the course of the year, Israeli startups raised a record $5.24 billion, surpassing the previous record of $4.7 billion raised in 2016. This past year also saw a continued increase in the number of growth stage funding rounds which rose 15% in 2017, a testament to the maturity of Israel’s market. At the same time, the market saw a marked decline in the number of early stage deals (defined as below $10 million) which fell by 11% in 2017. Capital allocated to such stages also decreased by 5% from $1.43 billion in 2016 to $1.36 billion in 2017.
With more early stage companies looking for funding and less funding available for such deals, the supply-demand imbalance in early stage continued to widen in 2017. As a result, early stage companies find it more difficult to raise capital, as investors become more selective in the market. Early stage investors have also enjoyed attractive investment opportunities relative to later rounds, where valuations were pushed higher by increased investment activity at those stages.
Like their global counterparts, pre-money valuations of Israeli companies across stages increased in 2017. That said, valuations of Israeli companies continued to be priced at a discount relative to their U.S. peers, especially for early stage investments which are priced at a discount of up to 60% of their U.S. peers. This trend underpins our constructive view of early stage investments in Israeli venture capital and strengthens our view that early stage offers investors superior returns on a risk adjusted basis.
From a sectoral perspective, in 2017 we continued to witness the expansion of the automotive ecosystem in Israel. As automotive related companies raised a record amount of $810 million, representing almost a 4x growth from the amount raised in the sector just two years ago. Although investors remained strongly invested in cybersecurity in 2017 with $791 million raised by Israeli cybersecurity companies, we have seen a decline in the number of deals in the sector, down 6% from 2016. This trend is inline with the overall trend we have seen in Israeli and global venture capital, as investors are aggressively investing in late-stage and follow-on opportunities in companies with the potential to be market leaders.
In 2017, exits by Israeli companies totaled $6.6 billion, an increase of 19% from 2016. These figures exclude the acquisitions of Mobileye and NeuroDerm, which increase the value of exits in 2017 to $23 billion, more than double the record $9.75 billion set in 2012. While the overall number of exits increased, their distribution across 2017 was uneven. The first half of the year saw a continuation in the slow momentum of the second half of 2016, with only $1.9 billion in deals. In the second half of 2017 however, Israeli venture capital saw a strong reversal as exits totaled $4.7 billion. From a geographical perspective, 2017 saw a sharp increase in the acquisition activities of European buyers, acquiring Israeli companies for over $1.5 billion, up from a mere $232 million in 2016 (over 6x). U.S. buyers remained the most active with 56% of the total acquisitions amount and 47% of the total number of deals.
The biggest drivers of the increase in exists during the second half of 2017 were global, including the anticipation of tax reform in the U.S. and the relaxation of Chinese governmental restrictions on technology investments outside of China. Going into 2018, we anticipate this momentum will continue for Israeli exits and will be driven by a stronger presence of international investors seeking opportunities in Israel. These international players include Amazon and Alibaba which recently established new R&D centers in Israel and are looking to pursue additional acquisitions, along with a growing interest in Israel’s automotive technology.
Looking forward we remain confident that Israeli companies will continue to hold a strong technological advantage over their global peers in the fields of information technology, internet and enterprise software. From a sectoral perspective we anticipate that fintech, the internet of things (IoT), automotive and cyber security will remain strong as their underlining technologies such as artificial intelligence, blockchain and big data analytics continue to evolve. We expect to see companies leveraging these technologies in new frontiers such as industrial IoT, crypto currency platforms and digital health. Within these fields we tend to favor Business-to-Business (B2B) and Business-to-Business-to-Costumer (B2B2C) products with focus on service optimization rather than end products.
NOTABLE INVESTMENT ROUNDS
Lemonade, an Aleph portfolio company, secured its series C funding for $120 million from Softbank's Vision Fund, General Catalyst, Sequoia Capital, Google Ventures and Aleph. Lemonade is a licensed insurance carrier powered by artificial intelligence and behavioral economics
Anodot, a Disruptive VC and Aleph portfolio company, secured its series B funding for $23 million from Redline Capital, Disruptive VC and Aleph. Anodot provides real time analytics and automated anomaly detection for big data of large enterprises.
Bringg, a Pereg Ventures and Aleph portfolio company, secured its series B funding for $12 million from Coca Cola and current investors in the company.Bringg is a delivery logistics platform for consumer products.
Veeam, an American online payment service provider, acquired N2WS , a developer of an operations backup and disaster recovery system for an estimated amount of $42.5 million.
Allot (NASDAQ: ALLT), an Israeli security and monetization company, acquired Netonomy, a developer of software-based cyber security solutions for connected homes, for an undisclosed amount.
RECOMMENDED VENTURE CAPITAL READS
The full story of Travis Kalanick's weird, stunning fall from grace at Uber—including the details on his favorite smartphone game. [Bloomberg]
If you believe the evangelists, the blockchain is the future. But it's also a way of getting back to the internet's decentralized and egalitarian roots. [The New York Times]
A look at Uber's secret tool for keeping the cops in the dark. [Bloomberg]
There's not yet a Starbucks of legal marijuana. A new crop of startups is hoping to change that fact. [The New York Times]